Aite Group: What’s in store for 2012

Margin pressure, upheaval in advisory business models, lack of certainty in the market – most of the current trends in the wealth management industry can be traced back to the global financial crisis in 2008. Three years after the world fell apart, the industry is still adjusting to the aftershocks.

Consider the flurry of recent acquisitions, says Alois Pirker, an analyst with the Aite Group, which just released its forecast for the wealth management industry in 2012: Raymond James’ acquires Morgan Keegan; LPL Financial purchased Fortigent; Cetera Financial’s makes a deal for the broker subsidiary of Genworth Financial. This trend that will continue, says Pirker, as firms struggle with pressures on profitability, the rise of self-directed investing, the expansion of fee-based businesses and the investor search for yield and stability.

Among Aite’s top predictions:

Profitability Pressure: The squeeze on profitability at wealth managers will force many to take a closer look at outsourcing solutions. “Adjusting costs to the new market conditions and increasing operational efficiency, while at the same time implementing required changes that allow the firm to compete effectively in a much-changed market environment, will most certainly put the current technology and operations setup at many firms in question,” according to the report.

Revenue for Banks: “We expect more of the large banks to retune or rebrand their ultra-high-net worth groups to better capture this growing market, following on the footsteps of U.S. Bank’s and Wells Fargo’s recent re-branding of their ultra-high-net worth organizations (U.S. Bank’s Ascent Private Capital Management and Wells Fargo’s Abbot Downing group),” according to Aite analyst Sophie Schmitt.

Business Model Changes: Aite says wealth management offers, their pricing and delivery, are expected to see significant changes over the next few years. Several trends and events will influence this including changes in investor behavior, firms’ focus on profitability and the efforts of the largest financial services firms to grow through cross-selling.

Self-Directed Investing: In 2012, Aite expects to see large brokerage firms introducing enhanced online trading and reporting capabilities to avoid losing wealthy investors to online brokerage firms. “Investors today demand greater transparency over investment fees and performance and require access to real-time portfolio information. But while a segment of wealthy investors prefers to invest on its own through an online brokerage platform, this does not necessarily exclude a relationship with a financial advisor,” the report reads.

Less than Ideal Investment Climate: Wealth management giants in 2012 will introduce and improve their gold and other offerings in response to the challenging investing climate. Charles Schwab, E*TRADE, and TD Ameritrade all have announced plans to enhance their foreign exchange (FX) trading offerings during 2012. “This year, we also expect at least two options brokers and two retail FX brokers to be acquired for their know-how by new entrants or to help larger peers boost their market share,” according to Aite.

Copy Trading: This emerging financial service, though still a small percentage of market, is gaining some ground in the age of social media. Copy trading, in effect, permits retail investors to mimic the electronic trading patterns of active retail investors at a brokerage house without heavy lifting by the “inactive” investor. The goal is to replicate the successful outcomes of other retail investors. “The net effect from a volume perspective is that a trading desk’s copy-trading volumes grow linearly as new traders join,” the report noted.

Advisors Seeking More Control: “Advisors are clearly seeking more control over their practices as more and more embrace the Rep-as-Portfolio Model. Having experienced the market turmoil of 2008 and its aftermath, only exacerbated by the heightened market volatility last year, advisors are reacting by exerting greater leverage over their practices. This trend fits well with the rise of fee-based business models,” according to the report.

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