In the recent BCG report “Navigating Wealth Management in a Post COVID World”, the authors note the subsequent year has actually been a productive time for wealth managers – in terms of client retention and acquisition as well as improved margins. How was this achieved? Outside of a surging equity market, it was done by adapting to new ways of working and facilitating a client base that suddenly adjusted to a new normal of virtual and remote interactions. Traditional services, after years of pushback from executives and clients alike, were forced to give way fully to digital financial services.
In the family office space, where we see specialist firms that target the UHNW sector, uncertainty was particularly heightened on how their service offering would survive in a world where connectivity and client interaction are paramount. From the same BCG report:
“there is a sense of necessary change for a wealth manager model that needed refreshing. And firms that have thrived are those that have taken this opportunity to “modernize, adapt and realise competitive gains.”
Opportunity Knocked
With market volatilely comes opportunity and a significant amount of our family office contact and clients were interested in taking advantage of market dislocation. The lessons learnt during those times is that there was a certain type of manager that had high mobility in their offering that could take advantage of this event and allow clients access to often hard to implement strategies.
The Cost of Advice
Wealth manager costs have been reduced through COVID. Some attribute this to a reduction in travel costs, some cite aggressive costs cutting programs that were introduced at the beginning of the pandemic and never turned around. The reduction in middle and back-office costs will be played in years to come as technology and infrastructure improvements avoided for decades, were fast-tracked as work from home mandates were enacted. The same mandate for front office staff further reduced costs as clients no longer expected face to face meetings, lunches or entertainment.
What does this mean? Clients and staff are now comfortable with flexibility.
New Clients
Where are they coming from in this new world? The BCG report shows that client retention was high, despite the inability to interact in person. So, how does the new wealth manager tap into the burgeoning UHNW bracket when this cohort is now very comfortable doing their due diligence via Zoom and the white glove and personality-driven RMs of the past are no longer as attractive or successful.
The term “digital nomad” was once a term used only for those in technology, in the new hybrid world, this now includes every profession that doesn’t require in-person activities. The digital adviser is here. We are seeing a lot of tax incentives from some countries for digital nomads and family offices in terms of a flat tax rate.
As global firms look to target clients in new regions, the conundrum of getting headcount may not be as difficult under a more mobile model. Talent can be sourced (and domiciled) in the country of their choice whilst providing much-needed expertise to those clients in countries on the other side of the world.
I spoke with one European based adviser that had an offering that seemed tailor-made for the “go anywhere” model: “I was in a closed shop for one organisation and that’s how it was. Now I am geographically neutral and so are my clients, I can give investment advice and I can choose the booking centre. Compared to someone sitting in Geneva that is tied to that location, I can be totally flexible.”
It seems very liberating but could be seen as very threatening for vested interests looking to ringfence those that create nodes into the client. It may also mean the increased proliferation of the unique fee models and away from the classic FUA or transaction fees which are more lucrative and easier to scale.
This new model also gives rise to the “curators” of family office services. Firms that specialise in selecting not only the asset mix but also the other services that make up the investment office. It’s a part of the democratisation of wealth management and allows for the client to establish their own preferred approved supplier list, becoming the counterparty and source of truth that they must plug into.
Being in advice could be attractive again
For many of my advice contacts, COVID has had an enormous effect on the way they view their chosen profession. This is coloured not just by the inability to interact with clients face to face, but by their acknowledgement that the best advice doesn’t need to be delivered by hand.
Pre- COVID, high touch advice was the norm (at least for the initial consultation) and for those in different states or countries this meant high client acquisition costs due to flights and accommodation. COVID cost reduction means that margins are higher and, most importantly, so is the ability to pursue work you find engaging and interesting over a driving need for revenue. Couple that with the ability to advise clients from an office/home outside the major centres and you can see why the game has changed forever.
Will Web3 increase mobility?
