Global consultancy firm Bain & Company released a new study this week predicting that customer demand for wealth management services will double over the next eight years, growing to more than $500 billion by 2030, and identifying three distinct business models best positioned to corner that market.
Based partly on research conducted by Aite-Novarica, the report found that wealth management businesses, with their recurring revenue streams and capital efficiency, could effectively double the market capitalization of a parent firm, but it pointed out that realizing growth potential has become increasingly difficult with the rapid evolution of the industry and its target clientele.
As new customers emerge with new priorities and preferences, new models and services will be required to attract them. Wealth management firms face four key disruptors that are realigning the market, the study found: new clients, new delivery models, new services and new economic models.
According to the research, an estimated 250 million potential clients born between 1981 and 2012 will earn an annual income of more than $100,000 by 2030, and Bain predicts a $90 trillion increase in liquid assets from investors worldwide, with about 45% of that coming from individuals with assets between $100,000 and $1 million. The majority of that increase is expected to come from the Americas and Pacific Asia.
Emerging customers tend to be more self-directed and self-educated, as well as show a greater affinity for digital interactions, the report found—although they still want to talk with a human when making tough decisions.
"While, overall, these emerging customers want digital delivery, for their most difficult decisions they want human interaction, requiring a high-touch hybrid approach," said author Markus Habbel, who leads wealth and asset management work at Bain.
Brian Seay, founder of the small Madison, Ala.-based RIA Capital Stewards, agreed.
“Our clients demand quality digital experiences and personal expertise,” said Seay, whose firm has been open for a year and manages about $10 million in assets across 24 client accounts. “They want to be able to move money. They want to be able to go online, see their investments and interact in a way that's simple and intuitive—just like they've been doing with their larger bank for a while. And then I I'd say even a step beyond that, they want to go into their financial plan. They want that to be dynamic and flexible and to do all of that in a way that's digital.”
It’s in the big, pivotal life moments, he said, that it’s important to have a personal advisor who understands the client and the client’s goals and circumstances—even if that advisor communicates with the client through Zoom or other digital service.
“Most of our clients are professionals who are on Zoom all day and don’t understand why they can’t talk to their financial professional the same way,” he said. “So being able to do both the digital and the personal, that’s how we work with clients, and I do think that’s where the market’s going.”
The Bain study estimates that returns to scale are about 35% higher with a digitally intensive model compared to traditional models and suggests that reserving face-to-face interactions for crisis situations could allow one advisor to serve as many as 300 clients.
In addition to new technologies, new services and offerings will be necessary for firms who want to remain relevant through the coming decade, Bain found. Emerging segments of the market have new and different priorities which will require new and different investment strategies, access points and solutions. Specifically, the research showed retirement planning, ESG investing and access to digital assets and private markets are increasingly important for younger clients.
To thrive in the new market economy, the Bain report suggests one of three emerging business models that wealth management firms could benefit from pursuing:
- Integrated platform providers, “large firms with distinctive capabilities and expertise, the ability to build standout products and insights and access to high-quality investment opportunities will have an edge,” according to the report. “They should seek to expand to affluent customers by democratizing their offerings through digital tools and channels that offer a better experience;”
- Customer acquisition specialists, which tend to provide holistic advice, rely on access to customers through “highly productive advisor forces” or complementary businesses; and
- Specialist providers, which serve a defined segment of the market, offering expert advice and solutions to clients with very specific needs.
“If you're smaller and you're not acquiring, or going to be acquired, then you've got to be in that client acquisition, holistic advice and niche model, I think, in order to be relevant,” said Seay, noting that his firm provides holistic advice to working professionals.
The report’s authors suggested firms can achieve scale by expanding geographically and offering customized services to a niche market segment in new regions, while acknowledging that all three models require investment in digital technologies and a shifting of advisor roles.
Bain advises wealth management firms to answer a series of questions before pursuing any of the recommended models: how they will capture next-generation clients, what technology is needed, are their advisors equipped to provide holistic advice, is the firm adequately positioned to deliver suitable solutions and what distinctive features or expertise do they possess?
The report predicts that the changing market is unlikely to dampen accelerating mergers and acquisitions activity in the wealth management space, saying that a desire to achieve the competitive advantages of increased scale will cause firms to continue aggressively pursuing M&A to solve for everything from technology to administrative and investment support to talent acquisition.
“Material wealth continues to spread around the world,” wrote the report’s authors. “New technologies allow individuals to be more competent investors and control more of their financial destiny. But there’s still an important role for wealth management firms. Those that develop the right blend of digital tools and human advice for the next generation of investors stand to reap substantial value for years to come.”