Wealth Management

The wealth management industry is constantly in flux as a result of bull and bear markets, government legislation, evolving business trends, globalization, and many other factors. One major trend is increasing consolidation in the wealth management industry, as large firms try to become even more profitable. This has resulted in an environment that is becoming dominated by a small number of large companies. “The top-five wealth management firms control 57 percent of broker/dealer (B/D) assets under management (AUM) and 32 percent of B/D advisors, while the top-25 B/D firms and their various affiliates control 92 percent of AUM and 79 percent of advisors,” according to Cerulli Associates, a finance market intelligence firm. Other noteworthy trends worth watching include technology and the increasing prominence of social media, the growth of automated robo advisors that manage investments by computers, the aging of the wealth advisor workforce, and changing customer expectations.

Technology is Changing the Wealth Management Industry

Technology has changed, and will continue to change, the manner in which wealth management professionals do their jobs. For example, wealth managers at large firms use data analytics software and artificial intelligence to better understand their clients, improve fund performance, attract and retain customers, improve in-house efficiency, and perform many other tasks. “Today’s clients want a cutting-edge client experience; to deliver it, wealth firms must boldly scale up analytics,” according to “Analytics transformation in wealth management,” an article from McKinsey & Company. “Some leading managers are building modular data and IT architectures, which enable smart decision-making, personalization at scale, and more extensive product offerings. The changes are also helping them meet their regulatory obligations, boosting the productivity of relationship managers, and lifting compressed margins.”

“The emergence of generative AI is likely to bring technology even further to the forefront of the wealth management model,” predicts McKinsey & Company in its 2024 report, U.S. Wealth Management: Amid Market Turbulence. Generative AI is a form of machine learning algorithms (including large language models) that can be used to create new content (including text, simulations, videos, images, audio, and computer code), as well as analyze and organize vast amounts of data and other information. Some people worry that the use of generative AI will reduce headcount in the wealth management sector, but McKinsey & Company takes a more nuanced approach. “While we do not see gen AI displacing the role of the adviser in the near future, it provides a once-in-a-generation opportunity for wealth managers to improve client experience and increase the productivity of advisers and other client-facing staff,” according to the report. “In the latter category, gen AI is already being deployed to generate and synthesize meeting notes, draft financial plans and client briefs, support compliance reporting, and serve as a virtual assistant.” McKinsey & Company estimates that the use of generative AI could “help the average wealth adviser reorient 20 to 30 percent of their time toward growth-related tasks.” With that said, there are risks associated with the use of generative AI including computer security and bias issues, regulatory uncertainties, and the need to ensure that appropriate controls and frameworks are in place so that the technology is not misused.

Here are some other types of technology that are changing the wealth management industry:

