Wealth management is evolving. Fast.
Once a niche space, its presence grew substantially following the 2008-09 Global Financial Crisis (GFC) and the strict regulatory landscape that followed in its wake.
According to a recent piece in the Economist, consulting giant Bain & Company predicts that a massive pool of capital will emerge in the coming years. In fact, Bain expects the liquid portion of wealth assets to skyrocket from $130 trillion to nearly $230 trillion by the end of the decade.
In other words, $100 trillion of investable capital is on the table.
Wealth management: factors driving change
According to the article, changes in the space have been driven by several factors:
- The global economy has grown by over 3% annually over the past two decades.
- Regional markets continue to expand, with wealth growing in Asia and Latin America.
- The decline in defined-benefit pensions means more individuals must make their own investment decisions.
- Technological advancements, like the ascent of artificial intelligence, are accelerating a winner-takes-all trend.
While I agree with much of the sentiment outlined in the article, it failed to mention another critical factor: monetary policy.
Aggressive tightening persists
Central banks worldwide continue to struggle to tame inflation. In the last 18 months, the Federal Reserve has raised rates from nearly 0% to 5.5%. This represents one of the most aggressive tightening campaigns in the Fed’s history.
Now, with zero-interest rate policy (ZIRP) in the rearview mirror, investors will require new and creative investment recommendations.
Assumptions held over the past ten-plus years will be challenged. Portfolios will require progressively more sophisticated tools to deliver the best performance.
More than that, rapidly changing market environments will demand more vigilance. Constant portfolio monitoring will be needed to take advantage of emerging opportunities.
For traditional players, however, this will prove challenging. Generous margins could shrink, making it increasingly difficult for conventional wealth managers to offer clients the attention the current environment demands.
Moreover, managing assets for clients with smaller net worths will only prove possible with a substantial increase in efficiency.
Adapt or perish
As a result of wealth management’s evolving landscape, technologies like AI will be table stakes. There is no way traditional managers can compete with the speed and capacity AI can deliver. Not only that, the technology continues to improve daily, widening the gap between it and old-school wealth management.
And clients are welcoming the new tech. Already, nearly 1 in 3 investors are comfortable implementing AI-derived financial advice without verification through another source, according to a recent CFP Board Consumer Sentiment Survey. If a financial planner verifies that recommendation, the number shoots up to over half (52%).
