Why Wealth Management is important

Historically, wealth management was limited to the family's elders.

These individuals, assisted by advisors and chartered accountants, made prudent and secure investments, guaranteeing the absence of concealed charges or hazards.

Those in the upper echelons of society were the primary investors, and their holdings were typically limited to real estate, precious commodities, and occasionally the stock market.

Due to low technological penetration, most transactions involving investors and their advisors or brokers were conducted manually and in person.

In recent years, however, technological advancements have caused a paradigm shift in wealth management.

Access to information has been democratized to such an extent by technology and access technology that information asymmetry has virtually vanished.

Information is easily accessible with the utilization of technology, facilitating transactions in an instant. The advent of payment gateways that facilitate monetary transfers has rendered time real-time and eliminated the need for physical distance.

Furthermore, it is crucial to emphasize that wealth management services are mandatory for all individuals.

Upon cautious examination, it becomes evident that every individual must

(1) Make preparations for medical crises,

(2) Prepare for old age,

(3) Make arrangements to acquire a variety of assets and devices, including television, phone, automobile, and domestic goods.

(4) Make plans to accomplish various objectives, including education, marriage, for their children, and family vacations.

Each person must strategize for these matters by their priorities and tolerance for risk.

 In each household, over some time, there is a need for emergency funds for either medical emergencies or funds required to deal with natural calamities.

But unfortunately, many households don't plan for this.
Along similar lines, planning for funds for old age still needs to be done or done at the very last stage.

A holistic planning should be done, which takes care of all 4 points. At max, households spend money on a tactical basis rather than in a well-planned way.

As an element of wealth management, financial planning facilitates the accurate planning of these matters.

It pertains to financial administration and planning, which are critical for every household regardless of their total income.

In addition to the increased disposable income of younger generations and advancements in the financial sector, the wealth management ecosystem has much-untapped potential.

When investing, the younger generation is impatient for results and does not hesitate to take calculated risks.

As the proverb goes, technology is levelling the playing field for all.

Likewise, this holds true in this instance.

Previously, the breadwinner and her spouse would record every expense of the month in the monthly budget.

They would determine their future financial needs by conversing with their peers and neighbours.

We might say that it was a laborious and error-prone endeavour.

Today, technology enables one to monitor and determine expenditures from the previous month or year.

In a comparable vein, many instruments are accessible to facilitate comprehensive planning.

Additionally, these instruments aid in numerous simulations.

That is, one can determine how much she must save now to meet the various future requirements or what a household can afford to buy if income and inflation remain constant, among other things.

The significance and convenience of the wealth manager's function are amplified in this context.

A wealth manager should be aware of these factors

1. Need to understand the demands of Generation Z: Traditional portfolio managers counsel their clients to allocate their wealth across diverse vehicles, including financial assets and insurance. However, wealth managers now have additional options.

They can segment the affluent and tailoring products to each segment.

Wealth management is currently undergoing differentiation through the utilization of digital technologies made possible by high-speed internet. Already exposed to cutting-edge technology,

Generation Z is proficient in simulating various scenarios to optimize outcomes and utilizing data analytics to suit their requirements. Currently, advisors are obligated to adopt the same technological practices.

There is currently a greater variety of financial products on the market than in previous periods, and the underlying assumptions and theories regarding portfolio diversification are changing.

Younger cohorts are more willing to pay for digital services that are already accessible due to the substitution of relational values with absolute values.

Not only are handholding-free millennials more diverse, well-informed, and active on social media, but they also know where to obtain a more extensive selection of alternative and socially responsible investment products. 

2. Democratization of Asset classes: Investment services previously inaccessible to all are now available to all.

Providing identical products to every individual was previously a costly endeavour (due to maintenance and reporting, amongst other things); however, technology has since levelled the playing field.

By this, wealth managers must tailor their approach to each client.

It may be not easy to comprehend exotic products with numerous features, including commodities and ecological and socially responsible alternatives.

Therefore, wealth managers should provide explanations in a friendly and personal manner, albeit for a fee so that clients can make informed decisions. In contrast to the newer generation of investors, millennials prefer to receive personalized guidance via tech-assisted platforms and omnichannel channels. 

3. The necessity for complete transparency: Considering the market's increased segmentation, wealth managers ought to ensure that the exchange of information is transparent and precisely comprehensible. This is particularly crucial given that new-age prospects are perpetually pressed for time and slightly impatient.

Therefore, advisors can utilize technology as a crucial instrument to implement a comprehensive strategy when providing wealth management services to younger demographics. Nonetheless, this requires an in-depth comprehension of their client's requirements. 

4. Significant potential for expansion: Due to increased longevity, higher rates of literacy, and the formation of nuclear families, individuals now possess a greater amount of disposable income.

