Tamara Kostova, CEO of Velexa, empowers institutional clients through customized and embedded investing services.
Economic, regulatory and technological changes have created a mercurial environment for the wealth industry. Wealth firms are having to adapt to things like growing retail investor interest, increasingly sophisticated cyber threats, regulatory dynamics, rapidly advancing technology and overall market volatility.
Keeping up with these myriad developments while still trying to maintain double-digit growth can be overwhelming. To help navigate, here is a guide to the challenges affecting the wealth industry:
1. Growing Retail Investor Interest
Research by Bain & Company indicates that fund managers won’t be able to achieve double-digit growth through institutional investors alone. Wealth firms must therefore target retail investors to reach their growth goals.
However, I find that the retail market requires a significantly different approach than wealth managers are accustomed to. Its liquidity needs are particularly challenging when attempting to structure alternative funds composed primarily of illiquid assets.
Alternative funds also lack direct channels to this market because their focus has been on building lasting relationships with institutional investors.
The growing Gen Z market further complicates retail investor needs. As a whole, the Gen Z cohort insists on digital-first solutions and seeks its investment advice primarily online. These self-directed investors don’t fit into any of the rubrics typically covered by wealth firms, yet wealth firms must find ways to appeal to this market to stay relevant.
2. Cybersecurity Risk In Wealth Management
Cybercriminals are increasingly targeting asset and wealth management (AWM) firms, according to research by ReliaQuest. AWMs typically hold as much financial data for clients as banking institutions, but these firms tend to have smaller budgets for cybersecurity, making them an attractive target for cyber-thieves.
Cyber attackers successfully infiltrated several Canadian wealth managers in May, resulting in leaked personal financial data. In 2020, the “Sodinokibi” and “NetWalker” ransomware variants captured confidential data from several financial services firms.
Research from Boston Consulting Firm reveals that AWMs are 300 times more likely to be targeted by phishing attacks than firms in other sectors. Because of this, AWMs need to factor in cybersecurity resilience as part of their future-ready plans, including how to recover from an attack if it does occur. Such a plan might include investing in a wealth management platform that’s been thoroughly battle-tested in production environments and is built to resist cybersecurity threats.
3. Regulatory Dynamics With Specific Asset Classes
Regulatory agendas are changing in response to technological advances, social concerns and recent economic debacles such as the far-reaching collapse of FTX. The SEC’s recent litigious approach to crypto companies makes for uncertain territory regarding this digital asset. Europe’s adoption of MiCA means that stablecoins will no longer be legal inside the bloc unless they’re backed 1-to-1 by a real physical asset.
Europe has already seen a 30% decrease in crypto usage among regulatory fears, while Asia’s crypto users doubled. But, even so, I believe that MiCA also provided much-needed regulatory guardrails for legitimate crypto companies to operate stably in the zone without fear of frivolous lawsuits.
With the regulatory environment seeming to be constantly in flux in certain asset classes, to be future-ready, I believe AWMs must adapt, modify and restructure products quickly in reaction to these changing regulatory conditions.
4. Agility In The Face Of Rapidly Advancing Technology
I think that rapid technological advances require the wealth sector to shift away from a traditional monolithic system and adopt more agile approaches. The industry was already trying to come to grips with the rise of Web 3.0, advanced CRM platforms, developments in KYC/AML and cloud-based solutions when AI came along and disrupted every major sector on Earth. Users now increasingly expect AI-driven solutions as part of their investment platforms.
Firms that don’t respond rapidly to technological advances risk losing visibility and becoming irrelevant. As the use of digital platforms increases, customers expect to be able to easily invest in “the latest thing.” Moving forward, AWMs can look to solutions and a shift in mentality that can allow for rapid adaptability in the face of a fast-changing ecosystem.
5. Market Volatility
It has been a tumultuous two years, with research by EY finding that 40% of clients (download required) feel that managing their wealth has become more complex. In Europe, as much as 48% feel this way. For very-high net-worth individuals (investable assets between $5 million and $30 million), the percentage hits 52%.
In these volatile times, I find that clients involved in the more innovative asset classes are hungry for more advice, especially self-directed investors and those investing in digital assets and cryptocurrency.
Alarmingly, the EY research also reports that 44% of investors intend to add new providers in the next three years, and 30% plan to move money away from—or completely close off their relationship with—their existing provider.
In the face of aggressive competition and a wide diversity of choices, wealth managers are under more pressure than ever to offer every service their clients need or else risk losing them or some of their wealth.
Prime Time Ahead
It is because of, not in spite of, the uncertain and volitale markets that the wealth management industry needs to consider future steps. For example, now is the time for wealth managers to consider developing in-house solutions or partnering with technology platforms in order to future-proof and better service their clients.
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