The wealth management trends for the rest of 2023 show new approaches will be needed to thrive in the current climate.
Just as the world moves on from COVID-19, new challenges arise.
Inflation, economic headwinds, and rapid advancements in machine learning are shaking the wealth management industry at its core.
These developments will affect the way wealth managers think, invest, and operate, in addition to other factors. While there will be difficulties, there are opportunities for those who adjust and adapt.
Inflation may be down from its 40-year high, but it’s still at levels too high for consumers, investors, and policymakers alike.
Although inflation is cooling, the US Federal Reserve raised rates once more, by a quarter of a percentage point.
After this recent hike, the Fed expects to pause further increases, and they do not expect to lower rates until 2024.
Indeed, it’s a delicate balancing act with rate hikes and timing, as higher rates increase the odds of a recession.
With still relative high inflation and interest rates, this will keep pressure on consumer spending and business activity.
If anything else, wealth managers will prove their value by how well they protect clients’ portfolios from inflation and their ability to generate positive real returns.
The Dow, S&P 500, and Nasdaq have all rebounded modestly from their 2022 lows, but it’s a still mixed bag for the 2nd half of 2023.
With inflation and interest rates still high, an ever-looming recession, fears of a US default, and a wave of bank failures, there are reasons to be cautious. Not to mention high energy prices and geopolitical conflict weigh heavy on investors’ minds.
Similarly, the markets face upward pressure with continued cooling inflation, fewer rate hikes (and eventual rate cuts), strong corporate earnings, and a belief among investors that many stock valuations are low and at bargain prices. As investors snatch them up, markets and clients’ AUM all rise.
These actively competing forces make it really hard for wealth managers to reach a consensus about what to expect.
Fed Chairman Jerome Powell said a mild recession is possible this year, and “the case of avoiding a recession is… more likely than that of having a recession.”
Under that outlook any market growth is minimal, and the losses should not be as severe as previous downturns.
“Equities drive long-term growth. Bonds provide stability and security. Alternatives allow for the potential to outperform public markets and access unique opportunities.”
Finding safe and reliable investments has been a challenge in the current environment, as inflation still eats into consumer spending and corporate earnings.
Once-hot performers like real estate have shown signs of cooling amidst rising interest rates.
There’s no quick and easy win, but there are opportunities out there who do their research.
Gold is on track to hit record highs.
And when investors are concerned about their investments, they typically rush to this precious metal for protection.
Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, shared his take:
“Our message to investors is to be patient. Also, look to non-stock and bond assets, like gold and the U.S. dollar, to lower risk and potentially increase returns.”
And gold prices could go up more.
Nicholas Colas, founder of DataTrek Research, a market insights and analysis services provider, said gold prices tend to stimulate global gold ETF demand, and prices could go higher:
“If global investor interest in gold starts to take off (as it often does when price momentum turns sharply positive), net ETF demand could be the fuel that takes the price of the yellow metal higher still.”
DataTrek’s recommendation to add a little bit of gold to a diversified investment portfolio is common practice among wealth advisors:
“We are neither gold bulls nor bears, but we do have a standing recommendation to consider a 3% to 5% position in a diversified portfolio.”
Defensive stocks are those that tend to provide stable earnings and consistent returns, even in a market downturn.
These stocks would include utilities, consumer staples, and health care.
Because people need food, electricity, and their health, they will make spending cuts in other areas first, not to compromise on the essentials.
Brian Katz, Chief Investment Officer at The Colony Group, further backs up that point:
“Companies that sell essential services and goods, such as food, electricity (and) shelter are generally non-cyclical and less exposed to economic cycle.”
Dividend stocks are also attractive in a down market, adding in a source of stable payouts.
Check out these dividend stocks that can hold up well in a bear market.
Dividend stocks are also attractive in a down market, adding in a source of stable payouts.
Having this liquid asset is valuable to have in a downturn, as there is flexibility to purchase others assets at discounted prices before the markets go up again.
Michelle Griffith, wealth advisor at Citi Global Wealth, supports this view:
“In economic downturns, cash is king. It’s better to be safe than sorry and beef up cash reserves during times of high employment.”
Having a fixed income asset is nice to have, especially when other asset classes aren’t performing as well.
Bonds generally hold up well in times of recession.
Elliott Herman, financial planner and partner at PRW Wealth Management, shared his take and how his firm uses bonds:
“Higher-yielding bonds with shorter maturities are attractive now, and we have kept our fixed income in this area.”
The thought of machine learning for wealth managers has often been a “tomorrow” thing, but that tomorrow is now.
More and more firms recognize the power of the technology, as there are numerous use cases in AI for wealth managers, including:
According to the Future Fit Survey 2022 from global market research firm Forrester, 62% of business and technology professionals at wealth management firms anticipate increasing spending on emerging technologies over the next 12 months.
Check out this article to see what other wealth managers think about AI and how the play to incorporate in their organizations.
AI will be able to do more work that humans do, but advisors should continue upskilling and use the AI to complement their own work. Be the most human where being human is valued most for clients. Let technology do the rest.