• Internet of Things. Firms are also using the Internet of Things (IoT) to collect data and customize products and services for current and future clients. The IoT refers to the trend of creating everyday objects with sensors, software, and electronics that allow them to connect to the Internet and exchange data.
• Metaverse. The metaverse is an emerging 3–D-enabled digital space that uses converging technologies (e.g., artificial intelligence, augmented and virtual reality, e-commerce, blockchain technology, cloud computing, digital twins, Internet of Things, social platforms) to create a lifelike online experience. It can be used to have fun playing games and interacting with others, meet business and other goals, engage in commerce, and utilized for other purposes. The metaverse has some current and many possible future applications for the investment management industry. For example, investment funds already have been launched that include companies that create or market metaverse-related products. In the future, the metaverse may be used for staff training and collaborative projects, as well as to interact with clients in improved and different ways. Unlike generative AI, which is already in extensive use in the investment management industry, the metaverse is still in its early stages of development and adoption. “At this juncture, [the metaverse] is much like the internet of the early 1990s or the smartphone of the early 2000s,” according to Reid Menge, co-portfolio manager of the BlackRock Technology Opportunities Fund. “We expect it is going to be big, and very likely change people's daily lives. But we don’t yet know exactly how, or how big the shift will be.” Overall, Strategic Market Research predicts that the global metaverse market will grow in value from $124.04 billion in 2022 to $1.6 trillion in 2030.
• Video Collaboration Tools and Office Support Software. Managers are using video collaboration tools to increase “face time” with investors who may be unable to make office visits. The use of video-conferencing tools increased during the pandemic due to shelter-in-place orders. Support staff members can do their jobs faster thanks to document capture and information management software, e-mail, and all the other technological bells and whistles that allow office support staff in any industry to work smarter and more efficiently.
• Virtual/Augmented Reality. Wealth management firms are beginning to use virtual reality (VR) and augmented reality (AR) “to make financial planning more intuitive for their clients and attract Millennials towards managed investments,” according to Capgemini. The technology consultancy reports that firms are using AR and VR to help clients better understand financial products, investment strategies, and product offerings. Professional Wealth Management newsletter reports that “industry giants such as Goldman Sachs and BlackRock are leading the charge in adopting VR and AR to enhance trading capabilities. By creating customizable virtual environments, these firms empower their wealth managers to monitor market movements in real time, regardless of their physical location.”
• Virtual Tools. Virtual tools such as smart assistants (which are also known as virtual assistants) and whispering agents will increasingly be used by wealth managers to better serve clients. “Clients are beginning to demand technologies that can listen, learn, process complex language and anticipate needs—not just for basic, transactional activities, but also to manage wealth and receive financial advice,” according to EY, a professional services firm. Smart assistants allow wealth managers to provide advice based on real-time data. Advisor co-pilots are another type of smart assistant. These tools “enable relationship managers, investment managers, and specialist advisors to improve their day-to-day productivity and efficiency—ensuring that interpersonal relationships remain the anchor of business origination,” according to the 2024 EY Global Wealth Management Report. EY says that co-pilots “assist with client intelligence gathering, interaction preparation, insights development, advice recommendations, next-best-action guidance, and administration,” [as well as] “help to overcome the challenge of enforcing compliance and ensuring efficient client transaction support.” Whispering agents are artificial intelligence–powered smart virtual assistants that provide information and guidance on “smart dialogue” to wealth managers and sales people as they interact with potential clients in order to help them answer questions and make sales.

Technology is changing the balance of knowledge between clients and advisors. “Today’s wealth management clients are better informed and more technically capable than ever before,” according to Evolving Wealth Management in a Digital Age, from professional services firm EY, “as advances in consumer technology and the 24/7 news cycle enable seamless and almost limitless access to markets information.” The bottom line: clients know more, can access information faster than in the past, and can select a wider range of investment options, so advisors must be at the top of their game when it comes to technology, expect to be available 24/7 for clients, and be prepared to explain new financial products in detail.

Technology is also providing firms with competitive advantages. “Advisors considered heavy users of technology tend to outperform other practices in terms of new client growth rates and assets under management growth rates,” according to The Cerulli Report—State of U.S. Wealth Management Technology 2024, from Cerulli Associates. The market intelligence firm says that the “tools advisors attribute most to improving operational efficiency include e-signature (65 percent), customer relationship management software (44 percent), and video conferencing (29 percent). These technologies also happen to be among the most frequently utilized within advisor practices, ranking first, second, and fourth most widely utilized technologies among advisors, respectively.”

Young Investors “Like” Social Media

Seventy-five percent of Gen Z (born 1997–2012) adults and Millennials (born 1981–1996) who were surveyed by Kagan for its 2023 U.S. Consumer Insights report said that they spent five or more hours a day on social media. (Kagan is the media research division of S&P Global Market Intelligence.) The rise in the number of twenty- and thirty-something millionaires and billionaires, and the trillions of dollars that are expected to transfer from older to younger generations in wealthy families during the next decade, should prompt financial advisors to take these stats seriously. Young investors want their financial advisors to tweet on X, post on Facebook and blogs, and otherwise have a strong social-media presence.

