In the global scenario, North America is one of the most prominent economy regions in the wealth management. The region is expected to grow at a CAGR or 5.7% in 2017-2023 period which is second highest growth rate after APAC region.

• Definition / Scope
• Market Overview
• Top Market Opportunities
• Market Trends
• Industry Challenges
• Technology Trends
• Pricing Trends
• Regulatory Trends
• Other Key Market Trends
• Market Size and Forecast
• Market Outlook
• Technology Roadmap
• Distribution Chain Analysis
• Competitive Landscape
• Competitive Factors
• Key Market Players
• Strategic Conclusion
• References

Definition / Scope

Wealth management is an investment/asset advisory/management service that combines other financial services to fulfill the needs of affluent clients. The process is consultative and one where advisor gains relevant information about the clients’ needs and return expectations and devises a strategy to utilize their assets in best possible manner. The firms especially make use of financial products/services to do so.

A wealth management advisor is one who professionally utilizes the range of financial services/products available in the market, such as, financial and investment advice, legal or estate planning, accounting and tax services, and retirement planning, to manage an affluent client’s wealth for a certain amount of fee.

The size and growth of the global wealth management market is very attractive. As of 2018, the market for net investable assets already exceeds $55,000 billion. The market is further expected to grow at a CAGR of 4.1% reaching $69,607 billion by 2021.

In addition, US captures the highest market shares worth $5.25 trillion (38%) among all regions in 2018 with China closely following behind with $1.31 trillion worth investible assets (9%) respectively.

During 2017-2021 period, from a regional perspective, we expect North America is expected to encounter highest growth in NIA. Although this region is mature in the industry, the growth is around 4.4% which is quite good compared with global growth of 4.7%.

The pursuit of personal success and a healthy risk appetite are some of the factors in the corporate culture of the firms in the region that is expected to drive private wealth accumulation.

Market Overview

In the global scenario, North America is one of the most prominent economy regions in the wealth management. The region is expected to grow at a CAGR or 5.7% in 2017-2023 period which is second highest growth rate after APAC region.

The US accounts almost 50% of the total wealth management market share of North America. However recently, the state debts remain at a critical level in the country and the government is under increasing pressure to find solutions.

In the US, bankable assets have been increasing by an average of 1.9% annually until 2018, supported by the strong performance of equity markets in the US.

The US economy is headed to find the path back to growth. Governmental and national bank initiatives will positively impact bankable assets, especially the upper HNWI (High Net worth Individuals) and UHNWI (Ultra High Net worth Individual) segments.

A report by the US SIF Foundation found that sustainable, responsible and impact investing assets have expanded to $12 trillion in the US in 2018, which is also about one fourth of the $46.6 trillion in total assets under professional management in the country. The growth is 38% from $8.7 trillion in 2016.

The growth of the industry is mostly driven by asset managers who consider the ESG criteria across $11.6 trillion in assets I 2018 up 44% from $8.1 trillion in 2016.

Until 2018, there are around 165 institutional investors and 54 investment managers controlling $46.7 trillion in assets under management (AUM) filed or co-filed shareholder resolutions.

The US asset management subsector is incomparable in its depth and diversity. The asset managers in the US at present are meeting the pension management needs of over 60% of the global retirement market.

As of 2018, the total US retirement assets were approximately $28.2 trillion. Moreover, if insurance assets and mutual funds are included, U.S. asset managers held nearly $51 trillion of long-term conventional assets under management in 2018.

As of 2018, at least 28 financial services companies out of all companies in Fortune’s Global 500 listing have chosen to locate their headquarters in the US.

Top Market Opportunities

Despite of the number of hurdles that persists in the US Wealth market, the managers in return need to adapt their business models to reflect the changing landscape of the industry. Thus, the players need to shift their focus towards improving their organic growth.

Out of the total investible assets, 9% i.e. about $4 trillion worth assets were set in motion in 2017. In addition, $2 trillion attributed to voluntary client transfers and remaining to advisors switching firms. Thus, the firms operating in the market landscape need to leverage on several opportunities to reduce customers pain points which are as follows:

Target right person at right time using advanced analytics-Serve clients across their entire financial lives by deepening relationships through engagement, support teams and access broad suite of products and services to more fully satisfy client needs. Beyond the offering, firms will need to invest in technologies such as AI that can lead to data driven marketing& sales and give a 360 degree view of customers.