There is a lot of talk about the next iteration of the internet and whether the next few years will provide a watershed moment via the metaverse or not.
One thing almost certain is that there will be a change. Potentially this will require a more immersive online experience which opens up the possibility that the trends in wealth management to digital will quicken with a pace unforeseen since the invention of online trading.
To draw this out, we need to ask what UHNW clients of 2025 – those likely to be affected by this new wave of digital financial services – will be looking for and how will that model compete with the vast array of information available. I don’t want to sound like someone looking to target “the kids” but if I can empathise with this cohort, advice will need to be relevant and structured in such as way that it can be delivered (and paid for) via a network, using data sets that may not have been developed yet. A network that is not familiar to firms that have provided advice for possible hundreds of years but one that can be utilised as the ultimate “digital financial service”.
And this will be the opportunity for those that can ignore the negative comments and truly strive to provide a new style of wealth management. I recently binge-watched the late, great Anthony Bourdain’s “Parts Unknown” and one episode was on the Danish restaurant Noma. Listening to head chef Redzepi talk about how he goes about putting together his menu made me think this type of approach could work in the new wealth management model.
The key to the advice for me seems to be the ability to curate for clients, like a great chef building a menu, there needs to be a mix of table stakes such as compliance, security and process. But there also needs to be imagination, experimentation and looking outside the norm for the very best components.
And what does the new version of the wealth platform look like? As the adviser is no longer beholden to the jurisdiction or counterparty of the clients, the infrastructure on which they build their advice practice must also evolve. As terminology such as “node” permeates the lexicon, people will become more comfortable working with advice providers that sit outside the classic ecosystem of banks and other institutions that up until now were pre-requisite. The advent of smart contracts and secure networks means that data and compliance needs can be met without the need to “log on”.
As one adviser told me: “We no longer have to be in the same country as the client platform. We can advise a client from a city or town of choice and book the trade or apply for fund units in our preferred jurisdiction.”
Products
Products, too, will be flexible as they become customised to an ever more granular level and the building costs decline. Solutions such as direct indexing will replace ETFs and other co-mingled trusts as clients seek true to label customisation, trading costs will reduce to zero across the spectrum, taking total costs ratios lower and increasing democratisation for asset classes that up until now were available only to those with large ticket sizes.
Unique fee structures will allow for new co-investments alongside specialist firms, pay to play style arrangements could be the norm rather than a fixed fee. Family offices and high net worth clients will be a hub, not the service provider and therefore will be in a position to generate strategies themselves, utilising infrastructure supplied by firms offering admin and operational support and nothing else.
Incumbents
Of course, the incumbent proponents of advice will attempt to control these developments, all the while dabbling in the digital-only space. We have seen this with large firms allowing for digital advice and trading. These firms may end up benefiting from the increased compliance burden we see, but I would guess that would be limited to the retail advice chain that requires that level of protection.
For wholesales advice and those targeting the family office space, the next few years will be a case of managing a massive transfer of wealth and making sure that the new wave of clients is not lost to the first firm to put up a sign in the metaverse.
Backers
And who will be the backers of these new firms? Will those that have supported payments and other fintech see an opportunity in taking equity in these non-traditional firms? KKR and others have a history of roll-ups in traditional advice firms, it remains to be seen if the same appetite exists for a new wave of potentially fragmented offerings with uncertain scalability. For me, the opportunity to differentiate is meeting technology and if the likes of BCG are correct, there is a growing cohort looking for something unique.
Location is a state of mind.
With an ability to assist clients regardless of geographical location, it becomes a question of where will the ex-private bankers that seem to make up this new breed of adviser base themselves? Some are looking to countries that lean into lifestyles such as Greece and New Zealand or those with high levels of infrastructure such as Singapore, Sydney or London. I have spoken to a lot of advisers that are going it alone, and most say that once travel restrictions ease, the “go anywhere” model will become even more attractive to those that have up until now sacrificed time through the commute, space and time with their family.