Wealth is growing globally
According to Wealth-X’s World Ultra Wealth report, in 2018 there were 265,490 ultra-high net worth individuals globally (those with more than $30 million in net assets). This number is expected to grow to 353,550 by 2023 adding about 88,000 individuals to this coveted sector. These 88,000 newly minted ultra-wealthy individuals bring with them $10 trillion in wealth. Bigger still ($15 trillion) is the wealth being passed from generation to generation over the next 10 years. These numbers do not include the very-high net worth population (those with $5 - $30 million in net assets) which, at 2.7 million individuals, accounts for a global wealth of $26.6 trillion and growing.
Two key demographic trends are bringing about a new generation of ultra-wealthy customers, whose expectations will trigger major changes to the Wealth Management industry:
· The technology sector is gaining weight in the category of self-made UHNW individuals, who dominate the ranks year over year (67% of the UHNW population). Banking and finance historically lead the list of industries for this group followed by consumer and business services, but technology has also crept up as one of the top 5 industries in recent years. A deeper look at those under age 50 shows that technology is the number 2 industry (4th for those between 50 and 70 years old).
· We are on the cusp of the largest wealth transfer in history. Over the next 10 years $15 trillion will move from one generation to the next. Within this group of inheritors there are those who rest solely on their inheritance (8% of the UHNW population) and those who build their own wealth on top of their inheritance (25% of the UHNW population). While strictly inheritors are shrinking as a segment, those who continue to build their wealth is a growing group.
Customer expectations are changing
There is a shift in motivations from the new generation of ultra-rich who have come and will come into wealth in a post global financial crisis world (whether they are self-made or have inherited their wealth). Several trends have emerged, and converged, that change the traditional approach to wealth management. We have identified a number of themes among this next generation of wealthy individuals that differentiates them from their predecessors.
1) True Omni Channel Access - The jump that the technology industry has taken to rank number two as a wealth creating industry is driven by the abundance of tech M&A and IPO activity in the past two decades. The speed at which entrepreneurs and founders (and very early employees) can get a product to market and capitalize on it underscores the value around immediacy that digital technology can offer to this group and highlights the expectation for digital financial solutions and products. Beyond the Tech Industry, it is common knowledge that Generation X is digitally savvy, and Millennials are digital natives. Understanding how this insight innately drives behaviour is critical to engaging with these groups beyond simply developing digital touchpoints for them. The digital world has created an expectation to be “always on”, 24 hours a day, seven days a week. Clients want anytime and real-time access to view their investments and accounts, but this is not enough. Premium services are almost never delivered in a purely digital fashion, human face to face interaction is often the distinctive element of high-end offerings. Client interaction is still important for complex conversations and developing plans or when market volatility greatly affects portfolio performance. In summary, in-person meetings and relationships still do matter, but they need to be supported by digital channels, and vice-versa. The new generation of ultra-rich individuals expects to be able to switch fluidly between digital and real world. It is not an either/or on digital versus ‘old school’ client interactions. Find the right balance between the two but make sure you are always “on”. Relationships do still remain important and personal contacts are, of course, a priority. However, they do not build a differentiation unless they are embedded in a real and user-friendly omni-channel service delivery.
2) Transparency - Trust has always been the cornerstone of the relationship between client and advisor. Traditionally that has meant “I leave my money with you and trust you will safeguard it”. However, with this generation, trust is now a requirement for transparency. Gone are the days of quarterly or monthly reports. New customers are accustomed to finding answers literally at their fingertips and in an instant. They know they can price shop without ever speaking to an advisor or setting foot in an office. Wealth management firms who keep portfolio performance, pricing and fees opaque will lose out. Those who have a client-facing digital platform, allowing for full transparency of managed assets and fees incurred with on-demand information accessible, will gain respect and trust and new business.
3) Seamless orchestration – Ultra-wealthy customers tend to rely on their financial advisors for a complex set of needs that go beyond financial planning to include the broader management of personal wealth preservation, consumption, and donation. Customers manage complexity by relying on a small number of close, trusted advisors. In this world, providing access to ‘exclusive’ high-end services builds a strong differentiation. This differentiation is at the core of the prevailing industry segmentation across Multi and Single Family Offices (MFO/SFO), Private Banks, Investment Banks and more ‘mass’ financial institutions. However, services such as portfolio management, international tax planning, multiple estate management, next generation planning, family business payroll, etc, are increasingly provided by specialised third-party firms, thus reducing an element of differentiation and causing the industry segmentation to blur. The new generation of ultra-wealthy individuals craves simplification and expects it to be delivered as seamless service orchestration via integrated digital service platforms.