Using social media is a great way for advisors to promote themselves, acquire business and investing information, and create more personal relationships with existing and potential clients. But, as we see almost daily, social-media missteps can snowball into an avalanche of negative publicity for an advisor or a firm’s “brand.” As a result, wealth advisors and their firms must be extremely careful about cultivating a fun and informative, but never offensive, social-media presence (including avoiding the incessant touting of products and services). Look for firms to increase hiring of social-media strategists and brand managers during the next decade to better reach Millennials and adult members of Generation Z.

The Robots Are Here!

No, not the ones with eight arms and ray guns bent on conquering Earth, but robo advisors, in the form of algorithm-driven financial portfolio management software that allows customers to invest with minimal human interaction. Start-up firms have created these robo advisors (RAs) as a cost-effective (some are free; others charge a percentage of holdings) tool for investors who don’t meet high-wealth criteria. But industry experts believe that RAs will increasingly be used by high- and ultra-high-net-worth investors with a more DIY mindset who prefer more control over their investments. Most RAs are limited to portfolio management functions and don’t offer the full range of services (such as estate, retirement, and tax planning) provided by traditional wealth management firms.

The robo advisor trend should be taken seriously. In 2022, robo advisors collectively managed $2.5 trillion in assets, according to PwC. The professional services firm predicts that “assets managed by these algorithm-driven and increasingly AI-enabled digital platforms will surge to almost $6 trillion by 2027, nearly double the figure for 2022. Major robo advisor firms include Betterment, Wealthfront, Personal Capital, SigFig, and Acorns.

Some traditional wealth management firms have welcomed robo advisors. Charles Schwab has launched its own robo advisor, Schwab Intelligent Portfolios. It now ranks in the top five largest robo advisory firms by assets under management. Look for more traditional wealth management firms to work with robo advisors during the next decade. Many traditional firms now offer a “hybrid” service that provides both robo advisory services and either access to one-time interactions with a financial planner or a regular relationship with a human advisor. The popularity of robo wealth management technology should create more opportunities for quantitative engineers, programmers, and other tech specialists.

Demand for More Advisors

In 2023, the research firm Cerulli Associates predicted that more than 109,000 advisors (representing 38 percent of industry head count and 42 percent of assets) will retire over the course of the next decade. This suggests that there will be strong demand for new wealth managers as current managers retire or scale back their workloads. (Of course, many managers say that they like their careers so much that they’ll work until they drop.) Another trend: EY reports that “Generation X and Y investors will accumulate close to $46 trillion in assets by the end of the decade, including $18 trillion in inherited assets from baby boomer parents.”

A related trend: the transfer of wealth between generations. Nearly 45 million U.S. households (the majority of whom are Baby Boomers) will pass much of their $68.4 trillion in wealth to their Gen X and millennial children and other heirs and charities over the course of the next 25 years, according to research from Cerulli Associates. Other studies find that 80 percent or more of heirs will seek out new financial advisor after inheriting wealth.

These concurrent trends point to excellent opportunities for wealth managers age 40 and under who are more adept at interacting with these young investors. “At 44 million households strong—and counting—this younger cohort increasingly is becoming impossible to ignore,” says John McKenna, a research analyst at Cerulli Associates. “With their financial wealth growing at a massive rate alongside the complexity of their assets, they are prime candidates for formal advice relationships beyond just a brokerage account and a local bank teller.” Wealth management firms face a challenge: retaining older investors, while also developing younger advisors who are attractive to the fast-growing number of younger investors. Look for more firms to implement multi-generational teaming approaches that incorporate both older, more experienced advisors and younger personnel.

Young Investors Seeking Different Skill Sets from Advisors

“Young investors will soon represent a preponderance of the population and wealth,” according to Fidelity, and members of these younger groups are seeking different skills in their advisors than those sought by older generations. Research shows that young and old investors largely agree that the important qualities for an advisor are integrity, professionalism, and intelligence. But young are also seeking advisors with soft skills such as creativity, patience, empathy, and strong interpersonal skills.

