The Wealth Management segment is a potential high growth business for any financial institution. It is the highest customer touch segment of banking and is fosteres on long term and extremely lucrative advisory relationships. It is also the segment which is the most ripe for disruption due to a clear shift in client preferences & expectations for their financial future. This three part series explores the industry & trends in the first post, business use cases mapped to technology & architecture in the next and discuss disruptive themes & strategies in the final post.
“If you (Wealth Advisors) continue to work the way you have been, you may not be in business in five years” – Industry leader Joe Duran @ the TD Ameritrade wealth advisor conference – 2015
Introduction to Wealth Management –
There is no one universally accepted definition of Wealth Management as it broadly refers to an aggregation of financial services. These include financial advisory, personal investment management, financial advisory, and planning disciplines directly for the benefit of high-net-worth (HNWI) clients. But Wealth Management has also become a highly popular branding term that advisors of many different kinds increasingly adopt. Thus this term now refers to a wide range of possible functions and business models.
Trends related to shifting client demographics, evolving expectations from HNW clients regarding their needs (including driving social impact), technology, and disruptive competition are converging. New challenges & paradigms are afoot in the wealth management space but on the other side of the coin – so is a lot of opportunity.
A wealth manager is a specialized financial advisor who helps a client construct an entire investment portfolio and advises on how to prepare for present and future financial needs. The investment portion of wealth management normally entails both asset allocation of a whole portfolio as well as the selection of individual investments. The planning function of wealth management often incorporates tax planning around the investment portfolio as well as estate planning for individuals as well as family estates.
There is no trade certification for a wealth manager. Several titles are commonly used like – advisors, family office representatives and private bankers etc. Most of these professionals are certified CFPs, CPAs and MBAs as well. Legal professionals are also sometimes seen augmenting their legal expertise with these certifications.
State of Global Wealth Management –
Private Banking services are delivered to high net worth individuals (HNWI). These are the wealthiest clients that demand the highest levels of service, customized product offerings than are provided to regular clients. Typically wealth management is typically a subsidiary of a larger investment or retail banking conglomerate. Private banking also includes other services like estate planning, tax planning etc as we will see in a few paragraphs.
The World Wealth Report for 2015 was published jointly by Royal Bank of Scotland (RBS) and CapGemini .
Highlights from the report –
- Nearly 1 million people in the world attained millionaire status in 2014
- The collective investible assets of the world’s High Net Worth Individuals (HNWI) totaled $56 trillion
- By 2017, the total assets under management for Global HNWIs will rise beyond $70 trillion
- Asia Pacific has the world’s highest number of millionaires with both India and China posting the highest rates of growth respectively
- Asia Pacific also led the world in the increase in HNWI assets at 8.5%. North America was a close second at 8.3%. Both regions surpassed their five year growth rates for high net worth wealth
- Equities were the most preferred investment vehicle for the global HNWI with Cash deposits, real estate and other alternative investments forming the rest
- The HNWI population is also highly credit friendly
Asia Pacific is gradually becoming the financial center of the world – a fact that has not gone unnoticed among the banking community. Thus Banks need to as a general rule get more global and focused on the non traditional markets (North America and Western Europe).
The report also makes the point that despite the rich getting richer, global growth this year was more modest compered to previous years with a slowdown of 50% in the production of new HNWIs. This slower pace of growth now means that firms need to move to a more relationship centric model – specifically among highly coveted segment – younger investors. The report stresses that currently wealth managers are not able to serve the different needs of HNW clients under the age of 45 from both a mindset, business offering and technology capability standpoint.
The broad areas of Wealth Management –
Illustration: The components of Wealth Management Business
As depicted above, full service Wealth Management firms broadly provide services in the following areas –
- Investment Advisory – A wealth manager is personal financial advisor who helps a client construct an investment portfolio that helps clients prepare for life changes based on their respective risk appetites & time horizons. The financial instruments invested in range from the mundane – equities, bonds etc to the arcane – hedging derivatives etc
- Retirement Planning – Retirement planning is a obvious function of a client’s personal financial journey. From a HNWI standpoint, there is a need to provide complex retirement services while balancing taxes, income needs & estate prevention etc
- Estate Planning Services – A key function of wealth management is to help clients pass on their assets via inheritance. The wealth managers helps construct wills that leverage trusts and forms of insurance etc to help facilitate smooth inheritance
- Tax Planning – Wealth managers help clients manage their wealth in such a manner that tax impacts are reduced from a taxation (e.g IRS in the US) perspective. As the pools of wealth increase, even small rates of taxation can have a magnified impact either way. The ability to achieve the right mix of investments from a tax perspective is a key capability
- Full Service Investment Banking – For sophisticated institutional clients, the ability to offer a raft of investment banking services is an extremely attractive capability
- Insurance Management – A wealth manager needs to be well versed in the kinds of insurance purchased by their HNWI clients so that the appropriate hedging services could be put in place
- Institutional Investments– Some wealth managers cater to institutional investors like pension funds, hedge funds etc and offer them a variety of backoffice functions
It is to be noted that the Wealth Manager is not necessarily an expert in all of these areas but rather works well with the different areas of an investment firm from a planning, tax and legal perspective to ensure that their clients are able to accomplish the best outcomes from a life standpoint.