However, this sector is still underutilized and has tremendous potential. As an illustration, even after a frantic growth in 2023, the number of Demat accounts in India is reportedly still around twelve crores (120 million).

According to the report, 60 percent of India's total population is between the ages of 18 and 64 years, which is considered the working population of a country. So, out of eligible 84 crore (840 million), India has around 12 crore ( 120 million) demat accounts.

Likewise, the rate of insurance penetration in India is meager.

The insurance density (premium paid per capita) or the proportion of insurance premiums to GDP determines the penetration.
Both of these indicators suggest that insurance penetration in India is minimal. The insurance penetration rate was around 4.76% of the GDP, deemed "very low." As per studies, 30 people out of 100 have a life insurance policy in India.

We find similar patterns of data in many other countries.
As I have argued earlier, each household needs to have a proper financial planning and robust financial plan. In that backdrop, each household must have life insurance for their bread earner. On similar lines, plans need to be made for money during old age, money for medical emergencies, etc.

5. Regulatory compliance challenges are an inevitable consequence of expanding business operations. Regulatory bodies have been implementing more stringent policies to safeguard the interests of investors. Wealth managers will be responsible for rigorously adhering to the regulations.

Automation, data analytics, and artificial intelligence, in particular, are increasingly being employed to alleviate the regulatory burdens that have replaced mundane compliance tasks.

Greater reliance will be placed than ever before on technology to manage compliance and accommodate regulatory changes. 

6. Need for hyper-personalization: Technology plays a crucial role even in hyper-personalization, which involves client segmentation based on behaviour.

As opposed to utilizing arbitrary asset ranges, client segmentation can be achieved by leveraging the capabilities of machine learning to analyze the transaction history and behavioural profile of each client.

Wealth managers can enhance personalization in their client management by employing distinct client segmentation.

a. When the market declines, wealth managers can engage in personalized communication with their clients via face-to-face conversation, reminders, and phone calls to individuals who own high-risk portfolios. The greatest benefit is that they will consistently be accessible to investors and clients as and when required.

b. It is possible to provide short-term financing while safeguarding wealth. Frequently, a consumer desires to purchase a device. He may be hesitant to liquidate his investment portfolio due to its exceptionally high rate of return.

Customers who break an investment will also be liable to pay the appropriate capital gain tax. It would be more prudent to extend him a loan, given that the interest rate on the loan might be lower than the return expected on his investment portfolio.

c. Wealth managers will be able to proactively anticipate and provide guidance to their clients if a novel product, set of regulations, or occurrence becomes public.

d. Those who are financially secure and prepared to make investments are in their mid-30s. This youthful cohort consists of affluent young entrepreneurs, a trait that was not passed down from generation to generation.

e. Every individual client is distinct, regardless of their gender. Instead of making assumptions, wealth managers should gain comprehension of their client's individual preferences through attentive listening and a thorough assessment of their risk tolerance. Personalized service is highly valued by the younger generation despite their digital prowess.

As per one report, 53% of investors were willing to pay more for personalized service, and 71% were willing to share personal information with their primary wealth manager to enhance services.

7. Automated advisors and hybrid models demonstrate that financial and wealth management is not exclusive to the affluent.

Financial and wealth management is a necessity for all individuals, whether for retirement planning, insurance procurement, or to pursue personal objectives like education and travel. Robot-automated investment platforms employ algorithms to generate solutions after evaluating the user's capital market expectations, financial standing, objectives, ambitions, time horizons, and risk tolerance.

8. Gamification: In light of the fact that younger generations now possess an unprecedented amount of wealth, gamification has emerged as a crucial instrument for wealth management firms to attract new, younger clients and make financial management an enjoyable experience. Many applications are currently available for young investors.

Investors can establish their objectives, transmit funds from their bank account, and monitor their savings progress. By utilizing visual educational aids, gamification, and rewards, one can build platforms, which can help young to understand the nuances of wealth management.

9. Need for Embedded Wealth Management: Information management innovation is stifled by legacy infrastructure and experiences, which constitute embedded wealth management. Nevertheless, the obstacles that previously impeded the implementation of embedded wealth management are progressively eliminated.

Policymakers and regulators have recognized the criticality of innovation in fostering market stability and future expansion. Presently, they are collaborating closely with fintech’s and promoting the utilization of technology as a facilitator. 

One study suggests that the following channels may be utilized for embedded wealth management:

A. Retail and challenger banks possess an advantageous position to enhance customer lifecycle value through their role as intermediaries between embedded savings and investment services.

Employee financial well-being platforms have the potential to guide personnel toward improved financial decision-making by facilitating intelligent money management and serving as an entry point to embedded wealth management services.

