The 2008 financial crisis triggered a great digital democratisation for wealth management. For the first time ever, ordinary Joe Schmoes with average incomes could log onto sites like Wealthfront and open diversified passive portfolios. Those who take the London Underground regularly will be familiar with the mountain of robo-advice Stocks and Shares ISA adverts donning every line. The marketing seems to be working, as 2 million accounts have been opened in the UK … and counting. But there have been limits to the democratisation. And a chasmic service gap still exists. While those with less than £100,000 make do with algorithms and apps, affluent and high net worth (HNW) clients continued to enjoy the trappings of luxury wealth management, but many are underwhelmed with the digital capabilities. It would take another great crisis, the COVID-19 pandemic, to bridge these two worlds.
In this article, we’re exploring the great collision of the old and new approaches, and the drivers behind the incoming blended model.
Managers cannot afford to leave money on the table
A simple reason why traditional wealth management must embrace robo-advice principles is because right now it is closing the door on too many potential clients. One 2024 report found that 18.4% of the UK’s HNW portfolios are now held in robo-advice platforms. Assuming the average advisor has 100 clients, each with £250,000 in assets under management (AUM), this would mean a shortfall of over £4.5 million. Presuming that the average mid-size firm employs around 10 advisors, £45 million is getting lost to robo-advice.
These are assets that traditional managers can ill afford to lose, as margin pressures squeeze the industry. Morgan Stanley for example, recently saw share prices nosedive, due to successive dips in wealth profitability.
In turn, lower flows mean cuts will be made to value-adding services like active management, further pushing clients towards robo-advice. Those managers who do not upgrade their software will find themselves in a vicious cycle of depleting returns and unhappy clients.
Seamless digital services prove non-negotiable
HNW clients are drawn to the firms with seamless online experiences. One PWC survey found that 22% of HNW investors switched firms to access “improved digital capabilities”. Another survey found that 70% of 18–44-year-olds want and expect their manager to use artificial intelligence (AI) to support with their wealth management. The appetite for a seamless digital experience is stronger in some cases, even than face-to-face expertise.
Notably, the clients who switch most frequently are those between the ages 18-34 years. This could suggest that they became wealthy with the help of robo-advice platforms, and therefore feel comfortable returning to the low-fee, low-fuss environment. Alternatively, it could indicate that they inherited family money but feel unseen and unheard by the family’s managers. The result is the same for traditional firms… a growing loss of clients. To stay competitive, managers must use innovative wealth technology to deeply understand who they are serving and how to do it.
Modern investors have different financial needs
The mass departure of younger HNW investors pose a real threat to traditional wealth management. An estimated $27 trillion will land in the accounts of Millennials now and over the following decade. Millennials and Gen-Zs have very different ways of earning and spending money from their parents, which seems to have gone largely unrecognised by the industry. Some of the most pressing differences are in the ways that wealth is generated.
In the USA, an Upwork survey found that 52% of Gen-Z professionals freelanced in 2023, while for Millennials the figure was 44%. Lending Tree ran a similar survey for the gig economy and found corroborating results, 55% of Gen-Zs have a side-hustle. The average additional income earned from these side-jobs stands at $1,253 per month.
What’s more, the younger population is made up of keen investors, especially when it comes to digital assets. One 2024 survey found that 24% of Millennials and 19% of Gen-Zs invest in crypto. The most popular way to do this is with investing apps, according to 65% of Gen-Zs and 55% Millennials. This is another example of how a blended service can add value. We calculated in this article that by adding white label services – such as crypto trading platforms – to existing offerings, wealth managers could add tens of millions to their AUM.
Cultural shifts need to be reflected in portfolio management
The drivers behind these differences are essential for wealth managers to grasp, as they are needed to upgrade offerings. Rather than one steady job, a mortgage and a pension, today’s under-45s have several jobs, six-figure student loan repayments, eco-anxiety and unsustainably high rent. This is what shapes their culture.
No matter how wealthy the young investor is, everything from the content they consume to the music they hear will reflect these sentiments. In the words of Stormzy, “It’s a horror up in our accounts. Why’s your money froze?“. And even in a recent Simpsons episode, Marge exposes the toxicity of the gig economy and forms a union. Younger investors have a keen activist appetite for the planet and society, which should be at the heart of their strategies.
Managers need to recognise these changing attitudes to wealth and lifestyle in their offerings. To buffer against an exodus of investors, they must stop using the outdated cookie-cutter approach to financial planning that worked well with Baby Boomers and Gen-X.
The only real way to get started is by analysing the churns of data, and for this, AI is crucial. Banks and large investment houses already have vast warehouses of valuable information on their clients, but an estimated 80% simply don’t know how to deal with it. AI is ideally suited to process big data in pico-seconds and make sense of it with lucrative findings. Better still, AI can create 360-degree investor personas instantly, complete with suggested portfolios ideally suited to match the tax status, location and financial lifestyle of the client.
The potential is limitless
Today’s technological advances go far beyond a slap-dash combination of 2008 robo-advisor with a classic investment manager. We’re now entering Wealth 2.0, the blended solution. The unique benefits of AI and machine learning mean firms can instantly benefit from data-driven insights and portfolio suggestions, which they can then present in-person to clients. It’s about creating an efficient and omni-channel service for everyone.
The many much-loved charms of wealth management – oak-lined offices, Nespresso coffee, Lindt chocolate and cashmere suits – should surely stay. Blending them with digital capabilities only serves to complement and heighten the luxury experience, with much healthier profit margins all-round.
Interested to discover more?
In this article, we’ve delved into some of the ways that blended wealth management will empower the current service models to grow and thrive. For a closer look at how technology can improve employee satisfaction, reduce costs and improve operations, check out this article.
