by  Alex Vovchuk

Why the Wealth Management Industry Needs Transformation

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When was the last time you visited a bank branch?

Due to the growing adoption of e-banking services, most of us have almost forgotten about physical bank branches. With the ability to allow customers to conduct banking from a mobile device, the financial services industry is well on its way towards digital transformation. Banking, insurance, investments, stock trading—all these financial segments are going digital and showing great results.

But what about the financial advisory industry?

An antique clock ticking in an oak-paneled boardroom may suggest to clients of traditional wealth management firms that this segment is reluctant to embrace the digitalization strategy. Not many can argue that the wealth management industry hasn’t changed for decades.

But do they need this transformation? What are the blockers? And how can they efficiently address them? Let’s look at some answers.

Who needs transformations?

Varying client demographics among financial services is the primary aspect to consider. A McKinsey report shows the average age of a wealth management client to be 64.2 years.  This leads us to the main study point: for now, wealth managers prefer to work with older generations and have a hard time engaging younger ones. It’s why the digital revolution is inactive across this industry.

Indeed, the wealth management (WM) industry is working with more mature clients. However, if we dive deeper, we see that WM naturally falls short of other financial industry segments in changing this stagnant approach. It is experiencing a massive demographic problem. Instead of gradually adopting younger clients and constantly improving workflows for new generations, the WM market will likely face a new younger generation, completely dissatisfied with its quality of services.

Cerulli Associates projects that over the next 25 years, $68 trillion in assets will move between generations. CNBC recently reported that over 80% of heirs will look for a new financial advisor after inheriting their parents’ wealth.

Two major demographic trends will impact the WM sector in the coming decade: aging advisors and the transfer of wealth from Baby Boomers to their children. Both trends could result in a massive shift in existing advisor/client relationships. In other words, assets will likely change both owners and advisors.

The advisor population is aging rapidly and preparing for a significant transition. Canada’s Financial Post reports that approximately a third of the current workforce will retire in the next 10 years. CNBC observes that the WM industry will need to engage and train nearly 200,000 advisors to maintain current service levels. This is especially challenging given the low graduation rates at wirehouse training programs.

Who are the new clients?

Millennials, born after 1980, currently comprise 27% of the US adult population. In 2015, Millennials became the largest generation in the workforce, with more than one in three workers identified as such.

The Pew Research Center points out that Millennials are the most dominating customer segment, accounting for $1.3T in direct annual spending, with $430B considered discretionary and nonessential spending. They are also the most educated generation (61% attended college compared to 46% of the Baby Boomer generation).

Millennials are usually comfortable interacting with consumer brands over social media. However, they are turned off when financial services companies use these channels to connect with them. The most preferred channels for interacting with a financial services firm, according to BNY Mellon study, are:

  • Website/email (40 percent)
  • Face-to-face (23 percent)
  • Telephone (18 percent)

But here is a paradox: while it’s easy to mark all Millennials as wanting a digital experience, there does come a time when they value human interaction. As validators by nature, Millennials regularly check in with parents and peers for guidance. The same is true for their financial advisor—the desire for face-to-face validation generally comes into effect when Millennial clients reach an asset level of about $150,000.

What type of service do they need?

Analyzing the future market and clients, we found no need for complete substitution of current methods for advice and personal service. Regardless of their digital technology adoption levels, all generations are still willing to interact with humans. Therefore, a hybrid model that combines digital and personal interaction to create a client-centric experience backed by data needs to be implemented.

Digitalization should not be a threat for wealth managers but rather a tool that will extend their capabilities and help them enter the digital space. Wealth management companies should consider moving their routine processes to this space, reducing time and costs spent on face-to-face meetings. This will enable them to focus on more value-generating and intelligence-driven activities.

Overall, it is evident that wealth management is not ready for any dramatic changes in its workflows. Moreover, such changes may cause the same disrupting effect as a rapid demographic change. That’s why a calibrated step-by-step digital transformation is the only right decision that can be implemented at this time.

SoftServe empowers leading financial services providers with business transformation, advisory, and innovation at scale. Let’s talk about how SoftServe can help you take a guided and data-driven approach to fuel your advisory services transformation today.

Or discover more about the possibilities of conversational AI (CAI) and financial robo advisors for wealth management in our latest whitepaper.