Retain more clients by delivering superior client experiences and leveraging near-real-time monitoring of client behavior and proactively address their needs and issues.

Recruit the right talent by using predictive models to target advisors with a high propensity to grow, also developing a new-gen tech savvy advisor teams to better serve diverse and socially conscious generation of clients.

Reinvent the pricing model, moving towards more advice-giving management fees and improving pricing control with tools and analytics.

According to Mckinsey, by practicing these 5 levers, firms operating in the industry have opportunity to achieve 7-12% increase in their annual revenue along with opportunity to build financial strength and capabilities across different dimensions of the business, setting themselves up to emerge as winners in a future environment.

Market Trends

Growth in assets: Since 2017, the overall clients’ assets have been increasing tremendously. Globally, the figure stood at $49 trillion, 75% of the growth in the asset was driven by market appreciation and net flows. The North America is the second fastest growing market after Asia.

As the clients’ asset grew, the global pre-tax operating profits grew by 0.6 to 24.4%, making the industry one of the most profitable among financial services segment. Performance in the US is strong, with profit pools growing by 15%, or $6 billion annually, driven by market appreciation, rising interest rates, and the continued migration of client assets to fee-based accounts.

Rising customer expectation: Wealth management client expectations are rising at an unprecedented rate, customers expect more convenience, personalization and transparency from the service providers. An innovative disruptors and platform firms outside and inside the industry are already providing these attributes.

For instance, Amazon’s one-click ordering, same-day delivery, and suite of over 500 million products, all accompanied by customer reviews. Companies such as Amazon or Google could further drive its model & introduce platform with similar features into wealth management industry, this in turn has led many companies in the industry to raise the customer experience through their products and services.

According to McKinsey’s 2018 Affluent Consumer Insights 360 Survey, firms with high levels of consumer satisfaction enjoy materially higher wallet share and retain customers easily.

As a result, leading firms in the US are making targeted investments in CX initiatives, leveraging advanced analytics to identify and prioritize customer journeys, in digital and even extending CX to telephonic and in-person encounters.

The US has made several developments in technology including, robotic process automation (RPA), smart workflows, machine learning, advance analytics, natural-language processing (NLP), and cognitive agents. Despite of this, many wealth managers are struggling to take full advantage of these technologies.

Across the industry, the firms remain encumbered with deferred IT maintenance costs, manually intensive processes, and complex servicing arrangements leading to high operating costs, reduced or sometimes even negative operating leverage, and relentless margin pressure. Thus, firms need to leverage these technologies to lead to efficiency gains, superior customer service and experience.

Technology adoption: The pressure to adopt latest technologies is becoming acute as the industry is bringing in more entrants such as Amazon and Google. However, the need, a CFA survey released that only 4% of the total wealth managers are likely to move away from traditional practices and take digital first approach.

In long run i.e. in a span of 10 years, more than half (54%) said wealth management is likely to see significant change. The reason for the industry to not adopt the technology could be tech itself posing as a barrier to the firms involved.

Although some tech is being used in managing paperwork and routine reporting which is leading to cost reduction however, the industry is in need of leveraging more advanced technologies such as data analytics.

Industry Challenges

The wealth management is in an era of rapid change, while the nine-year bull run has diminished the industry challenges prevail. Successful investment managers such as managers of mutual funds, hedge funds, and private equity firms in 2019 will likely be the ones that can continue to manage these challenges with plans designed to withstand changing market conditions.

Passive funds continue to garner assets: In the first half of 2018, 16 of the top 20 funds by net flows were passive mutual funds and exchange-traded funds (ETFs) accounting $143 billion.

The growth of passive funds may further grow reaching $25 trillion mark by 2025 up from $4.8 trillion in 2018. At the same time, making the case for alpha for many active managers remains a challenge.

Around 86.7% of US active funds have underperformed their benchmark, on a net-of-fees basis, over the 10-year period ending in 2017.

The valuations are continuously on rise and while, many investors have been enriched with the bull markets since more than a decade, some managers on other hand are becoming more cautious. In addition, fee pressure and margin compression have persisted for many investment managers throughout this bull market.

In such scenario, one of the biggest challenges for investment managers is to obtain profitable growth. Some larger investment managers have used their scale to expand profit margins, while offering products at lower costs.

A large number of investors are still affected due to squeezed profit margins however, there are few companies that are investing in analytics and in turn freeing up resources to lead more profitable activities. Thus, these firms are concentrated and have built a brand value among investors. On the other hand, many small and midsized investment managers, lacking scale, are battling to maintain profitability.

