Market Potential

Wealth, Asset and Investment Market Overview and Challenges

Wealth Management

This HNWI (High New Wealth Individuals) thanks to the steady growth and size makes it the most attractive. The net investable assets where “Net investable assets (NIA) defined as financial assets, collectibles and precious metals held by HNWI, less financial liabilities, main residence, durables, and consumables“ (ref. “E&Y Outlook”, 2018) will reach $69 billion dollars by 2021, with an expected annual growth rate of 4.7% through 2021. Breaking down the expected growth by regional level Easter Europe (6.3%), Middle East (7.2%), Asia Pacific (5.9%) represent the highest growth percentages with North America (4.4%), Africa (4.8%), Western Europe (4.6%) to follow. Most of this growth is due to the better return on investment in various asset classes compared to the local GDP growth.

Digitalization and Transparency play a significant role in the Wealth Management industry today, and even stronger in the future. Individual’s needs are growing and becoming more demanding. The globalization and ease to access various investment services through digital means are exponentially increasing competition and driving market optimization. On the right table, we show the top 10 trends in the Wealth management industry in 2017 (Capgemini, 2017). In 2018 the trends we are observing persist unchanged from the previous year and consistent with the Capgemini study

An overview of the industry shows that the ultra-low interest rate made investors very sensitive to price fluctuation adding additional downwards pressure on Wealth Management margins. An alternative investment is progressively replacing the ordinary investment vehicles together with hedge funds, private equity funds, and others. Wealthy individuals are demanding to access the full breadth of digital capabilities, and they are moving towards a less human constant interface for their investment. The market needs a new way to engage with clients less human more automated, with technology taking a primary role and with humans’ interaction with reducing in scale.

This is where the technology role is becoming the primary enabler to solve many of the existing problems. Using technology, we are now able to digest an enormous amount of data quickly. We can assess and analyze portfolio risks to provide individuals with the right recommendations based on the specific investment risk appetite. Algorithms, for example, can help to maintain portfolio optimized by continuously analyze performance data, and optimize portfolio return with recommendations to the investor to act upon or with automatized actions.

Regulations are increasingly adding complexity in the financial market, we can think about the CRS9 (Common Reporting Standard), FACTA (Foreign Account Tax Compliance Act), special requirements on funds under the Undertakings for the Collective Investment of Transferable Security (UCITS), Markets in Financial Instruments Directive II (MIFID II). The addition and increasing complexity of regulation translated into increasing operational costs, reducing margins, and increasing barriers to entry.

The advisory role is progressively diminishing of importance in the private investment decision-making process. Business Model (BM) is shifting from product-based to a holistic model, focused on client-centric and advice-based (ref. E&Y Wealth Management outlook, 2019). A switch to a genuinely client-centric advisory-oriented approach is more feasible than a diversification strategy.

Overall, Wealth Managers are struggling to justify the “value proposition” to their clients, that reflects downward pressure on fee, with subsequent erosion of companies’ profitability over time. To some extent, some wealth advisors are already operating advisory-oriented business model challenged by as mentioned before increasing costs from regulatory and technology perspectives. Survival is becoming critical, and where the primary drive is to keep cost controlled, it requires a scalable business that will by consequence drive merges and acquisition and concentration.

Maintaining low cost of capital, high digitalized platform and servicing will allow wealth management/banks to maintain the competitive position. This also applies to niche players, such as small family own business, focused on a specific market segment that will also need to adjust their model to support new technology to serve their clients through new digital means.

This wealth management business model is progressively moving towards an advisor-oriented model, with holistic wealth managers taking advantage of digital technology such as robo-advisory, life events to redefine their value propositions to their clients. Digital industrialization across the end-to-end value chain is key to success for the industry and to survive against the competition.

Investment Management (IM)

  • The Asset Management industry is living a tremendous pressure, and the industry is expected to change in the upcoming years fundamentally. Some of the key highlights:
  • Regulatory and fee structure is changing to reflect new and complex client needs and interests.
  • The rise of Outsourced Investment management (i.e., OCIO – Outsources Chief Investment Officer for Institutional Investors) (https://seic.com/solutions/outsourced-investment-management-ocio-institutional-investors). Asset Managers can also become OCIO themselves with advisory and manager selection skills and different governance approach.
  • Distribution is reshaping into a new model. Retail channel- Investment platforms, vertically integrated advisors and TAMPs (Turnkey asset management platform) “A turnkey asset management program offers a fee-account technology platform that financial advisers, broker-dealers, insurance companies, banks, law firms and CPA firms can use to oversee their clients’ investment accounts” (https://www.investopedia.com/terms/t/turnkey-asset-management-program-tamp.asp), adoption has been increasing.
  • Digital Transformation – The Asset Management industry has not been protected by the digital revolution. Robo-Advisor, artificial intelligence, machine learning, and analytics have increasingly grown of importance and the scale of which human’s tasks are replaced by the machines with long-term impact on a business model and workforce roles allocation.
  • Growing new business and startup in fintech will lead the market transformation bringing know-how and new ideas to drive market efficiency with new strategies, greater transparency on fee and downward pressure during investor to low-cost fund such as ETFs.
  • Higher operational and compliance costs will lead to market consolidation with merger and acquisition especially with small players.
  • The mutual fund is increasingly seen as expensive and anachronistic ETFs, separate accounts, and collective trusts are rising in importance
  • Advice for-fee model means product distribution efforts are more consultative and institutional.
  • Active portfolio management - With a greater focus on outcomes, products are designed to manage risks across multiple asset classes; firms are using the same tools to manage enterprise risk. Statistical analysis of durable drivers of excess return is being used to derive new smart beta products. Artificial Intelligence tools are being used to augment traditional fundamental analysis
  • Passive Portfolio management - Exchange-traded products rely on significant technology resources to interact in real time with intermediaries and end users

The role of Technology:

  • It enhances efficiency and distribution reach. Operational efficiencies are an essential response to revenue pressure. Investments in database tools and data analytics
  • Distribution architecture changing is changing requiring new skill set and understanding of the opportunities offered by these technologies.
  • Cost reduction initiatives in middle and back office
  • Technology supports changes in distribution practices and product innovation
  • Advisors are increasingly using holistic tools to manage clients’ wealth. Managers must sell into “universal account platforms” that optimize portfolios across all client assets
  • Asset managers are acquiring technology to sell into and capture the growth of “robo-advice”.

The industry is moving to passive products and advisory business models. Cost of comply with regulation is increasing (e.g. MiFid II) and non-traditional new competitors are entering the market (e.g. Blockchain companies).

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