Sizing up the competition in wealth management

Competition is nothing new to advisory services, and in the ongoing battle for clients, firms must identify risks and opportunities. To help do that, industry research and expert insight were presented at CFA Society Toronto’s annual wealth conference in Toronto on Wednesday.

Expected growth rates for wealth management’s various distribution channels, shown in the table below, were presented by Keith Sjögren, senior consultant and managing director at Strategic Insight.

Table: Size and expected growth rates of various distribution channels

Channel	Growth rate 2007-2017	2017 assets (billions)	Expected growth rate 2017-2026
Branch direct	4.6%	$1,005	3.9%
Branch advice	8.8%	$508	7.8%
Online sales and direct funds	6.1%	$85	9.7%
Online brokerage	9.4%	$440	7.4%
Full-service brokerage	5.5%	$1,230	5.5%
Financial advisor	3.5%	$552	3.4%
Private wealth management	8.9%	$456	7.8%

Source: Strategic Insight, using compound annual growth rates

Speaking to the audience of private wealth managers, Sjögren noted that the branch advice channel is growing at an above-average rate, representing a source of competition. The financial advisor channel will also struggle against branch advice, he said, especially where higher-fee mutual funds are a focus.

Online brokerages, with the highest growth rate over the last decade, are also a potential competitor for higher net-worth clients, considering almost 3% of accounts at online brokerages have assets of at least $500,000 and represent about half the channel’s assets (as of September 2018).

Still, regardless of differences among channels, sometimes pleasing clients comes down to the basics. The top reasons why high-net-worth clients leave their advisors are a failure to return a phone call in a timely manner, a failure to provide advice or ideas, and a failure to proactively contact the client, according to Vanguard Canada research. “It’s all about the client experience,” Sjögren said.

Whether because of client satisfaction or inertia, the client defection rate in private wealth management is low, at about 3%, while that of brokerages is in double digits. “You are retaining your clients far more effectively than any other channel,” Sjögren told conference attendees.

He also presented U.S. data showing that younger generations, specifically millennials and generation X, tend to focus more on financial goals relative to return targets. As a result, advisors should consider wealth planning and goal setting in a family context, he said.

Overall, successful firms tend to focus on client segmentation, and multiple products and services, with exceptional client experience for retention.

In addition to ongoing competition, other risks for wealth management include slower economic growth, which will result in less wealth creation and fewer new clients, as well as a greater demand for alternative assets and strategies; reduced margins as investors switch to passive investing; poor succession planning in the industry for both ownership and leadership; and pressure to adopt new technology. These and other issues will likely result in more consolidation, Sjögren said.

Tech trouble for advisors

Pressure to adopt new tech is particularly acute, as the industry braces for non-traditional entrants such as Amazon and Google. Despite this, a CFA survey yet to be released found that only a small percentage of global CFA Institute members (4%) said human wealth managers will go the way of the dinosaur in the next five to 10 years.

Instead, more than half (54%) said wealth management is likely to see significant change in the next five to 10 years—a challenge for advisors, though a surmountable one.

“The future is bright for the right kind of practitioner who’s willing to embrace the changes that are coming and adapt their practices accordingly” to provide better, potentially more cost-effective services, said Bob Danhauser, head of global private wealth management at CFA Institute. Danhauser also spoke at CFA Society Toronto’s annual wealth conference, and he offered a sneak peak of the survey.

Still, embracing those changes is a tall order. In the survey, the only profession to score higher on change over the next decade was IT. Plus, tech can be a barrier for some.

For example, CFA market research finds that CFAs are more likely to say they’ll leverage tech rather than ignore it, relative to other wealth management professionals. That finding might be the result of non-CFAs placing a premium on relationships as a key driver of value, but tech changes can’t be ignored, said Danhauser.

In an interview, he said that smart advisors are using tech to “sand off the rough edges of client experience,” such as paperwork and routine reporting. Such methods of leveraging tech provide the added bonus of helping advisors be more cost effective, he said.

He also forecasted increased integration of client needs by manipulating client data in a non-intrusive way. Wealth management will use technology “in its fullest to discern truths about their clients that we just can’t get reliably from sitting across the table from them,” he said.

Harnessing data has the potential to influence the quality of advice, he added, helping wealth managers identify consumer behaviour and so make better recommendations. “I don’t know what that looks like yet,” he said. “But I have no doubt it’s coming, and soon.”

An area still ripe for disruption is financial planning for mass affluent households. As it stands, over the last five years, financial planning resources have improved and become more cost effective for professionals. “It’s hard to believe that won’t be extended out to end consumers,” Danhauser said. While that would benefit younger investors, who are in particular need of planning services, for advisors it means defending their value propositions, he said.

Another opportunity lies in ESG investing. For advisors and clients who take a long view, Danhauser forecasted that ESG will be used as risk mitigation to protect clients’ positions, according to their time horizons. ESG has been embraced in the institutional space and in places like Europe and Japan, but has yet to be embraced here, he said.