Check out an article from Empaxis about how investment can make the most out of AI.
"I would guess right now that we're through the bear market (in cryptocurrencies).”
-Anthony Scaramucci, Founder, SkyBridge Capital
It was down, but not out, as cryptocurrencies like Bitcoin are up 69% in the three months ending March 31.
It’s a remarkable turnaround considering the FTX scandal, Bitcoin losing 70% of its value from its all high, and cryptocurrency market capitalization falling from $3 trillion to $900 billion, making it the 5th-worst collapse of an asset in financial history.
While recovering, many wealth advisors remain skeptical.
According to a survey conducted by market research firm CoreData, the survey found that 7 in 10 advisors believe there will be more cryptocurrency failures in 2023 than last year and more than a quarter (26%) expect to see the asset class collapse on a greater scale than was caused by FTX and Sam Bankman-Fried in November 2022.
And if one wants to keep crypto in the portfolios, they must understand how it work before they promote it to their clients
Devon Drew, CEO of AI-based distribution platform Diligence Fund Distributors, shared his view:
“There are financial advisors who do recommend cryptocurrencies as part of a diversified portfolio, as they can provide opportunities for growth and potentially higher returns. However, it's important to note that investing in cryptocurrencies comes with significant risks and should only be done after careful consideration and research.”
With the crypto crash and Sam Bankman-Fried FTX scandal in the backdrop, there’s clearly a need for more regulation of this asset class.
In fact, financial advisors “want more regulation” of cryptocurrency, according to Matt Hougan, CIO of Bitwise Asset Management.
American voters do, too. Even before the scandals broke out, a majority (58%) of 1,200 US voters surveyed want more cryptocurrency regulations. That number can only be higher now.
Survey respondents want lawmakers to prioritize market stability and fraud detection.
And governing bodies have taken note, especially considering all that has happened the last year and a half for these digital assets.
The SEC has issued an alert to advisors to exercise caution with crypto asset securities.
Meanwhile EU lawmakers have approved the world’s first comprehensive framework for crypto regulation.
It’s a two-way street, almost like a symbiotic relationship. Both sides have opportunities to invest in the other.
For starters, private equity investing is no longer just for large institutional investors.
Private equity firms recognize there’s so much capital out there (trillions) left on the table, and more and more PE firms are marketing themselves to attract that capital.
Smaller- and medium-sized wealth managers will have more opportunity to invest in PE, as private investments have outperformed their public counterparts.
Check out one of our posts on the rise in private equity investing for wealth managers.
At the same time, PE firms return the favor and invest in them.
Private equity investing has driven record levels of consolidation in the wealth management industry.
And for wealth managers, private equity ownership means an injection of resources and expertise, which allows them to deliver new products and services to their customers.
Michael Wunderli, managing director for Echelon Partners, shared his take:
"The acquiring [private equity] firms are run by sophisticated management teams that have been designed to increase profitability and drive faster growth for acquisitions."
In recent years, there has been a lot of talk about fee compression.
According to data from consulting firm Cerulli Associates, advisory fees rose on average 2.8 basis points from 2020 to 2021 for all investors. The average account fee in 2021 was 0.69%, up from 0.60% in 2020.
What’s driving the uptick? Simply put, clients are willing to pay for value in wealth planning and expertise. Scott Smith, director of advice at Cerulli Associates, stated:
"We have seen firms offering more and more services to their clients so paying a little more isn’t seen as much of a problem.”
Michael Kitces, a well-known investment industry blogger and head of planning strategy at Buckingham Wealth Partners, never thought fee compression was a substantive issue: "[It] was about doing more to EARN the 1%.”
For the last few years, there has been talk about the “Great Wealth Transfer.”
Year by year, this phenomenon manifests itself more.
The Baby Boomer generation, roughly defined as those born between the mid-1940s and mid-1960s, have already begun to retire, with more on the way.
As they do so, they will pass on wealth to children and grandchildren.
By 2045, up to $84 trillion in wealth will be transferred, according to Cerulli Associates.
Wealth advisors need to think about their older clientele:
Wealth management firms should think about ways to keep the business of the older clients’ beneficiaries.
Nearly two years into office, the Biden administration and Democrats have sights set on some of these areas:
Depending on what legislation gets passed and when it takes effect, that may influence when and how your wealth management clients transfer assets.
Just as wealth gets passed down, and as the millennials and Gen Z become a larger market, wealth managers will need to adapt.
They are tech-savvy, and they’ll expect you to be as well. Additionally and generally speaking, they are socially conscious and want to invest in a way that reflects their values.
To maximize revenue and quality of client service, wealth managers should carefully segment their clientele and cater to them accordingly.
This post from eMoney provides great advice on how to segment.
When employees transitioned from office to home in March 2020 at the start of COVID-19, the move had overall been successful. As a PwC report illustrated, more than 70% of financial services employers surveyed found work-from-home to be successful or very successful.
In fact, 96% of financial services professionals would take a pay cut to permanently work from home.
Employees are less tolerant than ever of commuting to and from an office on a daily basis, as shown in many cases the work can be done just as well at home.