Client Preferences and Trends –
There are clear changing preferences on behalf of the HNWI clientele –
- While older clients gave strong satisfaction scores to their existing wealth managers, the younger clientele’s needs were largely being missed by the wealth management community
- Regulatory, cost pressures are rising which are leading to commodification of services
- Innovative automation and usage techniques of data assets among new entrants aka the FinTechs are leading to the rise of Roboadvisor services which have already begun disrupting existing players in a massive manner in certain HNWI segments 
- A need to offer holistic financial services tailored to the behavioral needs of the HNWI investors
Technology Trends –
The ability to sign up new accounts and to offer them services spanning the above areas provides growth in the WM business. There has been a perception that WM as a sub sector has lagged other areas within banking from a technology & digitization standpoint. As with wider Banking organizations, the WM business has been under significant pressure from the perspective of technology and the astounding pace of innovation seen over the last few years from a Cloud, Big Data & Open source standpoint.
- The Need for the Digitized Wealth Office– The younger HNWI clients (defined as under 45) use mobile technology as a way of interacting with their advisors. They are very comfortable & demand a seamless experience across all of the above services using digital channels. This has been a huge issue for established players as their core technology is still years behind providing a Web 2.0 like experience. The vast majority of applications are still separately managed with distinct user experiences ranging from client onboarding to servicing to transaction management. There is a crying need for IT infrastructure modernization ranging across the industry from Cloud Computing to Big Data to microservices to agile cultures promoting techniques such as a DevOps approach.
- The need for Open & Smart Data Architectures – Siloed functions have led to siloed data architectures operating on custom built legacy applications. All of which inhibit the applications from using data in a manner that constantly & positively impacts the client experience. There is clearly a need to have an integrated digital experience across regional and global and to do more with existing data assets. Current players do possess a huge first mover advantage as they offer highly established financial products across their large (and largely loyal & sticky) customer bases, a wide networks of physical locations, rich troves of data that pertain to customer accounts & demographic information. However, it is not enough to just possess the data. They must be able to drive change through legacy thinking and infrastructures as things change around the entire industry as it struggles to adapt to a major new segment – millenial customers – who increasingly use mobile devices and demand more contextual services as well as a seamless and highly analytic driven & unified banking experience – akin to what the consumers commonly experience via the internet – at web properties like Facebook, Amazon, Google or Yahoo etc
- Demands for increased Automation – The needs to forge a closer banker/client experience is not just driving demand around data silos & streams themselves but also forcing players to move away from paper based models to more of a seamless, digital & highly automated model to rework a ton of existing back & front office processes – which is the weakest link in the chain. While Automation 1.0 focuses on digitizing processes, rules & workflow; Automation 2.0 implies strong predictive modeling capabilities working at large scale – systems that constantly learn and optimize products & services based on client needs & preferences.
- The need to Rightsize or even Change existing business models based on client tastes and feedback – The clear ongoing theme in the WM space is constant innovation. Firms need to ask themselves if they are offering the right products that cater to an increasingly affluent yet dynamic clientele ? Case in point .
The next post in this three part series will focus on the business lifecycle of Wealth Management. We will begin by describing granular use cases across the entire lifecycle from a business standpoint. We will then examine the pivotal role of Big Data enabled architectures along with a new age reference architecture.
In the third & final post in this series, we will round off the discussion with an examination of strategic business recommendations for WM firms. Recommendations which I will believe will drive immense business benefits by delivering innovative offerings & ultimately a superior customer experience.
 World Wealth Report 2015 – https://www.worldwealthreport.com/
 “The Rich are already using Roboadvisors and that scares the banks” – http://www.bloomberg.com/news/articles/2016-02-05/the-rich-are-already-using-robo-advisers-and-that-scares-banks