Wealth management and the digital age

Written by Daisy Reece

In 2008, the financial crash led to rapid changes in the commercial world. It was the beginning of an unprecedented global recession; in the wake of the crash, Lehman Brothers went bankrupt, and several financial institutions had to be rescued. Just as the financial markets seem to be recovering worldwide, experts are increasingly fearing a further recession. In June, J.P Morgan reported that their preferred macroeconomic indicator showed that there is a 36% chance of a recession within 12 months.[1] Of course, no recession can be pinpointed exactly, and predictions do not necessarily mean that the market will crash. Nonetheless, UHNWIs should choose their wealth management advisors carefully; investing with confidence can be a difficult decision during financial booms, but even more so during such uncertain times.

Yet, such warnings should not hide the fact that a quieter shake-up than a recession is currently happening. Just the phrase ‘wealth management’ conjures an image of an exclusive office in which the client wooing process is as important as the investment process itself. According to a report released by EY, the average age of financial advisors is now 50.[2] Yet with 10,000 baby boomers due to retire every day over the next decade,[3] it could be that the wealth management process as we know it will be following suit. The client base is changing rapidly, and if wealth management schemes hope to retain their success, their approach should be tailored to suit both generation X (between the ages of 34 and 54) and millennials (between the ages of 18 and 34). By 2020 it is expected that these sections of society will control more than half of all investable assets, making them wealth management firms target clients for the coming decades. [4]

The developing field of online platforms certainly suggests an alternative to the traditional approach to investment.  As an article in Huffington Post recently discussed, younger investors are increasingly turning to an entirely new type of workforce: robo-advisors.[5] With a recent report by Campden Wealth and Morgan Stanley Private Wealth Management citing that advisors are the the single most important influence on family wealth decision making, with 50% of their respondents describing them as having a strong influence, advisors have never been more important to those seeking to guard and grow their assets.[6] Is it time, then, that we entrust these decisions to robots that base their decisions on algorithm based investment portfolio construction and investment advice? As the younger generation are now accustomed to being able to obtain all of their information online, is it possible that robo-advisors constitute the new approach to hands off investment?

Robo-advisors simply require clients to fill out an online questionnaire that details their income, targets, willingness to take risks and length of time for which they wish to invest their money. From that point onward, though clients can adjust their goals and risk tolerance whenever they would like, computer software then tweaks the client’s investments as the markets change.  Investments are usually made through ETFs, which are low cost exchange-traded funds. The biggest advantage of using a robot advisory service is that in comparison to the 1% annual cost usually charged by human financial advisors, robo-advisors ask for only 0.5%. Another bright side to leaving human services behind is that the portfolio the robo-advisor builds for its client is hypothetical until money is put into the account; this means that clients can assess returns before spending a dime. For those interested in looking into a robo-advisor, Betterment and Wealthfront are two successful robo-advisor companies, but many companies offer a hybrid service that includes both human and robo services – one particularly successful company to date is Personal Capital. As robo services present what might be the biggest challenge to traditional wealth management firms since their initiation, it is time that wealth management firms question the needs of their client base.

With this in mind, the next question to ask would be what is it that millennials and Gen Xers look for in a financial advisor? A recent survey has outlined that 32% millennials say that reducing fees is most important. In contrast, 43% of Gen Xers look for years of experience when choosing an advisor. In addition to that, 37% of Gen Xers say that holistic financial advice is crucial to attracting their business, whereas only 20% of millennials regard holistic advice as important.[7] Indeed, a report by Deloitte found that 57% of millennials would even change their bank relationship for a better technology platform.[8] Even from a quick evaluation of these statistics, it is clear that the younger generation is more likely to choose a service such as a robo-advisor, whereas Gen Xers are typically more traditional in their approach to investing.

It is therefore clear that the question wealth management firms should be asking is what steps can be taken to attract millennials to their companies? Deloitte proposes that flat fees should be replaced with performance fees, to increase the transparency of the transaction. This would be in accordance with the earlier mentioned finding that millennials would be attracted to wealth management firms with reduced fees. EY finds that firms are employing CRM systems that search social media to provide financial advisors with information on their clients. With the gap between generations – and only 5% of financial advisors under 30 – it is clear that there is a gulf between the current financial advisors and their understanding of their new client base. In order to offer financial advice that is tailored to millennials, a thorough understanding of their daily lives is imperative to success.

Aside from social media, how can wealth management firms better understand their younger client base? Millennials want their voices to be heard, and for firms to demonstrate progress made on the changes they want to see. If a firm can highlight which changes are being made through results rather than conjecture, they will build loyalty among their younger client base – be it through letting them know through texting or Facetiming rather than the traditional face-to-face meeting! Whether traditional wealth management firms introduce robo-advisors or simply opt to introduce further digital measures, it is evident that whether the next year brings a recession or not, there will be major changes to the industry – with or without a further recession.

Posted in Editorial.


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