Wealth Management in the UK – Part I

Overview

The UK is recognised as one of the largest Wealth Management markets globally.  Estimates suggest in excess of £3trn, with £2trn in personal liquid investable financial assets held by individuals and a further £1.9trn sitting in defined benefit pension liabilities. (Source: LEK UK Wealth Management: Spotlight on Value Creation), but it is also incredibly fragmented – there is no single provider which has a majority share of the market.  Client needs are serviced through different types of Financial Service providers and Wealth Managers, including:

• Large Universal Banks which offer Private Banking and Wealth Management
• Small Private Banks and Wealth Managers
• Traditional Stockbrokers
• D2C Robo Advisors
• D2C Trading / Execution Brokers
• Independent Financial Advisors
• Single / Multi Family Offices
• Trust Platforms and Special Purpose Vehicles
• Offshore centres

Against this market structure, the UK is positioned as a Fintech Hub, with London being recognised as one of the largest hubs globally, along with San Francisco (US), New York (US), Sao Paolo (Brazil), and Tel Aviv (Israel), putting the UK at the frontline of the intersection where traditional wealth management and private banking faces-off against the democratising force of disruptive technology.

This is further reinforced by the regulatory approach to financial services in the UK.  We are currently in the midst of a shift from a prescriptive regulatory approach to a more principled approach.  Most notably, this can be seen in the post-Brexit agenda, with the Government’s explicit aim of making the UK the World’s most innovative and competitive global financial hub.  The recently announced “Edinburgh Reforms” targeted at repealing the retained EU law in favour of a UK specific regime, underpinned by the shift to client outcomes under the Consumer Duty, and the proposals from the UK as to how to regulate digital assets and AI technologies should all be seen as a transformation opportunity for Wealth Management industry, not a regulatory "hygiene burden" of maintaining regulatory compliance.

Overlay the above market structure and regulatory framework with demographic analysis and trends, only adds to the urgent need for Wealth Managers to transform their capabilities to capture the opportunities available.  Forecasts suggest a materialisation of one of the largest generational wealth transfers in history, as the baby boomers (born 1944-1964) are expected to transfer £5.5trn of wealth (Source: Kings Court Trust: Passing on the pounds 01.05.19.pdf) in the next 30 years.

This Wealth transition carries inherent risk for traditional Wealth Managers – how do they engage with the NextGen before the actual transfer of Wealth, especially where they are likely to only have a relationship with the current Wealth holders?

Most within the Wealth Management industry recognize there is a tremendous business opportunity for those Wealth Managers who embrace solutions and capabilities targeted at a broader set of investors, supporting existing clients, especially those which are approaching their decumulation and transition phases; new clients who stand to inherit Wealth or create new Wealth; and other segments of under-serviced / non-advised clients.

Key Trends

What then are the key trends being observed in the industry today and how are Wealth Managers going to be able to identify value-adding propositions as they look ahead over the next 3-5 years?  This is pertinent for both legacy providers and FinTech disruptors.  There is broad recognition amongst traditional Financial Service providers of the opportunity, with many looking to protect existing AUMs and revenues and to expand into other market segments.

For example, as the pensions landscape continues to evolve, shifting from the security of Defined Benefits to the self-funded approach of Defined Contributions, traditional pension brokers, with a large captive client base, are exploring opportunities to integrate a broader set of services beyond “pension brokerage”, and enter the realms of Advisory Wealth Management.  This is only one example of existing industry players looking at how they can gain an increased share of the Wealth Management pie.

Our analysis has identified several themes across the industry, which will be explored in further detail over the coming weeks in a series of blogs.  Three themes will be the basis for the first blogs of this series:

1. Hybrid Digital Client Journeys
2. Data Driven Organisations
3. Democratisation of Financial Products

Hybrid Digital - The Nirvana of Wealth Management

The prominence of digital capabilities is well documented and known, and for many aspects of Financial Services, the digitalisation journey has successfully disrupted traditional channels.  One need only look at all the headlines of major high street banks closing yet more branches, especially after the recent spate of lock downs.  Even within the Branch, there is a sense branch staff are more IT Support, encouraging clients to utilise the self-service capabilities available.

However, there remains a strong friction between the self-serve digital capabilities and the traditional Relationship Models, where F2F advice is provided, and is indeed pivotal to the wealth relationship.  This is understandable, given the complexity of the investment landscape and the fact that most people are not familiar with investment products, creating a nervousness to complete digitally led self-directed transactions.

Providing a full relationship model comes with a very high cost-to-serve. Therefore, in addition to the increasing client demands for digital capabilities, opportunities to deliver value-added services to relationship managed clients at a low cost-to-serve is a strategic imperative.  Operational efficiency and automation will be critical, as will both the client and colleague engagement models, as Wealth Managers try to support their clients and staff via digital capabilities.

• Product Excellence - whilst digital channels, out of necessity, need to be standardised, developing capabilities that tailor the outcomes to individual clients, giving them a feeling of "bespoke" service will be necessary.  Direct Indexing is one product area which is forecast to grow in importance, allowing clients to effectively choose the composition of their funds / portfolios, within the confines of the Strategic Asset Allocations / Tactical Asset Allocations which can be applied across all "bespoked" client portfolios, allowing for the efficiencies of scale at the back end to help keep cost-to-serve as low as possible.
• The increasing prevalence of Robo Advisory.  Or more generically, digital advisory services, which reduce the cost-to-serve of traditional advice models and broaden the target audience for advisory offerings to include the mass-affluent client base.  Such capability is timely, as the Baby Boomer generation is now at retirement age, gaining access to pension savings, potentially never having had any financial advice.  Whilst it may be seen as a purely digital journey, the capability needs to be viewed as part of the wider service offering across the client continuum, avoiding any disconnect in client and staff experience where clients adopt more traditional service offerings in addition to a digital-only solution.

For this, data, improving financial literacy and democratizing investment products is critical to support Wealth Managers achieve good client outcomes, as required under the new regulatory regime, and to empower future clients to optimize the opportunities for wealth management and optimisation.

The next posts will explore these themes further, in the context of both the changing regulatory environment and technological advances.