Technology Trends

Artificial intelligence (AI) – Deloitteʼs 2018 Investment Management Outlook revealed about the AI technology’s role of identifying market patterns and making investment decisions. Thus, some of the applications of AI in the industry include, wealth advisory services, offering customized portfolios and digitizing customer service among others.

One of the popular firms in the industry, Morgan Stanley is combining machine learning (ML) algorithms with predictive analytics to help its 16,000 financial advisers generate more insights and provide personalized advice for clients. These algorithms browse through the research reports, data sets and news articles to derive unique insights for better investment decisions.

A more number of firms are leveraging M&A and partnerships to provide more immediate solutions for firms that wish to incorporate AI or related capabilities in new products. In addition, some investment managers are also seeking robo-advisers to offer custom portfolio solutions.

ESG products: Some of the investment managers are also working to enhance their product offerings. For example, the availability of products with an investment mandate that complies with ESG issues is seeing a rise in trend.

Greater social awareness from millennials, pension funds’ long-term horizon, and favorable regulatory changes are driving the increased interest toward ESG investing. Investment managers are preparing for this rising demand with 90% of US managers planning to assimilate ESG in their product development plans.

Cloud technology: Some of the investment managing firms are growing organically by targeting incremental change through adoption of technologies such as cloud and advance analytics. The application of these technologies ranges from business functions in investment decision to risk analytics altogether.

Cloud and advanced analytics is used to enhance cost efficiencies. Some investment managers, such as T. Rowe Price, have directed toward cloud migration to achieve operational scalability and lower fixed costs.

Advanced analytics: Some of the firms are processing virtually all kinds of structured and unstructured data to improve decision making. In an Ovum survey, US firms prioritized advanced analytics deployment in the front office, particularly in the portfolio management and promotion functions.

An example is, Verus (a mobile application) that combines the power of ML, NLP, and human knowledge to analyze global news reports and then allocates a score based on their potential impact on portfolio holdings.

The app then provides investment manager with customized news feed that is most relevant to its portfolio helping manager with investment decisions and managing portfolio risk.

Pricing Trends

• An entirely new pricing model has emerged in the industry, where managers are providing free passive funds advice. The announcement of a no-fee fund was a paradigm shift for the industry. With other investment managers also following suit with the launch of zero-commission platforms, the firms revenue-generation focus is moving towards securities lending, order-flow payments, and shareholder servicing fees.
• The large investment managers are the ones likely to use zero-fee products and use it to sell other offerings while keeping investors within the fund family. The pricing model of active funds is also encountering a restructuring of pricing model. A “fulcrum model” links fees to fund performance and charges a base fee if the fund does not outperform its benchmark. If the fund achieves alpha, an additional performance fee is charged. Thus, a variable fee structure as such may create a win-win situation for both parties leading customer retention.

Regulatory Trends

Not just in the US but even globally, regulatory oversight of investment management firms have heightened in recent times. The changes that have followed since past years have impacted reporting requirements, deal structure, and taxation. Some of the potential changes in the horizon include:

Conversion from partnership to C Corporation: The US Tax Cuts and Jobs Act or the “2017 Tax Act” has forced many PE firms to transform from a publicly trading partnership structure to a C corporation owning to the corporate tax cut.

Nonetheless, there are benefits of the conversion such as, tax savings as well as a boost in firm valuation from a wider investor base, C corporations can be included in stock indices and in funds following such indices. However, many PE firms in the US are eager to observe the early movers before adopting such plans.

Increase in asset purchase transactions. The 2017 Tax Act has also introduced some provisions that may limit the utility of debt in PE deals. The act generally caps business interest expense deductions at 30% of EBITDA, with the limits tightening to 30% of EBIT after 2021.

This can present a significant challenge because the growth that have been present in the firms is because of these companies portfolio being financed through debt. Accordingly, PE firms may decide to use more equity capital or take the asset leasing path instead of debt.

Another provision of the 2017 Tax Act allows immediate expensing of new as well as used assets. PE firms can utilize this provision to their advantage by shifting their transactions to asset purchases rather than stock dealings. 

Other Key Market Trends

• Differing customer experiences:

Between the investor segments, expectations are deviating. Most Millennials and Gen Z (born from 1995 to 2010) have made change in their investment practices from those of the older generations.