4) ‘Impact Investing’ – or ‘Value-based’ investing is becoming mainstream. Concern for the environment is a value that has surfaced with this next generation as a priority that was not as prominent with prior generations. This issue is now at the forefront of political discussion in campaigns around the world and the rush to claim sustainability is now in every marketing campaign for luxury brands. As icons for this generation out of Silicon Valley drive around in their electric and hybrid cars and every exotic car brand offers these options, Generation X and Millennials are now making investment decisions based on corporate responsibility and environmental impact. 95% of Millennials are interested in sustainable investing and 67% are actively adopting these investment strategies.
5) Making Their Own Mark - Inheritors of wealth have traditionally prioritized wealth preservation and the family foundation (philanthropy) and are often stereotyped as the “trust-fund kids”. But more and more this generation is looking to make their own mark, building on what is given to them either by taking over the family business or making their own investments and starting their own businesses. This generation doesn’t stay with an advisor just because their parents trusted them. They will find someone who understands their motivations and best reflects their values. An inheritor will often want to start their own collection selling off any collection their parents may have treasured and reinvesting in something they are passionate about themselves. Similarly, family foundations and philanthropic giving can change focus from one generation to the next. Understanding this desire to make their own mark is important for wealth advisors. A best practice used by many family (and multi-family) offices is to start early and spend time working with future inheritors, educating them on investment strategies and taking time to understand their passions.
6) The Crypto Generation – While it may seem a niche category of the ultra-wealthy, adoption of crypto currencies continues. Motivations for investing in crypto currencies vary across a range of investors. The asset is just as appealing to a tech entrepreneur as it is to a millennial inheriting wealth. According to a Bankrate survey in 2019 crypto currency ranks as the 7th most popular long-term investment among Americans and millennials are three times more likely to invest in it than Gen-X. Crypto currencies are attractive to younger generations because the concept of a digital currency is far easier to grasp for someone who has grown up in a digital world. This generation uses digital payments and digital wallets as a norm. Having a digital currency is a natural fit.
7) Customization and privacy - Privacy has a different meaning in a digital world. The new generation of ultra-wealthy suffers from a digital ‘identity crisis’. On the one hand, they want complete customization which can only be done through personal data capture, while on the other hand they are anxious about their data and digital footprints and how these impact their privacy. For a very wealthy individual, privacy and trust are paramount to any client-advisor relationship as is customization of product and service. Organizations must strike the right balance utilizing all data points available (including artificial intelligence and ‘real’ intelligence) to know their clients and customize any offering to them while ensuring the highest level of trust and privacy. Advanced technology, services and tools leveraging AI are increasingly pervasive. A new set of capabilities is required to ensure privacy and security in this new context.
Creatures of comfort
The wealth management industry is accustomed to a 95% average retention rate. This is an impressive number, but this can also insulate advisors and their firms from market changes and open the industry up to a takeover by new and innovative players as is happening across the mass commercial banking and fintech worlds. Traditional players in wealth management who have not yet realized the scale and impact this shift will have on the market will miss opportunities that new entrants will seize upon. Future retention is far from granted. According to Ernst & Young, 39% of UHNW say they plan to change bankers in the next three years. The same report shows that over the past three years almost 50% of clients who inherited money switched providers.
The 2008 crash ended the days of spending on lavish client entertainment. From the ashes has emerged an opportunity to rethink how to utilize increasingly complex sets of data and insights to meet the expectations of the next generation of ultra-wealthy individuals. Big brand sponsorships and client entertainment opportunities are changing with this changing landscape. Where providing exclusive opportunities to entertainment and hospitality events or spending time on a golf course together once solidified a relationship of trust, organizations and managers should instead ensure they focus management and technology innovation towards immediacy, transparency, simplification, seamless integration, customization of products, services and portfolios and support to more active investors often driven by their values.
The idea of brand loyalty, within the wealth management sector, based on heritage and long-standing trusted relationships is a thing of the past. Brand loyalty based on a new set of common values is the new norm. A start up fintech platform has just as much equity as a 200-year-old heritage brand if they know how to connect with the values of their clients. Wealth management for the very wealthy still lags behind this trend as advisors hang on to their high industry retention rate and strong personal relationships. There is a reason the fintech industry is on fire as banking and specifically wealth management has been a sleeping giant when it comes to innovation. The next generation finance gnome will be quite different.