Asset managers can connect with their clients via digital platforms and offer integrated wealth management in addition to asset management.

B. Health insurers can assist their clients in saving for a comfortable retirement by gaining insight into their clients' lifestyles.

C. Life insurers and pension providers can integrate retirement and wealth decumulation services currently compartmentalized. Younger generations are drawn to consumer platforms that possess robust customer engagement and extensive data sets. These platforms can potentially integrate embedded wealth management into their current offerings.

Technological foundations of wealth management

1. Digital technologies: Wealth managers must employ an astute combination of conventional and cutting-edge digital channels to provide products and services.

Contemporary digital channels encompass a variety of platforms, including but not limited to mobile, social media, analytics, and the cloud. These channels ultimately facilitate user interactions and transactions by delivering current stock market information, financial guidance, and investment prospects.

2. Digital documentation: Intelligent Character Recognition (ICR) and Optical Character Recognition (OCR) can be utilized to generate documentation that is both accurate and efficient.

3. Data analytics: Autonomous cognitive solutions are now available due to technological progress; they can analyze data, detect patterns, and forecast hazards and changes. This facilitates more expeditious and effective decision-making.

By leveraging customer analytics, wealth managers are capable of discerning and ranking digital opportunities that have the potential to influence both customer experience and business value significantly. 

4. Cloud: A cloud-based model offers numerous advantages, including cost reduction, increased flexibility, actionable insights, and the ability to scale on demand while streamlining the cost of IT infrastructure ownership. 

5. Artificial Intelligence: Financial wealth managers can assist investors in making more informed investment decisions, assessing market conditions, and collecting consumer behaviour data, in addition to developing exclusive offerings for their clients and investors, with the assistance of AI-based emergent technologies.

Additionally, AI can be used instead of human intervention, which will assist wealth management firms in reducing the cost of their services. 

Additionally, wealth managers can utilize AI systems to collect client information and recommend distinctive investment products. However, time is the primary benefit of utilizing AI, as it can process vast quantities of data, such as product perception, trends, and external factors.

Numerous instances exist wherein wealth management firms have developed and implemented AI platforms to obtain precise market data, gain client insight (including risk tolerance), and facilitate effective decision-making, among other functions.

Wealth managers are responsible for enhancing their understanding of their clientele by emphasizing their priorities and delivering comprehensive investment guidance.

A communication divide should be the primary obstacle surmounted; doing so will enable wealth managers to establish a stronger rapport with their younger clientele.

This is an urgent matter, as 70% of female and millennial/GenZ investors intend to sever ties with the financial advisor of their family. Therefore, wealth managers must implement appropriate technology that functions as a listening engine rather than a platform for amplifying the quantity of text notifications and alerts.

Other technological factors to consider:

1. Automation of back-office functions: Many wealth management firms still depend on manual data analysis to generate leads, recommend assets, and assess compliance and risk. One report found that wealth managers devoted as much as 70% of their time to data input, correction, and reconciliation tasks.

Back-office processes must be automated to prevent this inefficiency and ensure wealth managers are accessible to clients. Numerous tedious and repetitious back-office tasks can be automated with the help of AI, allowing wealth managers to devote more time to value-adding endeavours.

2. Technology to increase visibility and facilitate integration with other stakeholders: Despite numerous technological solutions, the pillars of financial health remain segregated.

For example, personal pensions, occupational pensions, retirement plans, and life insurance are all evaluated separately. It is said that the migration from legacy to modernized stacks is a significant trend that enables financial institutions to maintain their competitiveness. 

Integrating modular, API-centric, cloud-based technology solutions with the current back-end systems permits concurrent modernization of the back end and implementation of front-end innovations.

By implementing the tenets of open banking within wealth management, all pertinent client data becomes easily accessible, enabling wealth managers to deliver comprehensive services. Additionally, the democratization of technology has enabled small investors to leverage it by maintaining low-cost portfolios and trading via various applications.

Given that the market for embedded wealth management is more than $100 billion, numerous major actors have noticed.

Many wealth tech companies compete for clientele by promising them exceptional experiences and catering to their specific requirements.

The realm of WealthTech is dynamic and ever-changing. Adopting digital technologies undoubtedly drives the next wave of expansion and ensures consumer contentment.

Massive opportunities abound, and banks and wealth technology providers can undoubtedly take advantage of the situation.

As I have highlighted earlier, wealth management should not be seen from the lenses of a 'high net worth individual' or ' investment in equities or derivatives.' Wealth management and financial planning are required for each household.

Preserving money is equally important as earning money. With proper planning, money should help each household in meeting those four objectives.

In that sense, Wealth management becomes a tool for overall financial inclusion.