The younger generation tend to prefer engaging with online and mobile channels, a low minimum initial investment amount, and 24/7 access to investment advice on smart devices.

Meanwhile, more experienced segments GenX are often expecting one-on-one human interactions either through mobile and online investment accounts. While, the institutions on other spectrum are demanding better portfolio transparency, tailored investment solutions, and global products. 

• Tech-savvy firms are putting pressure on traditional firms:

A number of investment management firms are planning for potential disruption caused by new technology-based entrants. As a result of these disruptors, there is incredible change in online fund distribution, digital advice, or micro-investing with their expertise in digital experience delivery or large customer bases.

The new entrants in the industry also provide low-cost services combined with digital-age capabilities, aiming to attract new generation customers before they are targeted by the traditional firms.

• Acquisitions and minority stakes lead the way in the industry:

In the wealth management industry, many managers are hunting for strategic acquisitions. Many investment managers are hunting for strategic acquisitions. In 2018, the number of $1 billion deals were more prevalent than five years ago.

Especially, ETF segment had the highest wave of acquisitions than any other segment. In September 2017, Invesco announced the acquisition of Guggenheim Investments’ ETF business for $1.2 billion.

In addition, a leading US investment manager’s recent investment in micro-investing app Acorns helps them understand how to engage the younger generation of customers in mobile first world. The deal may also help the incumbent firm diversify its distribution capability into apps and chatbots.

Market Size and Forecast

• In 2018, In the US, the total asset under management in the wealth management industry was worth $4.43 billion.

Market Outlook

• The Wealth mangement industry in the US is expected to grow at a CAGR of 3.9% in 2017-2026 period and reach $5.9 billion by 2026.
• For 2019, “partnerships” will be the new buzzword as incumbent players in the wealth management industry realize the importance of meeting the demands of their millennial clients. On the other hand, fintech companies realize the importance of face-to-face conversations that they lack to deliver to client which they can by partnering with the traditional as well as professional wealth management companies. One of the recent acquisition in the industry was Morgan Stanley’s $900 million cash deal to buy Solium Capital. With this acquisition, Morgan Stanley hopes to draw more millennials into wealth management practice.
• Although a lot of robo advisors and AI based advising is popping up in the market, these models are still not mature enough to entice the millennial segment consumers. The AI is still not able to replicate the insights gleaned or the comfort level achieved through one-on-one conversations with the traditional managers. However, the future clients are more likely to have hybrid advice.
• The expected partnerships are not only going to revolve around technology, advisor and client dynamics. Total investible assets is North America is expected to grow nearly by 10% reaching an astounding $28.8 trillion by 2021. The maximum wealth will be concentrated of stocks and bonds. The low interest rate is further likely to drive more customers to allocate their wealth to alternative asset classes. Thus, advisors also need to have the knack to manage and analyze diverse holdings.
• Thus, the future of wealth management industry has high prospects to grow and is focused on attracting young engaged workforce to meet the increasing demands. The solutions are to shift from analog to digital with companies leveraging partnerships and acquiring talents from Silicon Valley as an average advisor in wealth management of US is aged around 55. Thus, the room for partnerships in 2019 extends throughout the wealth management pipeline.

Technology Roadmap

Choosing a distinct digital transformation plan is crucial to investment management firms to grow their operational efficiency. Serving new customers also requires to take leap in new capabilities.

In the US, new investment firms are already targeting, millennials, a segment estimated to account for $15 trillion in the US over the next 15–20 years, with innovative capabilities. These innovative capabilities include: tech driven interface, p2p interaction, low cost, transparency and social impact.

In terms of technology, digital voice assistants are expected to drive differentiation in the investment management area. Customer experience is one of the most important factors outside of investment performance for competitive advantage. Thus, digital voice may become the next customer interface.

According to the statistics, nearly 48% of the Americans may have a smart home speaker by 2019. One US-based investment management firm is already working towards offering advice through Amazon’s Alexa. DVA based service may guide clients perfectly on the amount they need to invest and suggest portfolio allocations based on their goals.

Distribution Chain Analysis

• The private wealth managers’ advice channel is growing at the fastest rate i.e. 8.9% representing a source of competition to other channels. 
• Online brokerages are also growing since last decade and are potential competitor for high net-worth clients. As of 2018, considering the fact that almost 3% of the accounts at online brokerages have assets of at least $500,000 and represent about half the channel’s assets.
• The slowest growing channels are full services brokers and financial advisors. One of the reasons could be high net worth clients who leave these advisors as they are unable to follow the clients and respond to their need promptly.
• Finally, the channels that are growing in an average rate at present but are likely to grow above average rate are: Online sales & direct funds, online brokers and private wealth managers. In addition, the channels that are likely to encounter reduced growth rate in future are: Branch advice and branch direct (mostly branch operation channels).