Advisors who serve younger clients should take note of these changing skill sets and understand that they will be serving the needs of a larger number of these clients in the future. “Contrary to the beliefs of many advisors, young investors can be attractive and profitable clients, especially over time,” according to Fidelity. “They value and are willing to pay for the advice of professionals, are motivated to improve their finances, prefer to consolidate assets with a primary advisor, and are loyal clients. They also are at ages when they first start to establish a financial advice relationship.”

Holistic Wealth Management Increasing in Popularity

Holistic wealth management involves a more personal approach by the financial planner to his or her clients' wealth management needs. It involves not just putting a client’s age and income into a financial model to determine how much a client will need to save, but spending more time than is customary talking with their clients regarding their retirement goals, potential roadblocks to saving, investment challenges, etc. to determine more accurate investing strategies and goals. Eighty-five percent of Gen Y and Gen Z investors (including 673 millionaires and 1,520 investors with advisors) who were surveyed by Fidelity in 2022 said that they sought “some form of behavioral coaching from their advisors to keep them from making mistakes, procrastinating, or making rash decisions.”

Research from The Boston Consulting Group “suggests that over 70 percent of wealth management clients see highly personalized service as a key factor in deciding whether to stay with their current provider or switch to another. Firms that can deliver smart, individualized products, services, and prices…will significantly bolster their top-line growth and will occupy a differentiated position in the market.”

More Companies are Competing with the Wealth Management Industry for Clients

Many wealth management firms—especially large ones—have embraced the use of technology to improve efficiency, transparency, innovation, communication with clients, and other functions. Some are also using algorithm-driven financial portfolio management software that allows customers to invest with minimal human interaction. But some wealth managers also worry that Big Tech companies such as Google, Amazon, Apple, and Facebook may decide to not only provide technology to their industry, but also begin competing with them. Others feel that a closer relationship between the wealth management industry and Big Tech may be beneficial to both parties. According to Capgemini, “besides tipping the scales in satisfaction rates, offerings in collaboration with Big Techs could help fortify the loyalties of HNWIs in the lower wealth band (with US$1 million and US$5 million in assets), who are much less likely than wealthier individuals to recommend their wealth manager to others (according to an analysis of Net Promoter Scores). Given this group accounts for 90 percent of all HNWIs globally, it is critical for firms to better serve their needs.” It's not a question of “if” but “when” Big Tech will become more involved in the wealth management industry.

Other competitors to traditional wealth management firms include universal banks, asset managers, online brokers, wealthtech firms, and health insurers. “Increasing competition from these maturing players will accelerate structural change in wealth management, forcing incumbents to defend their market positions, enhance their capabilities, differentiate themselves more strongly and rethink the synergies offered by parent groups’ integrated business models,” according to the 2024 EY Global Wealth Management Report. EY says that areas of growing investment by incumbents include:

• improving wealth advice and planning capabilities
• digitizing processes such as client onboarding
• acquiring niche investment providers, such as alternative asset managers
• partnering with technology vendors and banking service providers to reduce time-to-market and overcome the limitations of legacy technology systems

Interest Growing in Passively Managed Funds

Passive investing is a style of investment that requires a buy-and-hold mentality to obtain positive market returns. On the other hand, active investing is a style of investment in which a portfolio manager uses a hands-on approach to beat the stock market’s average returns—buying and selling securities frequently to achieve his or her client’s investment goals. Passive investing strategies comprised 34.7 percent of global AUM held by the top 500 managers in 2022, according to the Thinking Ahead Institute, up from 8 percent in 2019. “The rise in popularity of passive funds in the United States is linked in part to two decades-long trends in wealth management: clients shifting from commission-based trading to advisory accounts and advisors migrating from traditional broker-dealers to fee-only registered investment advisory firms,” according to AdvisorHub magazine.