Current Trends Driving Client Advice Models in Wealth Management

Author: Liqueo Wealth Management Team

Wealth Management remains an attractive sector for financial services organisations. Increasingly it is attracting disruptive new entrants, aiming to capture market share. This is because growth prospects are good, as wealth management firms typically have lower capital requirements than most other retail banking businesses, consequently higher returns on equity are achievable. In addition, clients tend to be stickier, particularly at the more retail end of the wealth spectrum (less than £1 million assets under management), which forecasts further growth in the sector. Despite the upsurge of digital challengers, incumbents can maintain barriers to entry through investment in technology. They can also differentiate themselves across their advice proposition, notwithstanding the margin compression at lower AUM (Assets Under Management) where service has become more commoditised.

The highest levels of sub-sector growth are expected to be in Digital D2C (direct-to-consumer), Independent Financial Advice lead (IFA) and Advice lead.

We examine factors affecting each model in turn.

Digital D2C

As clients become increasingly comfortable with technology, the convenience and relative affordability will continue to drive growth of D2C players, particularly those focused on low-cost propositions. For robo-advisors, the development of more compelling propositions and partnerships with other financial providers will likely result in greater asset flows.

IFA lead

Post Retail Distribution Review (RDR), there continues to be demand for advice, and coupled with strong propositions and growing advisor numbers, this will continue to fuel growth. The greatest potential will likely be seen in larger firms, hence the appetite for Mergers and Acquisitions and consolidation of smaller players.

Advice lead

Although private client growth in this area is likely to be lower compared to IFA lead, this should be offset by relatively faster growth of intermediary and execution-only propositions. Greater growth is expected from firms offering a combination of financial planning as well as purely investment advice.

It should be noted that most global wealth managers and UK banks are not expected to grow significantly. This is because they remain distracted by de-risking, managing credit issues or are too focused on the UHNW (ultra-high net-worth) segment.

Factors driving revenue

So, having described the outlook for growth, what are the factors driving revenues for each of these models? The largest pressure on D2C and IFA lead models continues to be the downward pressure on fees, primarily driven by the rise of the low-cost platform providers, but also due to price competition in model portfolios. However, the outlook for Advice Lead providers remains brighter. This is due to a growing requirement, across the industry, for advisors to justify higher fees in a low-return environment. The need is greatest at the mass affluent end of the client spectrum, where clients tend to be stickier due to limited price competition.

The final key factor driving advice models, is that the mass-affluent market (<£300k AUM) continues to be poorly served. COVID-19 has only accelerated the structural challenges around client digital attitudes and business capability for this client segment. The proposition of UK players remains weak compared to international peers. Firstly, most UK offers have focused on either technology with no human interaction, or the digitisation of their face-to-face offer. Secondly, the most successful US players have a multi-channel offer: from execution-only to hybrid to telephone to face-to-face to premium service delivery. The most successful offer must therefore build trust with clients. This is done through human interaction supported by digital tools. As previously mentioned, this ability to charge for advice, particularly as needs become more complex, continues to drive the case for hybrid and face-to-face propositions, alongside self-directed digital models.

Therefore, we see the greatest opportunity for advice led firms offering a combination of services across the wealth spectrum. This ‘staircase proposition’ increases the sophistication of advice as the needs of the client become more complex and accordingly the required interaction becomes more personal.

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