The Wealth Management Industry is changing. Here are 3 ways that Private Wealth Managers can actively prepare for growth - or an exit

Change is the new normal for all industries; wealth management is no different. I wrote this article a year ago based on facilitating over 30 transactions and buy/sell deals totaling more than 5 billion in AUM - as Partner, Head of Investment Banking at Toren & Associates. I’m sharing it now as it’s more relevant than ever – a major shift is required to meet client needs in today’s environment.

It is no surprise that the wealth management industry, like many other industries, is undergoing a massive transformation. Growth opportunities are in clear sight, however, only for those that are reading the signs and taking the bull by the horns. For wealth managers that are not, client churn will occur.?

Wealth managers are being forced to adapt their growth strategies to a market environment that is being completely remodeled by a widening breadth of client expectations, technological developments, alternative investments and industry consolidation.?

It’s already apparent that new business models and structures are emerging. And while the full impact is not yet clear, wealth managers are well advised to enter the arena - and actively prepare for growth or an exit - rather than waiting for evolution to run its course.?

In this new playing field, change-resistant firms — those steadfast on holding onto growth strategies and investment philosophies that once positioned them as industry darlings — will remain flat in their growth. Some will be acquired, and others will see their lifeblood (modern clients, producing portfolio managers and advisors) age, form their own family offices, or migrate to more relevant and modern firms that have been able to adapt or evolve their business models.?

The first step to ensure survival is acknowledging that these new forces exist and realizing that they will affect every firm’s growth. The proper path forward can occur, similarly to how wealth managers rebalance portfolios - by applying risk and reward principles and focusing on multiple avenues of growth. In other words - taking a diversified approach to fulfilling client needs, asset growth, preservation, and protection.?

1. Tackle the New Breadth of Client Desires

Today’s Hight-Net-Worth (HNW) and Ultra-High-Net-Worth (UHNW) clients want - and increasingly require - holistic wealth management. They appreciate a broader scope of financial guidance when making current, mid-life, and succession decisions. This must consider life and estate planning, after-tax wealth preservation and performance, inter-generational education, legacy planning, cash flow management, philanthropy, and planning for major expenditures. Depending on family needs, other increasing considerations include preparing for the unexpected with cybersecurity and protection, insurance, and emergency funds.?

Investor—like consumer — behavior is affected by the circular and gig economies, the introduction of digital currencies, and shifting demographics. Wealth managers face high expectations as clients align with technological factors such as ubiquitous smartphone penetration, increasing app usage, and virtual meetings. Other dynamic factors include self-education, a low interest-rate environment, low-cost ETFs, and online investment platforms. The result is that clients have become more price-sensitive while expecting more wealth education and support, which is advisory-rich rather than product-driven.?

Firms that solely focus on investments and products are missing the opportunity to provide holistic wealth management services to today’s clients, which would foster deeper relationships. Failure to educate clients on the trends and, as a result, widen client relationships leads to a quicker loss of wallet as clients are more likely to jump ship or create their own family offices.??

2. Connect with Tech

Today we routinely communicate, interact, invest and make purchases online. We rely less on mass media experts and increasingly look to social influencers, crowd-driven recommendations, user ratings, algorithms and artificial intelligence (AI) - driven systems and apps – to interact with the world.?

All consumers and investors — not just millennials — now expect full use of digital capabilities and education tools. Still, some aspects of interaction with clients will remain at a personal level, and within the traditional advisory process. Clients and their wealth advisors may find themselves opting for hybrid wealth management structures. These business models combine customized advice with smart and purposeful technology-driven support, including biometric-driven authentication, blockchain technology and privacy-protected interactions.?

Robo advisors are regularly shunned by wealth managers for their lack of ability to replicate the personalized and bespoke value that traditional structures offer their clients. But as time passes, this view will limit traditional firms from extracting opportunities of great value, not just from robo advisors, but from a wider universe of business models, structures and tools that exist within fintech.

Fintech, short for financial technology, broadly includes any new technology that improves or automates the delivery and use of financial services. It incorporates software. Algorithms and blockchain technology to help business owners and consumers manage their financial lives.?

For one thing, fintech can enable “big data” to be collected from a variety of sources, including social media platforms, banks, investment platforms or lenders. It can apply algorithms to use real market information to rebalance portfolios. It can improve the compliance process, perform batch transfers, optimize financial planning experiences, perform KYC (know your client) requirements, help onboard clients and even authenticate client transactions.

Still, firms are well advised to research, vet and implement technologies that align their unique investment style and philosophy to the needs and behaviors of their clients. This will help minimize asset loss while maximizing net new client registrations.?

