Wealth management providers must listen to their customers to succeed in the post-pandemic era. Our Wealth Report 4.0 survey of over 2,300 investors confirmed that we are entering a new phase of wealth management driven by a radical shift in customer needs and expectations.
Brought into sharp focus over the past few years, environmental, social and governance matters are increasingly a key concern for clients across all generations and wealth levels both in their investments and the firms they engage with. At the same time investors are looking to achieve better returns from their investments in a time of low interest rates. In combination, this will require wealth and investment firms to significantly adapt their products and services to meet these new expectations of clients.
The rise of ESG
ESG is increasingly a key expectation across all client. Therefore, clients not only expect wealth management providers to be committed to ESG matters and have ethical business practices but also to be knowledgeable and incorporate ESG into their investment strategies to achieve these goals. As well as client expectations, there is increasing pressure from wider stakeholders (including regulators, employees and shareholders) on this, so firms need to capitalise on the opportunity to invest and drive change throughout their organisations. This is a global trend, but European businesses are generally the most ESG driven, particularly in France, the UK, Switzerland, and Germany—especially as new EU regulations come into force. Those in Japan and the US also score high, while others are less committed.
Do ESG funds deliver against goals?
Clients expect wealth managers to be knowledgeable about Environmental, Social and Governance and not only have an opinion at an investment level, but also have a consistent corporate position. Despite controversies about transparency and metrics, most organisations believe ESG funds generally do a good job of delivering against their goals, and investors believe they can achieve high returns through ESG. Notwithstanding that, our research showed more than one-third of investors are willing to accept lower returns if necessary to align with their ESG objectives. This will be tested in due course, and about a quarter of firms think it is likely that ESG investing will decrease if the market falls.
Democratisation of products and services
Investors are looking for ways to improve outcomes. Currently about three-quarters of investors use actively managed mutual funds but this is reducing. Our results anticipate more investment in both passive funds and individual securities. And in the hunt for better returns and increased yield, more than two-thirds of investors plan to turn to alternatives such as hedge funds, private equity, specialised products like IPOs, commodities and derivatives, REITs, and structured products. This is being met by managers, with two third expecting to deliver a much more comprehensive range of alternatives within the next 2 years.
“The pandemic has created a trading frenzy in the markets. But it has also made investors more aware of competitive pricing from firms like Robinhood, which started the move toward zero commissions." Vinod Raman, Vice President and Director, Product and Operating Unit, Stash
In this context, it is worth noting the jury seems to still be out on cryptocurrencies—while a small percentage of investors (generally younger) see them as the future of money, many more investors and firms are not convinced, concerned about the regulatory, market, and cyber risks, as well as increased volatility: only 16% of wealth firm are looking to offer clients crypto assets in the next 2 years.
Investors are also looking for a wider range of wealth management services such as tax and retirement planning to achieve their financial outcomes, with pensions, annuities, and whole life products that offer longer-term tax-sheltered returns also moving up the priority list in this context. More than half of the firms in our research intend to offer goals-based financial planning and additional advice and support to enhance the client experience.
How do firms need to respond?
As the expectation of clients changes wealth management providers need to adapt their offering, opening up ESG and alternatives from a niche part of the market to being mainstream for a much wider group of clients. Wealth managers need to also ensure their own organisations reflect how clients expect them to act on key topics like ESG.
In summary, customer needs will dictate the future of wealth management, and that require firms to be flexible in the way they respond to individuals' needs. This will require the creation of new products and services, but above all, it will require a shift in focus to meeting the client need and away from selling a product.