Despite the upheavals and aftershocks brought about by the COVID pandemic, the wealth management industry in the U.S. has enjoyed a period of growth and continued investment. According to McKinsey, the wealth management industry actually enjoyed record-high client assets of $38 trillion in 2021 in addition to a record high 16 million net new brokerage accounts.
However, increased costs combined with declining profits and pre-tax margins from rock-bottom interest rates and uneven cost discipline have fostered uncertainty and concern among advisors and firms. Other matters, such as an increased number of mergers and acquisitions, changing demographics of charitably inclined clients and advisors, in addition to technology innovations and digitization, present new challenges — but also new opportunities.
For those firms that are quick to adapt and want to prepare for whatever comes next in the wealth management industry, here’s what to look out for in 2023.
Upcoming industry challenges
While we can’t account for any unforeseen developments, there are a few lingering challenges from the past few years that firms should be prepared to manage.
- An increased competition for high-net-worth individuals (HNWIs). As baby boomer wealth starts to transfer to upcoming generations, expect there to be more firms and industry disruptors looking to attract those new HNWIs looking for ways to invest. Continued industry consolidation through mergers and acquisitions means that some competitors will have wider reach and a lot of resources at their disposal.
- The aging-out of the existing advisor force. Investors aren’t the only group facing a massive generational shift. A large number of existing financial advisors are approaching retirement, which means firms will need to have succession plans in place or risk losing their existing investors to competitors.
- Continued economic uncertainty due to inflation, rising interest rates and other disruptions. We can’t predict the unknown, but we do know that the global economy will continue to be challenging for the near future. While inflation rates finally look to be slowing and are projected to fall in 2023, don’t expect any real reduction in costs or interest rates until the end of next year.
- Increased demand from investors for digital tools and omnichannel access to their wealth management. This is more of an opportunity for those looking to connect more with their clients, but it can be a challenge for firms that are still lagging behind on digitization. Younger investors prefer to use technology to manage their finances and even HNWIs are increasingly reliant on digital tools such as payment processing apps and social media. If you don’t have the tech to meet investors where and when they want to connect, then they’re going to look for financial services elsewhere.
So, with those existing challenges accounted for, what else can firms look forward to in 2023? Here are some of the wealth management industry trends to account for.
Top wealth management trends for 2023
1. New competition. Don’t expect industry disruptors to go away anytime soon. You can be sure that new family firms and fintech business models will arise over the next year, each looking to shake up existing firms and compete for investors. You’ll want to stay abreast of what services these firms are offering to ensure they can’t easily steal your clients.
You can also expect a continued rise of active traders and self-engaged investors, empowered by the technology-enabled ease and affordability of direct investing. You should seek to serve this market by finding ways to meet their demand for direct brokerage-based investing. Once you get their attention, you can go on to build a deeper relationship by offering other financial services.
2. Continued industry consolidation. 2020 saw a eight-year record high number of consolidations. As the industry continues to grow, mergers and acquisitions will continue to become more prevalent. This is complicated by the large number of established advisors who are aging toward retirement. They may choose to leave the industry entirely after their firms are bought out.
Firms that bring on new advisors will have to carefully consider their features and offerings to ensure they support the skillsets of their staff, meet the expectations of their new clients and can compete against increasingly larger competitors.
3. Shifting wealth demographics. The looming Great Wealth Transfer will be one of the largest wealth transitions in history as Millennials and Gen Z are set to inherit baby boomer wealth. In the process, they’ll transition from holding a mere 3% of the entire world’s wealth to approximately 60% of it. Advisors that want to get these clients will need to carefully consider the goals and needs of these younger generations in order to build relationships and win their loyalty.
It’s essential to consider philanthropy as one way to do that. Bank of New York Mellon found that 97% of millennials they interviewed considered charitable giving part of their overall wealth strategy. In addition, 79% of millennials engage in sustainable investing and a majority want to work with advisors who understand their values.
4. The Secure 2.0 Act. The Setting Every Community Up for Retirement Enhancement (Secure) Act 2.0 was signed by President Biden on December 29, 2022. The act affects how to count qualified charitable distributions (QCD) from an IRA to an eligible charity toward satisfying the required minimum distributions (RMDs) for the year. RMDs can be claimed as taxable income, which can potentially reduce a donor’s eligibility for certain tax deductions and credits. Read more about the changes here.
