3 key market drivers for the wealth management industry

Global Industry Marketing Leader – Financial Markets & Wealth Management, IBM Analytics

Wealth managers would be wise to embrace digital transformation, as it is the essential ingredient underlying much of the current evolution the wealth management industry is experiencing. Digital transformation can create a highly connected experience with clients, advisors and third-party business partners who provide solutions.

Determining how to create these connected experiences and ecosystems to bridge the growing gap between client expectations and services delivered is one of the most immediate and strategic questions facing wealth managers in the 21st century. There are three key market drivers that are creating urgency around transforming the wealth management industry: regulation, competition and client behavior and demographics.

1. A dynamic regulatory environment and advisors currently face limited and sometimes conflicting guidance across regulatory bodies. The growing volume of regulation likely adds costs and complexity. These new regulatory frameworks combined with additional new financial regulations and customer protection measures are expected to create barriers in some local markets, which can add complexity and costs for multinational players.

2. Disruptive competition

As information proliferates, the need for an advisor solely as an expert to help clients manage their way through an opaque market is increasingly being called into question. Wealth managers are being forced to reconsider the role of the advisor as new disruptive competition for obtaining investment advice and selecting and evaluating advisors emerge—all with the backdrop of a rapidly changing regulatory landscape.

Advanced paradigms for the role of the advisor are emerging; the next generation of investment advice is using digital environments to transform the client-advisor relationship. These new financial advisors have several personas:

  • Traditional, relationship-based advisor: This individual elects not to adopt a digital transformation.
  • Traditional advisor: This individual becomes increasingly technology-enabled and digitally engaged with clients in daily activities.
  • Social advisor: This individual is embedded in the social network of the self-directed investor, whose opinion and views are highly sought-after and followed by the community.
  • Automated advisor: This entity replaces human advisors to manage investors’ portfolios.

Established wealth management organizations that do not learn from digital start-ups and adjust their business models accordingly may find themselves at a significant disadvantage in the marketplace, while incumbents that learn to use digital technologies to address unmet needs and deliver a superior client experience may be able to leapfrog the competition and capitalize on emerging market opportunities.

3. Client behavior and shifting demographics

Traditional value propositions are quickly fading. Demand for multichannel access is immediate and exists across client segments. Several demographic forces are converging to alter the composition of the wealthy and those organizations that serve them.

Consider the increase in the retiree population. As the first baby boomers among the 78 million Americans born between 1946 and 1964 hit retirement age, they face longer life expectancies and more expensive healthcare costs than generations that preceded them. This generation is faced with a need for individual wealth preservation and advice during the 15–20 years of the retirement phase in which they shift from income accumulation for retirement to income and standard of living preservation during retirement.

The challenge for this generation is the financial advisor role—the people who will help aging investors focus on income that is guaranteed through retirement age, rather than the traditional return-based focus of the industry. Over the next 50 years, more than $41 trillion is estimated to be transferred from one generation to another. The next generation has different wealth and personal finance preferences, and specific expectations about client interaction, technology and access that may drive demand for robust, highly connected client experiences.

The current financial advisor population is also aging. As the average age of advisors continues to increase, changes in the recruitment and development of future advisor talent become increasingly necessary.

Tailored financial advice

Today’s clients want their advisors to anticipate what their financial needs are, and for those advisors to use what they know to tailor financial advice to their specific needs. In addition, clients want convenience and consistencies in how they interact with their advisors and for the experience to be the same, whether it is online, on the phone or face-to-face. Clients also want advisors to be there when they need them, and to leverage all previous interactions to deliver financial advice tailored specifically for them. To anticipate and respond to these requirements, financial advisors need enhanced insight into their clients’ relationship with their firms.

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