Competitive Landscape

The wealth management industry of the US scores all-time high, given its performance is highly correlated with capital market appreciation and interest rates.

However, lately the industry profits have plummeted which is also a strong indicator that these wealth management firms are not well positioned for the growth in different macroeconomic environment.The face of competition in the industry is changing, with “platform” or tech-intensive companies entering financial services.

Similarly, asset management partners are turning into partner/competitors, with some developing and expanding direct-to-consumer distribution models. Also new models are evolving such as, tech-enabled remote and digital advice which is becoming increasingly efficient, cost-effective and well received by the consumers. For example, the digital service segment grew by 90% in 2017.

From a competitive standpoint, the wealth management companies and banks in the US, both are joining their offerings and proving a more holistic product/service to the clients which is turn is leading the convergence of both businesses.

As the digital tools further break down the barriers and is allowing customers to have a common view and simple approach. As these relationships consolidate, the number of financial services firms are also reducing in number.

Moreover, banking is the fundamental need and wealth management secondary for the clients, thus wealth management firms without banks may run the risk of becoming cost uncompetitive and may have a difficult time acquiring clients.

Competitive Factors

As the industry dynamics is shifting, the wealth managers in the industry are also rethinking about their relationships. Some of the retail asset managers in the US are already investing in building direct to customer channels whereas minority of the players are remaining focused on several other strategies such as narrowing product shelf space, model portfolio inclusion, and staying top-of-mind with advisors, developing data-driven advisor segmentation, digital marketing, advanced analytics tools etc.

In addition, the asset managers are also investing in techniques for improving advisor experience and engagement such as portfolio management tools and practice management support.

The growth in the robot and remote advising models in the wealth management industry of US is quite evident and remarkable at the same time. The digital attackers were the first to offer these robot-advisor services and recently, the business model has been common among the digital-first incumbents.

Thus, a number of firms have started to think about the channel beyond traditional and engaged in developing competitive viable offerings tailored to the needs of customers that include, implementing next-generation client- and advisor-facing technologies, recalibrating product offerings and service levels, and deploying new pricing models and go-to-market strategies.

Thus, the future of wealth management in the US looks like a high-touch human advice model targeting less affluent segments.

Key Market Players

• In terms of the Asset Under Management(AUM) in 2018, the top 10 players in the US Wealth Management Industry are follows:
• Bank of America Global Wealth & Investment Management
• Morgan Stanley
• JP Morgan Private bank
• UBS Wealth Management
• Wells Fargo
• The Vanguard Group
• Charles Shwab
• Goldman Sachs
• Fidelity
• BNY Mellon Wealth management

Strategic Conclusion

The US wealth management industry is poised for growth over next decade. The new scalable and cost effective business models that are evolving in the industry will allow the future generation wealth managers to serve new, historically undeserved segments.

The present firms should however, focus on improving customer experience to further strengthen relationships. The successful players will likely not enjoy profits as high as it claims today, but they will be paid off by serving a significantly larger number of clients in a cost-effective way.

Thus, the executives should be closely examining and rethinking their business models, and taking bold actions to build for success and competitiveness through the cycle and into the future.

References

1. https://www.investopedia.com/terms/w/wealthmanagement.asp
2. https://www.investopedia.com/articles/investing/061314/best-best-wealth-management-firms.asp
3. https://www.rolandberger.com/publications/publication_pdf/roland_berger_wealth_management_in_new_realities_1.pdf
4. https://www.boyden.com/media/wealth-management-and-private-banking-market-overview-oct-dec-20-8083181/wealth-management-and-private-banking-market-overview-oct-dec-20.pdf
5. https://www.selectusa.gov/financial-services-industry-united-states
6. shorturl.at/brsJ9
7. https://www.advisor.ca/news/industry-news/sizing-up-the-competition-in-wealth-management/
8. https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-fsi-dcfs-investment-management-2019-outlook-rev.pdf
9. https://blogs.cfainstitute.org/investor/2019/02/13/2019-us-wealth-management-outlook-the-old-guard-and-fintech-cozy-up/