Megatrends that will shape the financial industry in 2020
2020 will see some long-term shifts in the wealth-management landscape, including greater integration of technology, incorporating sustainability aspects into the investment process, and responding to the demands of a changing investor demographic.
The change in investor demographics is one of the most significant changes in the market that will occur over the coming years. Millennials and women, who are entering the market as investors, have very different ideas on what their money should be invested into and how it should be managed, compared to the existing ageing investors. Firms that fail to identify and adapt to the demands and expectations of these demographics will fail to attract and retain them as clients and will ultimately be edged out of the market.
Technology and artificial intelligence will also be drivers of change in the financial market, and will need to be adopted by wealth managers in order for them to remain competitive. Big data can give firms insight into products and services they should offer, while AI can improve operational efficiency dramatically, both resulting in greater value to clients.
The consumer demographic is changing. With the ongoing inter-generational wealth transfer, as well as an increasing number of women and millennials entering the workforce, a new group of investors are entering the market. As the pace of wealth accumulation among millennials and women of all generations continues to increase as a result of the boom in tech-driven innovation, it creates a huge opportunity for wealth management firms who offer unique products that meet their expectations and preferences.
The changing demographics are prompting a shift in product innovation, product experience, and advisor training. The integration of technology into society, younger generations’ comfort with digital tools, and the ever-expanding gig economy are just some of the considerations that are going to shape product and service offerings going into 2020. Those firms that do not keep up and evolve with the trends risk be left behind.
Many firms are targeting millennials, in particular, due to the size of the market, their evolving wealth needs, and the impending wealth transfer. New products that have been developed to attract these investors include “impact investing”, innovative pricing models (for example subscription-based pricing), and new asset classes (for example music royalties). Furthermore, most of the private wealth that changes hands in the coming decades is likely to go to women, which is why wealth managers are also beginning to target women as clients. EY reported that by 2028, 75% of global discretionary spending will be controlled by women. Recent data has also shown that women are increasingly likely to make a family’s financial decisions based on new investment models.
For these reasons, the most effective way that wealth managers can grow their assets going into the new decade is by expanding their client base across demographic segments and geographies.
Concerns about climate change and social impact
Arguably, climate change is the defining challenge of our time. With today’s instant access to news, information and the reach of social media, the urgency of the issues that the world faces today is common knowledge. The understanding of how sustainability-related factors can affect economic growth, asset values, and financial markets as a whole is driving the incorporation of impact and sustainability factors into investment decisions.
This shift is being led by the new generation of investors, millennials, who are focusing on the environmental and social impacts of their investments. This generation is aware of the responsibility that comes with wealth, and they want to leverage their wealth to not only secure their financial futures, but also the environmental and social future of the planet. For this reason, they are demanding that sustainability factors be taken into account in their portfolios. In addition to millennials, women are also increasingly looking to their advisors to integrate ESG (Environmental, Social and Governance) aspects into their portfolios. In order to both attract and retain these clients, firms need to start incorporating impact, or at least ESG factors into investment decisions.
The most recent public show if this was at the beginning of 2020 by BlackRock, the world’s largest asset manager with US$7 trillion AUM, when it announced that it is shifting its investment approach to put environmental sustainability at its core. The giant asset manager has long faced criticism from environmental groups for ignoring climate-related issues, making their announcement even more significant. There is huge power in an industry leader making an announcement like this, as it not only causes global corporations to reflect on their business practises, but also puts pressure on other major (and minor) players in the industry to follow BlackRock’s lead.
In the past 10 years, financial services has been one of the industries most impacted by digital disruption, and the coming decade will be no different. The implementation of artificial intelligence (AI) in particular has the potential to both dramatically improve customer offerings, as well as create significant internal efficiencies.
As technology becomes increasingly integrated in the daily lives of everyone, including high net worth investors, wealth managers have to find ways to attract, engage and retain customers that are already accustomed to continuous innovation. Companies will also have to develop new and innovative products in order to capture the demographic groups that are entering the industry as clients, and as well as collaborate and integrate fintech into their investments and product offerings.
While one-on-one relationships between a wealth advisor and a client remain important to everyone, even the youngest, most tech-savy clients, high net worth individuals also want fast, convenient self-service options that are accessible via their digital devices. Going forward, uses of AI including robo-advisory and digital investment tools will allow wealth managers to offer more personalised services, increase client engagement, and maximise their clients’ wealth. Furthermore, by automating certain aspects of the business, AI will enable firms to handle more clients, allowing AUM to grow.
Other uses of AI include improving fraud detection during client verification, which can assist in building loyalty, and driving sales among younger high-net-worth clients as a result of simpler on-boarding processes. In addition, as the threat of cyber-attacks continue to rise, wealth management firms will have to integrate digital solutions into their operations to protect themselves.
The newfound efficiencies that are realised when using AI allow for highly specialised strategies that would not be possible using traditional wealth management practises. The disruption that AI has and will continue to cause in the industry will increasingly drive more differentiated offerings than have been seen in the past, and foster a fiercely competitive environment for traditional industry players.