A growing number of wealth managers are seizing the opportunity to cooperate with fintech firms to build new capabilities. The focus throughout the process should be on user-friendliness and a positive client experience. The industry will likely shift toward a model where the wealth manager is essentially a wealth doctor / requirements engineer / client manager - backed by digital tools. The key value lies in combining the advice of the wealth manager with the added value generated by technology. This, overall, can supercharge a holistic perspective on the client’s private wealth and well-being.?

HNW and UHNW private wealth management will remain a people business, but digitally enabled production and client engagement provides an opportunity to manage the forces of an evolving landscape.?

3. Alternative investments?

Investors are increasingly looking to allocate a portion of their portfolio to alternative investments as a reaction to low interest rates, high volatility among equities and the loss of trust in traditional investments since the 2008 financial crisis. Traditional asset classes such as shares, bonds and money market investments are progressively giving way to alternatives, which are gaining a significant share of wallet. Examples of this would be direct real asset, venture and private equity investments. These are also on the rise via online platforms and apps and could focus on tech, real estate, infrastructure, loans, agriculture and co-investments with funds.?

Additionally, but to a lesser degree, a share of wallet is being allocated towards e-sports, digital currencies, batteries, cannabis, alternative energy and “passion-based” investments such as cars, artwork, wines, or coins. Some investors are looking at ethically motivated investments in sustainability and social entrepreneurship. More and more, multi-family offices and independent holistic wealth managers are actively answering the call from modern clients by offering direct investments or white label offerings and partnerships with third-party managers. Wealth managers that are unwilling to evolve are seeing a slow but steady outflow of assets and client accounts towards self-directed alternative investment options. Some of these include Multi-Family-Office (MFO) structures, holistic wealth firms, or standalone & independent holistic wealth managers that have these options.?

The good news is that firms still have an opportunity to acknowledge and pivot. Responding to the increasing demand for alternative investment options does require change and some firms will opt to add costly in-house expertise as their solution. But the solution need not be a capital-intensive endeavor. Adding in-house private label products or establishing an efficient third party alternative multi-manager structure, can help the shift towards growth and client retention without breaking the bank.

4. Buy or be bought

Expanding in the private wealth space through mergers or acquisitions can be incredibly valuable for those with the opportunity and know-how to make a deal happen. Nearly every firm is looking at acquisitions as a means of impacting survival and scale. Some want to expand their geographic presence into another province or country - or gain instant access into a coveted or new client demographic.?

There are more than 700 private wealth firms across Canada (including the big five banks), and upwards of 30,000 standalone and wealth management teams within these organizations. A tidal wave of activity is not expected, but consolidation has increased in the past three years and will likely continue to show consistent, gradual growth.?

Scale matters more than ever in the private wealth business, which relies on the strength of relationships with clients, and the time required to cultivate them. Retail and institutional organizations, by comparison, tend to lean on strong performance and credible brands.

Buying a wealth management firm or book of business can help an organization make it through uncertain times by generating extra cash. That, in turn, can help the company afford better technology, retain the best talent and attract and secure larger and growing producers. It also further improves the probability of courting additional firms, Wealth Managers and books of business – for even more growth. With scale, a firm has the opportunity to build or acquire ancillary services such as financial, tax and estate planning. It may also enable the opportunity to offer lower transaction costs to clients, pay third-party managers and access institutional-grade deals.?

It’s a seller’s market, and nearly every buyer in the country — including investment counselling firms, banks, and independent wealth managers - is hungry for accelerated asset growth. Demand far outweighs supply, so few will have the opportunity to pursue and attain this goal.?

When an opportunity to buy or sell becomes available, the key is to understand both the visible and hidden factors. The visible components include contract and payout terms, market valuation, the fit of investment style and client composition, and the payout length and terms. Not to be ignored however, are other vital issues that nearly all buyers overlook. Sellers are not just selling their assets — some are grappling with the thought of redefining their identity and giving up control. Others are restructuring their livelihood, defining their retirement plan and letting go of clients that have become personal friends. Mergers and Acquisitions (M&A) is not all black and white; it is peppered with a lot of grey.?

Most sellers have a vast selection of suitors to evaluate. They are well advised to obtain a cross sectional market valuation to determine their greatest value, payout and payment terms. Sellers should assess which firm or wealth advisor is most suited to take care of their clients and is best aligned to their investment style and philosophy. This hidden data collectively clarifies the difference between a good deal and a bad one.?

For buyers, acquisitions are highly effective components to a diversified growth strategy that generate recurring and consistent cash flow. Acquisitions must however be executed in tandem with an organic growth and retention strategy. The highest value derived from the deal – for both buyer and seller — ultimately depends on one thing, and one thing only, client and asset retention.?

by Giselle Melo

@MarkToren @AvivaEngelhard ?