Dangerously disruptive or an untapped opportunity?
The rich are getting richer and the number of individuals in the high net worth category (HNWI) has grown rapidly in the past ten years.
The rich are getting richer and the number of individuals in the high net worth category (HNWI) has grown rapidly in the past ten years. Yet, wealth management firms are struggling to convert this increased wealth into increased revenue and have seen a steady decline in profitability in recent years.
The problem seems to stem from the fact that wealth managers are failing to keep up with the changing customer landscape. Alongside the rise of the Asian market, the biggest disrupter to traditional methods and thinking has been the growth of a new type of ultra-rich - millennials. This new generation of HNWI has been fuelled by the rise of the internet and is increasingly self-made, in contrast to previous generations. Forty-six of the world’s wealthiest people, according to Forbes, are now under 40 and their behaviour appears to defy conventional HNWI understanding.
The Death of the Loyal Customer
Historically, HNWI have shown great loyalty to their wealth managers. However, firms can no longer take this for granted; a third of clients have switched providers or moved assets in the past three years. This loyalty is even more sparing amongst millennials who are 29% more likely to switch than baby boomers. Those under 40 are likely to be less satisfied than their older counterparts (70% vs 73.4%) and have a lower trust in their wealth managers (54.3% vs 58.3%). These factors are causing this generation of HNWI to be far more diverse in their interactions, being much more likely to have relationships with five or more wealth management firms than those over 40 (43.2% vs 14.7%).
These firms clearly need to reflect on who their customers are, what drives loyalty, what their needs and expectations are, and how they can adapt their business model to attract and retain these customers.
The question wealth managers therefore need to answer is: what does the new generation of HNWI want?
Younger HNWI have different expectations of their wealth managers compared to their older counterparts. Oliver Burns LLP explains that the new generation is led by experience rather than badge-led luxury in all elements of their finances, and wealth management is no different. They are generally more aware of what they are paying for and desire value from their wealth managers beyond simple return on investments. There is an expectation that managers should now be providing more than the traditional portfolio management and offering extended concierge-like services in some cases. They are also critical in pushing for different pricing models, with 60% of millennial HNWI indicating a desire for a new form of payment method. Their objection to the ad valorem structure is reflected in a preference for fixed-rate wealth managers.
The Conscious Generation
The younger generation has different investment preferences too. Lombard Odier found that 98% of young Asian HNWI and Ultra High Net Worth Individuals (UHNWI) were looking to increase their allocation of impact investments, with 3% seeking to make their portfolio impact investments-only.
It is the young and tech-savvy HNWI shaping the technical trends that will come to define wealth management. They are driven by a preference for digital touch points and are increasingly looking for digital channels to fulfil their needs. The Global HNW Insight Survey found that 64.2% of HNWI globally expect their future wealth management relationship to be mostly or entirely digital, with this figure rising to 82.5% amongst under 40s. How the industry encompasses the digital revolution is undefined but will likely involve mobile applications. 47.7% of under 40s stated that they wanted to transact through apps compared to just 22.5% of those over 40. Whatever form it takes, the increased digitalisation of the service must come soon, as 79.7% of under 40s say they would leave a wealth firm if they felt there was a lack of integrated channel experience.
The younger generation is more aware, more demanding and more tech-savvy than the baby boomers who have traditionally shaped wealth management services. In order to tap into this new wave of HNWI, firms must be willing to challenge the norms and begin to provide a more engaging customer experience that is no longer centred around face-to-face interactions. Increased digitalisation and use of innovative technologies including AI and blockchain should be paired with a greater focus on KYC (know your customer) thinking. Doing so will ensure the new generation of HNWI represent an opportunity rather than a challenge to the traditional wealth management firms.
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