Chanakya Dissanayake, Managing Director, Global Head of Investment Research Acuity Knowledge Partners:
We are pleased to present the results of our third survey of wealth managers. Acuity Knowledge Partners has been associating with the sector for over a decade, working with leading wealth managers and helping them with a broad range of activities including securities research, portfolio management, credit risk/lending analysis, sales and marketing and compliance. This has helped us become a trusted partner to drive front-office productivity and effectiveness.
With these results, we aim to provide insights on the latest trends in wealth management and how key players are reorganising their offerings to suit market requirements. We echo our survey respondents’ expectations of high demand for premium services and personalisation of offerings combined with technology in the changing private wealth landscape. While overall wealth is set to grow at a moderate pace despite geopolitical headwinds and challenging macro conditions, we expect market leaders to drive AuM by tapping into emerging markets and consolidation.
This survey is part of our effort to gauge the sentiment of and outlook for the global wealth management sector, and we hope the results offer valuable insights on sector trends. We thank all the respondents for their participation and sharing their insights.
Private wealth managers face challenges such as margin pressure, operational issues and ensuring regulatory compliance. Acuity Knowledge Partners (Acuity) conducted a study of global private wealth managers for a third consecutive year to understand how best-in-class firms are reorganising themselves after the pandemic and rethinking their client offerings.
Around 100 representatives of leading private wealth management firms responded to our survey, including CEOs, CIOs and heads of research and advisory who play an important role in growing assets under management (AuM) and defining business strategy. The majority of the respondents were from Europe and the US.
Key takeaways from the survey are as:
1.Far higher service levels are required, driven by the demands of younger wealth management clients. Those making use of private wealth managers are demanding ever greater personalisation and 24*7 service
2.Private wealth is set to grow in the coming years despite the headwinds from geopolitical issues and rising inflation, dominated by emerging markets. AuM growth is expected to be driven by traditional and alternative investments.
3.Private wealth managers are likely to grow their AuM through entry into emerging markets, market consolidation and recruiting more investment managers.
4.Top trends that have emerged after the pandemic:
- The growing number of younger clients emphasises the need for private wealth managers to combine technology and specialised advisory
- The need to preserve wealth for future generations emphasises the importance of sustainable investing, creating a need for more ESG-focused investment advice
5.Offering customisable investment solutions and personalisation emerged as important strategies for maintaining and growing AuM. Hybrid models with digital tools for routine investments and specialised advisory for complex investments were the top choice.
6.Ways of driving front-office efficiency include empowering relationship managers with analytical tools and dashboards, leveraging outsourcing to optimise costs and digitalising front-office functions.
7.Regulatory requirements make it mandatory to provide research recommendations for advisory, increasing the need for global coverage and ESG-integrated investment advice. Partnering with an outsourcing service provider was the top cost-effective solution
8.Costs are increasing due to enhanced focus on sales and marketing, investment management and middle-office and corporate functions. Investment in digitalisation, entry into emerging markets and advisor headcount is likely to account for most of the costs in the coming years.
This is the third year of the survey, and we intend to make it an annual exercise to assess short and long-term implications
We sent email invitations to participate in our survey to more than 100+ global private wealth managers with AuM of USD1- 50bn+. The following charts show a breakdown of the respondents.
Global private wealth to grow steadily amid headwinds from the pandemic and geopolitical issues
Global private wealth has been relatively resilient to macro issues such as the COVID-19 pandemic, rising inflation and geopolitical headwinds from the Russia-Ukraine war. Despite increasing inflation across markets, the hawkish stance of central banks and market volatility, global financial wealth is growing steadily. Around USD26tn of new wealth was created in 2021, driven by growing corporate earnings and market gains; this was an increase of 10.6% over 2020 and took the total wealth pool to USD530tn1. Asia is expected to lead growth over the next five years, followed by the Middle East and Africa.
Investment options for high- and ultra-high-net-worth individuals (HNWIs and UHNWIs) include traditional investments (stocks, bonds, funds and real estate) and alternative non-traditional options such as private equity, digital assets and hedge funds.
Positive revenue outlook for traditional
AuM-based investments and loans and deposits
Responses relating to the revenue outlook for the next three years indicate the following trends.
