Encompassing much more than simply creating financial plans and running portfolios, the wealth-management business has long thrived on complexity. Because it also coordinates retail banking, money management, estate planning, and tax and legal advice in a highly personalized fashion, the industry has been able to protect itself against structural changes. It has prospered on the hefty fees banks charge its customers due to high barriers of entry, ample “gray money” pouring into Europe, as well as holes in local taxation systems. High capital market returns—driven by high interest rates and buoyant equity markets— contributed to lifting margins. And charging fees based on a percentage of assets under management is a lucrative fee structure.
This high-margin business, however, faces challenges to the core of its business model. Several factors are contributing to the erosion of margins: increasing regulatory pressure; rising compliance costs; the advent of new, disruptive technologies that have bred new competitors; and ultimately, the loss of client trust due to poor investment returns during the financial crisis. These factors could be compounded by less benign capital markets. With equity valuations stretched and the continuation of the multiyear bond bull market unlikely, asset performance as a growth factor for wealth managers is under question.
Many pushs and pulls are rocking the boat
The challenges facing the industry can be summed up in three key aspects: regulation, trust, and technology. While disruption arguably will lead to the consolidation of the industry, it need not only be seen as a threat. Change and challenges offer opportunities for innovative and flexible incumbents. After the financial crisis, waves of regulatory measures hit the banking industry. In Europe, the Markets in Financial Instruments Directive, known as MiFID II, is expected to have a sweeping impact on the financial services industry. The far-reaching set of rules, which has kicked in at the start of 2018, cover investor protection, fee transparency, internal and external controls, and market structure.
Following the successful launch Morningstar’s cooperation with the think tank ‘Redesigning Financial Services’ (University of St. Gallen and ETH Zurich) at the Morningstar Awards 2017, we followed up with the discussion panel “What Clients Really Want” which took place on March 21 at the Alte Sihlpapierfabrik in Zurich. While ongoing changes in the industry are the talk of the town, demands of investors will shape the resulting strategies of wealth managers – the incumbents and the challengers entering the Swiss financial market.
The panel involved Andreas Feller, Managing Director at Julius Baer, Roi Tavor, Co-founder & CEO of Nummo, a technology platform, Sven Württemberger, Head of Passive Investments Switzerland & Israel at Deutsche Asset Management and Olaf Töpfer, Partner at EY Switzerland. The panel was moderated by Robert Ruttmann, Founder and CEO of Redesigning Financial Services, and Ali Masarwah, editor in-chief or Morningstar's German-language websites.
Incumbents vs. newcomers cross swords at the Morningstar Awards. From left to right: Robert Ruttmann, Sven Württemberger, Roi Tavor, Olaf Töpfer and Andreas Feller. (Foto: Evenito)
As could be expected, the discussion was dominated by the bi-polar view of the incumbent, personified by Feller of Julius Baer, and the newcomer, Tavor of Nummo. According to Feller, trust is at the core element of the relationship between wealth managers and their clients. "You don't entrust your money to anyone, this is a highly personalized business", he maintained. While trust is a crucial element in the client-advisor relationship, it is, however, also an elusive one. The fallout of the financial crisis, in which investors suffered losses and watched big banks saved only by state-sponsored bailouts, should not be underestimated. Accordingly, Tavor stressed the importance of transparency, data efficiency and lowering the cost of investments as could be expected by a challenger to the old order.
But while tech advances and the advent of robo advisors will doubtlessly shake up wealth managers, the technology which powers the newcomers also enables the industry to become more efficient, and changes also include developing new back- and middle-office structures. This aspect is a powerful inducement for cooperation between newcomers and incumbents who can strive to co-opt the challengers which lack brands and client relationships. Töpfer of EY stressed the potential of optimizing the technology and introducing more efficient structures. This implies that wealth management will continue to be a highly profitable industry, according to Töpfer.
Clients arguably need to be saved from old-age poverty
But what about the clients? The contradicting picture incumbents and newcomers painted of clients’ needs may actually illustrate that clients’ demands vary widely thus making it difficult to identify the priorities of the heterogenous clients groups. “Maybe it will be less important to ask what clients really want, but more important to address the pressing need of preventing old-age poverty”, maintained Tavor. This implies that optimizing returns will be crucial in order to maintain the financial health. According to Sven Württemberger from Deutsche Bank, the ETF industry is set to profit from the rising demand for low-cost index vehicles. ETF providers are also set to transcend the level of plain vanilla products. Increasingly, so-called smart beta ETFs will also be part of the offerings of index fund providers, said Württemberger.
The results of a poll conducted with the audience at the Morningstar Awards seem to suggest that the drive to more consolidation of the wealth management industry is set to continue. The demand for transparency will remain a prominent feature, according to the overwhelming majority of respondents, and fees will continue to come under pressure. However, advice and service will also be a bedrock of the wealth management industry, according to the online poll conducted at the Morningstar Awards. This indicates that, while disruption will be painful, it has become a fixed part of the discours, thus bringing wealth managers to think more and more about how to improve the value of their services. With the right response, the ongoing changes thus may offer upside to firms willing to recognize shifting industry trends.