But more and more industry leaders, including JPMorgan’s Jamie Dimon, want their teams back in the office.
While work from home has its benefits, a recent report found that workers in the office spend 25% more time in career-development activities than their remote counterparts.
Adding to that point, the research found that those who came into work devoted about 40 more minutes a week to mentoring others, nearly 25 more in formal training and about 15 additional minutes each week doing professional development and learning activities.
There are benefits to both remote and office work settings, and a hybrid approach should be seen as the best way going forward for wealth managers.
There are now over 14,800 registered investment advisors in the United States, part of a continued annual increase over the last decade.
In spite of the growth in wealth management servicing and the demand for talent, there is another challenge: a disproportionate amount of assets could be concentrated in the hands of fewer advisors.
With growing competition and an increasingly digital atmosphere, wealth managers must adapt technologically to stay ahead.
Good marketing, sales, and networking are also important. Check out some of our recent content around these topics:
Though some older advisors show no signs of slowing down or retiring, others are calling it a career.
About 40% of financial advisors plan to retire within 10 years, according to CNBC. In fact, there are more certified planners over the age of 70 than there are under 30.
For business owners close to retirement, they should think about succession planning for their business, as well as attracting new talent.
This includes outreach to college students, in particular women and minorities who are currently underrepresented in the investment industry. Expanding and cultivating the talent base is a win for all wealth management firms.
The great wealth management companies know how to tailor the client experience, making optimal use of human capital and technology.
Furthermore, the call for digital adoption among wealth managing firms is nothing new. It’s a message loudly proclaimed even before the pandemic, and now accelerated with AI tools like ChatGPT.
Candice Carlton, senior vice president of adviser education at FiComm Partners, stated it best as quoted in this InvestmentNews article:
“To stay relevant, it is critical that the adviser of today stay connected in a high-touch, digitally enhanced way to drive loyalty, trust and wallet share. Clients now expect their advisers to add value beyond the traditional financial plan and twice a year in-person meeting… advisers need help in learning how to adopt and use modern communication mediums to supercharge their prospect and client experience.”
As wealth management competition intensifies, moving fast in an efficient manner is more than ever.
New technology is making it possible to do more in less time and with fewer resources.
Artificial intelligence (AI) is one of the tools to help. Machine learning can help wealth managers recognize patterns, anticipate future events, create rules, make good decisions, and communicate with others.
AI is big business. The global AI software market is projected to grow rapidly in the coming years, reaching USD $126 billion by 2025.
And by 2024, 75% of organizations will shift from piloting to operationalizing artificial intelligence, according to Gartner.
Wealth managers have indeed begun to embrace AI, as 68% of wealth management organizations are using AI tools to support decision-making processes.
According to a report from Arizent, parent company of the publication Financial Planning, the report stated:
"Wealth management's ardent approach to the technology is notable given the wide variety of firms small and large reporting for this survey. Participants come from seven types of wealth management firms and hail from companies with assets under management as little as under $100 million to $2 billion or greater."
While AI focuses on the independent learning of machines, Robotic Process Automation (RPA) focuses on performing routine and predictable tasks.
Repeatable steps like downloading statements, storing files, and emailing reports can be done through RPA. In fact, has Empaxis has developed tools to help in these areas, helping investment firms of all kinds.
A Broadridge survey revealed that 57% of financial firms have long-term plans to increase automation through RPA and AI.
We live in a data-driven world.
In an increasingly competitive space, wealth managers need accurate, up-to-date information to allow for faster decision-making.
Having the means to aggregate data and see it in a nice, clean and customizable format is indeed helpful.
And it’s not just for the wealth managers; it’s for their clients, too. Clients across all age ranges are coming to expect modern fintech from their advisors.
Even older clients that generally shunned new technology are now opening to it, given the importance of protecting their health during the pandemic.
Clients should have easy and instant access to their portfolio details, via cloud-based technology.
It’s to a point where these features are no longer just nice additions; they are necessities.
Good data is a significant part of a firm’s credibility. Having the right data management and portfolio management platforms like TAMP1 can help.
Being an expert at everything is not easy, nor is it necessary. Wealth management executives and their staff should focus on what they do best: investing and client servicing.
Admin and operational work are important, but they’re not the main reasons for going into business. For anything that is non-core and a cost of doing business, it can be outsourced.
A Fidelity survey on outsourcing for wealth managers shows just the value that can be had from leveraging third parties. In short, those who outsourced were more likely to report a growth in clients and larger AUM.
The recent wealth management trends show opportunities and challenges facing the industry, and firms should look at the trends to develop a strategy around an investing, operations, technology, client servicing, etc.
The fight against inflation and a market uncertainty will continue having a significant impact on the way the wealth managers run their businesses, and their strategies should take into account the memories and lessons learned from the past, wherever and whenever appropriate. Adapting to and managing new technologies are also important.
Despite the challenges, there is opportunity out there for wealth managers; they just have to prepare and position themselves accordingly.
Empaxis is a leading provider of operational and technology solutions for wealth managers, helping them increase efficiency and scale while cutting costs. Looking to improve your organization? We can help.