A busy 2016 for The Wealth Consultant (including a relocation to Singapore) was capped off with an opportunity to share my point of view with some great industry analysts, as well as win an award for a white paper written earlier in the year (more to come on that one).
The team at the CFA Institute kindly offered me the opportunity to share my views on younger HNWIs, which was published in December 2016. I share below for ease of reading, but if you would like to read the article in its full form, please go here http://www.cfapubs.org/doi/pdf/10.2469/cfm.v27.n4.11
The Hidden Cost of Digital Immaturity
TO GAIN VALUABLE YOUNG CLIENTS, WEALTH MANAGERS MUST ADAPT
Wealth managers have long understood that attracting younger high-net-worth clients is critical to the future success of advisory firms. Today, however, many managers risk missing a critical window of opportunity with the next generation of high-net-worth individuals (HNWIs). Recent survey data indicate wealth managers’ misconceptions about the behaviors and preferences of younger HNW investors may cause managers to lose potential clients to competing providers, such as automated advisers. To avoid serious disruption of their business model, wealth managers must adapt in several important ways, especially by raising their level of digital maturity.
A FRAGMENTED MARKET
The past few years have been very good for HNWI wealth growth. When our firm, Capgemini, released its World Wealth Report 2016 (a benchmark for insights into the global wealth management industry and the 20th anniversary edition of the report), findings showed that global HNWI wealth expanded almost four-fold over the past 20 years, from US$16.6 trillion in 1996 to US$58.7 trillion in 2015. This remarkable growth came despite the Financial Crisis of 2008 and the largest contraction of wealth recorded since the Great Depression. Another positive tailwind has been the return of trust to the industry. The Capgemini Global HNW Insights Survey, conducted in the first quarter of 2016 and spanning more than 5,200 HNWIs in 23 countries, observed large increases in the trust HNWIs have in nearly every aspect of the financial services business. This finding was especially true regarding the percentage of HNWIs globally who expressed trust and confidence in their primary wealth management firm, which increased 17 percentage points to 74%. Despite increased trust and record levels of wealth, however, the survey shows that wealth managers oversee less than one-third of global HNWI wealth. The picture is starker still when observing that primary wealth managers handle less than 22% of HNWI wealth. The takeaway is that wealth managers are falling short in their ability to attract a greater amount of HNWI assets.
Of the remaining two-thirds of HNWI wealth, roughly half is locked up in illiquid assets (including real estate and businesses) and thus will not present a short-term opportunity for consolidation. But the wealth in illiquid assets will provide a medium-term opportunity as liquidity events arise. For wealth managers, a more immediate target of opportunity can be found in the largest chunk of the remaining wealth, representing more than one-third of the total, given it is essentially liquid and thus potentially available to wealth managers. Thirty-three percent of investable HNWI wealth is sitting in retail bank accounts or in the form of physical cash (Figure 1). But younger HNWIs are even more inclined to allocate their wealth to bank accounts and cash rather than the services of wealth managers. They also appear to have more of their wealth tied up in their businesses than older HNWIs. Specifically, less than 28% of the wealth of under-40 HNWIs is held with wealth managers, compared with 42% for those HNWIs over 60. Our view is that this finding is a significant challenge to wealth managers and firms alike. If the trend persists, it will be capable of imperiling the wealth management industry. But there is some good news. HNWIs are willing to consolidate more of their assets with their primary wealth managers in the future. This willingness is even stronger (perhaps unsurprisingly so) among HNWIs who are satisfied, with 68% of such HNWIs willing to consolidate, compared with only 21% of those who are dissatisfied. This situation also presents an opportunity for wealth managers. While HNWIs under 40 currently have a relatively low level of wealth booked with wealth managers, younger HNWIs are also the most open to the idea of consolidating their assets under a manager, with almost two-thirds stating they are likely to do so. The key, then, will be to offer a proposition that attracts them to the firm.
MYTHS ABOUT YOUNGER HNWIS
Being able to attract younger HNWIs is a critical success factor for the future. One phase is to attract these potential clients as they create wealth of their own, but another phase is to attract them as they inherit wealth (notably from the Baby Boomers in North America and Europe and from the first- and second-generation wealth creators in the emerging markets of Asia Pacific) over the coming decades. But wealth managers have to overcome an obstacle of their own making. When wealth management firms look at attracting and serving younger HNWIs, they often base their strategies on the myth that younger HNWIs generally have simple wealth management needs and are only interested in using online services to fulfill their need for basic services. Our research has found this not to be the case at all; in fact, the financial planning needs and concerns of younger HNWIs are even more acute than those of older HNWIs. Such a mismatch is perhaps why we have consistently found that the satisfaction of younger HNWIs with their primary wealth managers lags that of clients who are 60 or older. As a result, the demand for professional advice is very strong. For example, in our 2015 report we found that younger HNWIs globally are more worried than wealth managers realize about affording retirement, managing education costs, and passing down their wealth, among other areas. The primary concerns of younger HNWIs revolve around health and financial planning, including their own and their family’s health (69.9% stating a concern), fears around assets lasting through their lifetime (67.9%), being able to afford the lifestyle they prefer in retirement (67.1%), and the rising costs of healthcare (65.2%). In contrast, wealth managers’ assessment of the importance of these HNWI concerns is much lower, with a gap of 16 percentage points regarding family health, 18 points with respect to assets lasting a lifetime, 22 points regarding rising healthcare costs, and 19 points with respect to maintaining their lifestyle in retirement. There is also a considerable gap of 23 percentage points between younger HNWIs expressing high concern about rising education costs and wealth managers indicating that it is an important concern for clients.