» 57% of our respondents see organic growth coming from traditional mandates
» Over 52% of our respondents expect organic growth from non-traditional mandates such as loans and deposits
» While the outlook for revenue growth through M&A is largely flat, according to 48% of the respondents, 56% of the respondents expect growth to be supported by new mandate wins, largely driven by most private wealth managers widening their client base
» Offering advisory services on products such as Lombard loans in addition to regular advisory services enables private wealth managers to tap the growing liability markets where market share is largely held by non-private banks
Private wealth managers are set to grow their share of AuM through emerging-market penetration, M&A and recruiting more investment managers
Despite the near-term challenges of inflation and the uncertain outcome of the Russia-Ukraine war, global wealth is set to record consistent growth. Asia Pacific excluding Japan is expected to record the fastest growth in private wealth, at an 8.4%2 CAGR over 2021-25, with increased penetration
of private wealth managers and riskier financial products gaining popularity in the high-inflation environment. Private wealth managers planning to expand to emerging markets are well positioned to benefit from the trend. The Middle East and Africa are expected to record a high growth CAGR of 5.4%3, and growth in the developed markets of North America and Western Europe is expected to be subdued at 4.7%4 and 4.5%5, respectively.
Private wealth managers believe market consolidation through M&A offers opportunity to diversify their offerings to new markets or add newer technology-driven services to their product portfolios. While North America leads the trend, Europe and Asia are also adopting it either through pure M&A or alliances/partnerships.
Based on our survey results, growth in AuM is likely to be dominated by entry into growing emerging markets (41%), followed by inorganic growth by acquiring smaller players through M&A (31%) and recruiting more investment managers (28%).
Non-AuM-based revenue growth to be driven by diversified service offerings and personalisation
To enhance the client experience and create stickiness, private wealth managers need to provide a range of additional services with appropriate personalisation. Customisable discretionary mandates aligned to clients’ preferred risk levels offer a high degree of personalisation. Providing access to alternative investments such as pre-IPO, private equity and digital assets helps a private wealth manager create a holistic investment solution. Diversifying into non-AuM-based revenue sources such as loans, custody assets and transaction-based revenue also provides private wealth managers with a stable alternative revenue channel. Private wealth managers could increase market share of the growing liabilities held by HNWIs and UHNWIs by offering integrated services for lending and credit risk management. Most liabilities are serviced by non-private banks at present.
The top choices for growing non-AuM-based revenue were through transaction-based revenue growth (38%), custody assets (36%) and lending products (26%).
Trends in the new normal
Growing number of younger clients highlights need to combine technology and specialised advisory
The private wealth management sector is seeing a shift in the client mix to younger clients, “affluent” clients and female investors. Younger clients with higher risk appetite prefer to have a mix of high-quality tools/dashboards for monitoring their routine investments and specialised advisory on niche areas such as alternative investments. Our survey respondents reported a client split of 56% of investors over 50 years of age and 44% under 50 years.
Wealth preservation and holistic service emerged as top post-pandemic trends
The focus of investing is seeing a shift after the pandemic to wealth preservation for future generations. Wealth preservation emerged as the top trend in our survey, with 28% of the responses.
Another key trend is the shift to virtual meetings from face-to-face meetings earlier, with 24% of the responses. The pandemic-induced lockdowns pushed private wealth managers to accelerate the shift to digital tools for conducting meetings and communication. Amid the uncertainty surrounding investments and investors being spread across the globe, 24*7 support soon became a value differentiator. Our survey results show that access to 24*7 advice is the third trend, with 19% of the responses. Our survey results also indicate the need for analytical and holistic advisory, suggesting high demand for a combination of digital communication/tools and regular access through face-to- face meetings/calls (18% of the responses).
Sustainable net-zero investments are growing rapidly to become a large part of the investable wealth of private wealth clients. Mirroring this, 11% of our survey respondents viewed ESG-focused investment advice as another key trend in the new normal, highlighting the need for private wealth managers to offer such products/investment advice
New tech-driven platforms and lack of access to a diverse range of products emerged as top threats to sustaining client mandates
The pandemic highlighted the need for private wealth managers to fast-track their investments in technology. With face-to-face meetings becoming digital, round-the-clock support was expected. A lack of digital tools and analytics and regular advisory support is a threat to sustaining client mandates. Heightened competition from robo-advisors and fintechs requires private wealth
managers to shift their business strategies to provide a digital experience and diversified investment options. Offering diversity in investment options by including alternative investment options such as private equity, private debt and digital assets would give private wealth managers a competitive edge.
We tried to ascertain the top threats to sustaining client mandates. The emergence of new platforms targeting younger HNW clients (32% of the responses) was seen as the biggest threat. Next-generation clients (25-50 years of age) self-managing routine investments and using premium advisory services only for specialised and complex investment products is a potential threat to traditional private wealth managers that need to scale up their investment offerings. A lack of
diversity in offerings was seen as the next biggest threat (26% of the responses). This was followed by the increasing cost of advisory services and the inability to provide clients with a continuous value- added service (22% and 20% of the responses, respectively).
A hybrid model that comprises high-touch holistic advice on niche areas such as pre-IPO and private equity, and digital advisory to handle routine investments would be the best to attract and retain clients. Innovation in offerings and services to adapt to the dynamic environment is a key component of success.
