Within the strong measures of the growth of the wealth management industry in recent years, there’s a widening advantage for planners who can tap into digital advice.
That’s one of the key takeaways in a report released last month by McKinsey on how the consulting firm predicts financial advisors and wealth managers can get ahead of the competition after the eventual end of the coronavirus pandemic. Despite eye-popping metrics such as 25 million new direct brokerage accounts opening since the beginning of 2020 and a record $38 trillion in client assets, the report supplies some caveats. Falling equity values and interest rates during the pandemic pushed down industry profits by 11% in 2020. And a single-year rise of 6% in expenses that year amounted to a record, according to McKinsey.
One area of higher costs — technology — represents an especially worthwhile investment as the industry mimics others that have also seen accelerating consolidation and more customers rethinking their relationships with firms during the pandemic, said Jill Zucker, a New York-based senior partner with McKinsey and one of the authors of the report. After several years of survey results, 2021 marked the first time that the share of a client’s assets managed by their primary wealth manager fell, Zucker said in an interview. She points out that clients still want comprehensive, planning-based advice from a human advisor, though.
“It doesn't mean they don't want a digitally enabled experience,” Zucker said. “The primary advisors lost share because people are experimenting with omni-channel relationships. There's much more experimentation than we've seen historically.”
For the industry, that could mean using remote methods of only engaging with clients through the phone, email and video calls or even deploying automated asset allocation as a robo advisor. For instance, wirehouses often use “call center” advisors for accounts with a smaller amount of investable assets that become so-called hybrid clients. Many have acquired robo advisors as well; UBS agreed to buy Wealthfront in January for $1.4 billion.
The record M&A and massive valuations prompt many questions about the sustainability of the capital flowing into the industry from investors such as private equity firms. The deal volume has been a “healthy” development for wealth management overall, according to Skip Schweiss, the CEO of Sierra Investment Management and the former managing director of advisor advocacy at TD Ameritrade. He notes the number of advisors in need of succession plans, resources like tech and compliance services and the fact that planning “was a cottage industry for decades” and “for the most part still is” with tens of thousands of small practices. Advisors can find greater scale and lower costs in the future if they make the right deal, Schweiss said.
“What it really is going to come down to is culture, ultimately,” he said, citing factors such as how to serve clients best and what services to offer. “I have seen some things go south in some deals I've witnessed with people I know in this space.”
To view the most interesting findings from the survey, scroll down our slideshow. For another recent look at industry trends and where they’re leading into the future, click here.
Note: All figures come from McKinsey’s Feb. 16 report, “U.S. Wealth Management: A Growth Agenda for the Coming Decade,” by authors Pooneh Baghai, Alex D’Amico, Vlad Golyk, Agostina Salvo and Zucker. The firm conducted the survey in the last months of 2021.
