Although headwinds caused by geopolitics, the pandemic and economics will likely dent assets this year, the report from Morgan Stanley and Oliver Wyman said that firms can prosper in several ways, by capturing mass-affluent/low HNW segment revenues for example, and proving that they can build value for clients more effectively than their competitors.

The war in Ukraine, high inflation, rising energy prices and disruptions to supply chains caused by COVID-19 will likely blunt growth in assets under management for the wealth industry this year – the first possible drop in a decade, a report said. 

The Morgan Stanley and Oliver Wyman Global Wealth & Asset Management report, Time to Evolve, predicts growth to be around 4 per cent per annum over the next five years through 2026, slowing from the 8 per cent rate seen in the last five years (2016 to 2021). Such a result suggests that firms that were buoyed on a decade of ultra-cheap credit and rising equities will have to work harder to stay competitive.

About 80 per cent of the new wealth will come from Asia-Pacific and North America until 2026 (which also shows how Western Europe’s contribution is relatively small). 

Even so, the report said that the growth rate gap between APAC and North America is narrowing.

The publication comes at a time when several organizations, such as Capgemini and Boston Consulting Group, are bringing out reports tracking performance and issues for the global industry (see the BCG report here). The Capgemini report is due out this week. This news service has also recently pondered whether definitions of "high net worth” need to be changed as inflation erodes the value of money.

The prospect of an AuM decline in private wealth for 2022 comes on top of firms’ margins having been compressed by ultra-low/negative official interests and enthusiasm for lower-margin “passive” asset management models such as exchange-traded funds. In this environment, large players with economies of scale have benefited, while smaller organizations have had to merge, outsource functions and forge alliances to pool costs. Clients’ demands for real-time digital engagement and more information have also added costs.

“Pressure on smaller firms and booking centers has grown significantly, leading to increased consolidation and footprint rationalization, particularly in Europe where the lack of a real banking union still hinders a fully-integrated operating and funding model across markets. Considering the cyclical headwinds and structural changes outlined above, we foresee that profit pools of wealth managers are under threat unless there is a fundamental transformation of service and operating models,” the report said. 
 

Ultra-high drivers
“Over the past decade, the primary focus of internationally oriented wealth managers was on higher wealth band clients as they drove the majority of AuM growth and, given their oftentimes institutional needs, provided the opportunity for larger bank-owned wealth managers to foster cross-divisional revenue opportunities with their corporate and investment banks,” it said.

“Many wealth managers struggled to profitably serve lower wealth band clients given uniformly high costs to serve, and consequently they managed cost-income ratios by off-boarding and restricting the access of these clients.

“We expect UHNW investors with more than $50 million in wealth to continue to drive wealth creation and to account for more than 40 per cent of total wealth growth by 2026. However, this segment accounts for less than 15 per cent of the overall potential wealth management revenue pool and for less than 20 per cent of its growth,” it said. 

Broader banking revenues linked to the UHNW segments, such as from investment banking, will also likely come under more pressure due to deleveraging, slowed deal activity and potential reduction in banks’ risk appetite. This growth will also come with higher uncertainty and risks compared with the last decade, where for example European collateral could finance a transaction in the US for a Chinese client.

Nevertheless, UHNWIs will remain a core segment for global wealth managers.

There’s gold in those hills
The study said the “largest revenue growth opportunity will be in the affluent and low high net worth client segments with more than $300,000 and less than $5 million in wealth. This segment looks likely to create about $45 billion of new revenues and account for about 60 per cent of the total wealth management revenue pool by 2026. 

“Currently, we see a revenue pool of about $230 billion in this segment, of which only 15 to 20 per cent is penetrated by wealth managers,” it said. 

"We see three priority investment areas for wealth managers to accelerate their transition: firms must make delivery models more flexible, differentiate from their competitors, and keep costs down."

The cost of serving an “average client” in the traditional UHNW/HNW bracket is $8-20,000 per client, but can fall to $2-8,000 in a hybrid model and $0.5-2,000 in a digitally-led model.

Organizations must also be more transparent, open and systematic about how they generate value for clients, using tech such as digital dashboards to give clients information in real time.