5. Technology-assisted investing. The under-40 generations are more into self-service options versus just working directly with their advisors. It’s likely that many donors will utilize technology to familiarize themselves with elements of investing and giving, but will need assistance from advisors in formulating a larger wealth management strategy.
For advisors, the use of big data and advanced analytics can bring more information and better insights about their clients. AI-based technology can help automate tasks like compliance checks and credit rating analysis, impacting everything from customer acquisition to portfolio management. Even the use of robo-advisors that offer automated, personalized portfolio management for investors will be important for meeting donors wherever and whenever they choose to engage. Firms that don’t have their own self-directed trading platforms or the right digital outreach could be missing out on key efficiencies.
6. Interest in sustainable investing. As mentioned, a large majority of millennials believe in sustainable investing, which also involves an awareness of justice and equity matters. To appeal to younger investors and align with their goals, firms need to create and adhere to rising standards for environmental, social and governance (ESG) investing. Even more importantly, firms need to avoid the appearance of greenwashing or merely paying lip-service to investors’ ESG concerns, as younger investors are better able to educate themselves and will likely see through such deception. Firms will need to further develop their ESG initiatives to assist their clients in selecting the right investing portfolios to achieve their philanthropic goals.
7. Expectation of personalized investing. The age of information is also the age of personalization. Digital technology, AI and mobile applications have developed to the point where every outreach an individual receives from a company is personalized in some way. Wealth management is no different and personalization is a key driver of investor satisfaction as well as a high priority for clients selecting financial advisors. Firms will need to carefully consider how they design the front end of their investor outreach (directed emails, frequent updates, personalized alerts and recommendations) as well as the back end of their systems (big data management, machine learning AIs, behavioral analytics, etc.) to generate insights and offer the proactive recommendations and advice that clients now expect.
8. Preference for holistic wealth management. In coordination with the more personalized approach to investing comes a need for a fuller and more holistic review and management of a client’s wealth. Investors, especially younger investors, are more interested in achieving larger goals beyond just growing wealth — including saving for major life events, supporting causes they believe in and setting up financial support for their own children. Firms that look to manage this level of robust portfolio management will need to utilize automated technology and specialized algorithms to coordinate all of these matters. They also need to ensure there’s a “human touch” to their outreach to better speak directly to the needs and desires of their clients.
9. Rising importance of net new assets. As cash reserves look to become scarce in the face of continued inflation, clients may need to unlock new assets for investments by selling illiquid assets like real estate. As illiquid assets cannot be easily converted without losing value, clients will need advice and direction on how to unlock the most value.
Digital assets will also continue to offer a lot of promise and peril. According to the McKinsey report, 11% of affluent clients and 8% of HNW clients already invest in digital assets like cryptocurrencies or tokenized equities and bond debts. There remains a lot of interest in digital assets, but recent upheavals like the FTX crash may not only scare off investors, it’s likely to invite increased government scrutiny and new regulations. Firms are advised to proceed with caution.
10. Charitable giving to see continued growth. Despite all the economic uncertainty and continued hardships, philanthropy remains an important priority for many investors. Charitable giving saw a 5.1% increase from 2019 to 2020 and then a subsequent 13% increase into 2021. Giving levels for 2022 look to continue this rising trend, which is likely to carry on through to 2023.
One big shift for donors is the rising importance of flexible giving options. Economic uncertainty can make it difficult to plan donations or make it harder for donors to commit. Digital giving solutions that allow donors to adjust the time and amount of their donations are likely to increase in popularity. Likewise, flexible charitable vehicles like donor-advised funds will also continue to gain favor as the charitable vehicle of choice.
Let Ren help prepare you for what’s next
Regardless of future challenges, charitable giving is continually on the rise. It’s essential to present your clients with charitable donation options in order to meet their wealth management goals. We’re finding that the flexibility and ease-of-use provided by donor-advised funds make them the charitable vehicle of choice for younger investors. DAFs are also great “sticky assets” that can keep your clients — and their children — engaged and invested with your firm. For younger Gen Z investors who may have less capital to invest, there are also flex giving accounts which can give them the benefits of DAFs without the high minimum investment.
Ren can provide you the insights and technology to best understand and meet the charitable needs of your clients by providing expert administration services, operations, and support. We’ve designed our platform to take advantage of charitable opportunities to grow and evolve with our customers through 2023 and beyond.
Talk to us to see how you can position the right charitable planning vehicles for your investors.