ACHIEVING DIGITAL MATURITY
Attracting younger HNWIs involves two scenarios: (1) wealth transfer among generations and (2) wealth creation. First, during wealth transfer, an often overlooked fact is that in most cases the wealth does not pass directly from one person to another (e.g., from parent to child). Instead, wealth often passes among three people (e.g., from parent to spouse to child). Of course, such a three-stage transfer is likely to occur over a number of years. There is therefore a clear need to engage the full household as part of the overall wealth relationship in order to better serve the primary relationship. Just as a client planning for retirement requires optimized wealth distribution solutions, the spouse and next generation need to be prepared for the wealth transfer event. (This is also a chance to build intimacy and trust well in advance of their inheriting the assets.) Firms can and do go about engaging the full household in a variety of ways, from using multi-generational and multi-gender adviser teams to tailoring propositions for key solutions of interest to different clients (such as philanthropic causes) to hosting youth academies and other offsite events. The second scenario where there is an opportunity to attract younger HNWIs relates to wealth creation. Younger HNWIs are active in the traditional wealth-creating engines of entrepreneurship and career earnings, but to gain younger wealth creators as clients, firms will need to have excellent prospecting tools that go beyond traditional referral models (which often rely on close-knit connections in a physical community) and embrace new social media technology. According to the 2016 Capgemini survey, 60.5% of wealth managers of all ages view prospecting through social media as the most important digital capability their firm can provide, and this number is closer to 70% among wealth managers under 40. It’s worth noting, however, that this capability is also where satisfaction for clients lags the most, with the gap between importance and satisfaction reaching 17 percentage points, the largest of any capability surveyed. Regardless of whether the scenario is wealth transfer or wealth creation, digital maturity packaged in an overall goals-based financial planning model will be critical to attracting and retaining the younger HNWI set. Firms cannot afford to fall short in any aspect of their digital strategy, as HNWIs hold digital capabilities to be important across informing (real-time portfolio information, portfolio evaluation, research), engaging (with wealth managers, exchanging documents), and transacting capabilities. Across all ages, wealth segments, and regions, there is a significant risk of HNWIs leaving a firm because of the lack of an integrated channel experience with digital capabilities. Further, 66.3% of HNWIs globally said that they would consider leaving firms that do not allow digital transactions. The greatest attrition risk comes from younger HNWIs; 50% of HNWIs under 40 said they would leave if there were no way to engage digitally, compared with 20.5% of those over 60. Given the magnitude of this challenge, our firm developed an assessment model in 2016 to help firms gauge and improve their level of digital maturity. Findings from the model indicate that the industry has achieved only a medium level of digital maturity, which will not be sufficient to tackle the high levels of digital demand that exist, especially from younger HNWIs. The need to improve digital maturity levels is only going to intensify with the ever-increasing penetration of non-traditional fintech firms into wealth management. The demand for automated advisers, for example, has been well reported, with wealth firms increasingly going from resistors to embracers of these models, either by building in-house or partnering with/acquiring automated advisers. That being said, the industry may not be fully aware of the extent of HNWI demand, given that 67% of HNWIs globally indicate a willingness to use automated advisers (compared with only 31% of wealth managers). Demand from younger HNWIs is even higher, at 82% of all HNWIs under 40. Of more concern for the industry is fintech’s penetration among advice providers. Our survey shows that HNWIs are turning to digital peer-to-peer investment forums, swapping insight and information with peers through so-called open investment communities. Specifically, we saw that nearly half of HNWIs tap into online peer-to-peer networks at least weekly to find out about investment ideas, and another 26% use them monthly or quarterly. Usage is also set to expand, with 84% of younger HNWIs saying they expect to increase their use of such networks over the next 12 months. Firms cannot delay in building digital maturity and business model innovation and positioning wealth managers as holistic, goals-based planners rather than investment managers. Overall, the rise of automated advisers has had two different effects on wealth management. Although it led to commoditization of the more basic functions of investment management, automated advisers also have put a premium on those advisers able to deeply engage HNWIs and their families and bring a broad range of expertise to bear in the achievement of life goals. At the same time, the fintech trend is providing strong complementary digital capabilities that can help wealth managers attract and serve the future of wealth: the under-40 HNWI. In both cases, raising firms’ level of digital maturity will be key, but simply adding technology functionality is not the goal; rather, firms need to focus on customer journeys and identify the digital capability needed to deliver differentiated experiences.
David Wilson, December 2016, CFA Institute ViewPoint