Growing private wealth managers’ advisory revenue
Growing advisory revenue is a key priority for private wealth managers, as they can charge premium fees for advisory services, with regulatory directives such as MiFID II and bodies such as the Hong Kong Securities and Futures Commission requiring investment products to be backed by investment rationale. Broad research coverage complemented with bespoke research enables private wealth managers to offer high-quality advice to clients. The post-pandemic scenario and the Russia-Ukraine conflict have also increased the need to give clients frequent updates on individual securities and macro, ESG and thematic research. However, deploying an in-house research team to meet research requirements proves to be a very expensive option. We believe private wealth managers can choose from the following options to provide research.
Enhancing cost-effective bespoke research offerings by using outsourced research to complement in-house work
To tap increasing wealth, meet regulatory requirements and offer value-added advisory to clients, private wealth managers are focusing on improved research products. Broadening research coverage and increasing the frequency of research reporting would help them provide clients with regular updates amid the current geopolitical and macroeconomic situation. While deploying an in-house research team is a costly option, complementing the research with outsourced work is highly cost- effective.
Our survey shows the top choice is complementing in-house research with cost-effective outsourced work (28% of the responses), followed by growing the in-house research team (26%) and using more modern analytical client tools (24%). The last choice (22% of the responses) was using third-party research providers, as most investment managers are more comfortable providing clients with in- house views than third-party views. Given the cost-effective nature of outsourced research and the added advantage of enhancing branding, it becomes part of the top choice.
Cost margins over past 12-24 months and outlook for the next three years
Private wealth managers face a number of challenges such as pressure on margins and rising costs, especially with the focus shifting to digitalisation after the pandemic. Private wealth managers offering digital experiences have a clear competitive edge. Equipping investment managers with digital tools and dashboards facilitates providing end clients with an enhanced experience. The other main expenses are expanding to emerging markets to tap underpenetrated wealth markets and recruiting more advisors.
Our survey results indicate that the cost-margin outlook appears to be largely flat for the next three years; 46% of our respondents forecast a flat trend, 41% see an increase and 13% a decrease.
Investment in digitalisation emerged as a top priority, with 65% of the respondents predicting an increase. This was followed by expansion to emerging markets, with 57% predicting an increase in related costs, and increasing advisor headcount, with 41% forecasting an increase in costs.
Empowering investment managers and outsourcing – important to increase front-office efficiency and operational flexibility
Empowering investment managers with the analytical tools and materials necessary to conduct insightful conversations with clients is becoming a priority, especially with the recent shift to remote meetings and increasing advisory requirements.
Our survey indicates that 42% of the private wealth managers surveyed are considering improving investment manager productivity in an effort to improve front-office efficiency. Leveraging outsourcing to reduce costs emerged as the next important driver, with 35% of the responses.
Digitalising front-office functions was the third, with 23% of the responses.
Outsourcing helps reduce costs and free up the onshore team to handle more complex and value- added tasks. Benefits of this model include the following:
» Cost savings – 50-80% cost savings vs resource costs in major financial centres
» High returns – using onshore talent for more client-facing tasks and exploring new opportunities, indirectly enhancing employee retention and growth onshore
» Access to a highly qualified and talented resource pool – with outsourcing, private wealth managers have access to a trained talent pool that could be used as an extension of the onshore
» Flexibility to scale up or down with minimal investment – outsourcing models provide ample opportunity for private wealth managers to leverage resources in flexible models. Easy ramp-up or down of resources based on demand also helps reduce time to market
Ramesh Punugu Director, Investment Research Acuity Knowledge Partners:
Wealth managers are set to benefit from key macro trends such as growing wealth pools across the world, especially in Asia.
Key priorities for wealth managers include expanding the service offering to incorporate non-traditional products such as loans and growth through M&A. Expansion to emerging markets, investing in digitalisation and increasing advisory headcount are key cost drivers in the medium term. Driving relationship manager productivity and leveraging outsourcing are cost-effective means to drive profitable growth. The uncertainty following the pandemic and surrounding the Russia- Ukraine crisis highlights the need for wealth- preservation strategies and offering 24*7 support. The increasing share of the tech- savvy younger generations in the customer mix emphasizes the need for investment in digital tools and specialized advisory. We believe private wealth managers who leverage a global operating model that optimizes access to specialist talent pools in cost-effective locations and contextual technology capabilities can gain a competitive edge and leapfrog competition in this environment.
Priya Vaidyanathan Associate Director, Investment Research
Priya has over 19 years of experience in equity research and financial auditing. At Acuity Knowledge Partners, she currently manages client relationship and delivery for leading private banks. She has been with the company for over 17 years and has led teams in sell-side and buy-side engagements. She previously worked at Ocwen Financial Services and as an auditor at Deloitte. Priya is a Chartered Accountant and holds a Bachelor of Commerce degree from Bangalore University.