Amid shifting market dynamics, how can wealth managers create value?

The wealth management market is going through a rough patch as a consequence of market volatility. Wealth managers are facing increasing pressure from several areas, including growing competition, operational and regulatory changes, digital preferences, and the addition of newer complex assets. This calls for them to take immediate steps in rethinking operating models and strategies.

Economic uncertainty and financial stress are having a negative impact on investor sentiment, as well, shows a new EY global wealth research report. As a result, clients have started to ask more questions and demand more proficiency. 

Prepare for choppy waters

Today’s consumers expect personalized experiences, increased access to products and services, and improved digital capabilities high up on wealth managers’ agendas. When clients lack these experiences, they consider changing their wealth manager.

25% of North American clients are planning to change wealth management providers or add new wealth management relationships for these values in response to the market volatility of the last couple of years. This switching is sharpest among high net-worth investors. 

40% of investors think that managing their wealth has become more complex over the last two years, compared to 14% who say it has gotten easier.

In addition to inflation and economic changes, the addition of digital assets has added to the complexity of wealth management. While adding digital assets to a stable investment portfolio can create more opportunities to maximize returns, it also comes with increased volatility and the risk of substantial or total loss.

All things considered, the current economic environment has pushed investors to focus on three key areas – 43% are prioritizing protecting and preserving their assets against inflation, followed closely by 32% willing to strengthen investment returns and 25% looking to ensure financial security. 

Clients’ need for protection and security is increasing their appetite for advice on knowing and managing their investment portfolio risks and capitalizing on emerging opportunities across various asset classes. Now, they expect holistic advice beyond investments that is personalized and in sync with their financial, emotional, and social goals.

To broaden their target customer base and foothold in these markets, the report highlights how wealth managers not only need to increase focus on developing virtual interactions but also actively educate clients on areas like goal-setting, risk appetite, and diversification to better meet client needs.

Across the investment landscape, younger investors tend to feel less confident about how to reach their investment goals. As a result, they (27%) feel the increased urge to be connected with their financial advisors around the clock and not only at critical points to keep their financial moves in line with broader market developments. 

What do clients want?

As the saying goes, ‘first impression is the last impression’ – client engagement is a vital part of success for a financial advisor, which starts from the very first interaction. It can set the tone for the entire professional relationship going forward.

72% of consumers prefer straightforward and user-friendly onboarding processes from the get-go that can act as a significant differentiator between peer financial institutions. 60% find personalized human assistance of significant importance, while 48% prefer in-person engagement during account opening.

Personalization can especially be fruitful in driving repeat engagement and loyalty over the course of time. 

Due to the high cost and manual paperwork involved, many wealth management firms have digitized their new account opening workflows using software, creating a hybrid mode of interaction – digital along with human communication. Additionally, post-pandemic, customers plan to make even greater use of digital tools when managing their accounts.

Consumers expect wealth managers to add value by helping them to stay on track to reach their goals. Wealth manager’s advice is most valuable to customers in keeping tabs on and analyzing their investment progress toward a goal (85%), and devising strategies accordingly – all while providing comprehensive suggestions across a broad range of financial plans and related areas.

How can wealth managers stay ahead of the game?

When choosing a wealth management firm, the obvious factor that weighs in instantly between choosing companies is price. However, rather than focusing on price alone, customers also tend to sharply evaluate a wealth manager’s past performance (46%), ability to offer portfolio diversification (36%) – to create the right balance between risk and reward, and reputation (31%).

Additionally, wealth managers can work to improve customer satisfaction and experience with newer asset classes, including alternatives such as hedge funds or private equity, digital assets like cryptocurrencies or non-fungible tokens (NFTs), and environmental, social, and governance (ESG) investments.

Interest in trading digital asset derivatives is growing. However, as a class, digital asset markets remain small relative to other traditional assets. Despite the impact of recent market volatility, overall levels of client satisfaction with traditional asset classes and strategies – such as actively managed funds and passive investments – are relatively high. Clients are less satisfied with new asset classes, including digital assets and alternative investments such as private equity or real estate, suggests the report.

For wealth managers, the newer asset class and the emergence of new products present both a challenge and an opportunity. Digital assets allow retail investors to invest in tokenized alternative assets with minimum capital, eliminating the need for a financial advisor or broker. Inversely, cryptocurrencies and security tokens can be added to wealth managers’ existing portfolios to diversify assets and hem in a growing market of blockchain-based assets.

Moreover, environmental concerns are picking up steam on wealth managers’ agendas, as banks have already begun to introduce ESG metrics into their annual bonus and Long Term Incentive (LTI) plans. ESG investing is a fast-growing sector of finance – global ESG fund assets reached about $2.5 trillion at the end of 2022 and are estimated to surpass $50 trillion by 2025.

But while some clients may gravitate toward investing in ESG, often they are faced with the misapprehension that sustainable investments yield lower returns. Despite growing efforts in this field, average levels of satisfaction with ESG investment performance stand at just 36%, according to the report.

Clear and credible awareness and information on the returns — regarding both financial and carbon offset impacts – is crucial. It can increase customer satisfaction by aligning products with customer values, especially among younger – Millennials and Gen Z – investors who are more bullish than other age groups to put money into environmental and social goals, even if it is more expensive.