The steady rise in global wealth growth came to a sharp halt in 2018. Gains in global personal financial wealth tumbled by more than 5 percentage points year on year, the weakest performance in the past half-decade. The fourth-quarter dip in major stock indexes pulled down equities and the large regional portfolios tied to them. High valuation levels, geopolitical risks, and the challenges of returning to normal interest rate levels also contributed to the decline.
The big question now, of course, is whether the pullback in wealth growth is a precursor to deeper changes. Analysis of major segments, markets, and wealth manager performance suggests that a number of shifts are underway. One is the broadening wealth clientele. Although most of the world’s millionaires currently live in North America, the fastest growth in personal financial wealth is occurring elsewhere. By 2023, revenue pools of the private banking channel in Asia could equal or exceed those of Western Europe.
Wealth bands are evolving, too. High-net-worth (HNW) individuals hold the greatest concentrations of wealth, but the middle band of affluent households will grow significantly over the next five years. This often-overlooked segment—with its $18 trillion in investable assets—is a golden opportunity for wealth managers willing to tailor their service and coverage models to clients’ needs. The wealth management space is also becoming more crowded and more competitive, as fintechs and nontraditional players enter the market. The battle for market share will intensify as new competitors jostle with established players to meet the rising expectations of a broadening client pool.
Accustomed to the ease and convenience of digital apps, features, and channels for banking and other activities, wealth clients increasingly expect their wealth management providers to offer a similar experience. Yet many firms lag behind other sectors in employing digital tools and capabilities and in acquiring the speed, agility, and mindset to develop them. That deficit has a negative impact on the client experience, leaving value on the table and increasing the cost to serve at a time when wealth managers can ill afford it.
Finally, the slowing global economy—assessed in combination with projected rates of inflation, foreign currency movements, and market performance—suggests that wealth worldwide is likely to grow at a compound annual rate of 5.7% from 2018 to 2023, a slightly lower rate than in recent years.
To navigate this changing environment and create a strong bottom line, wealth managers must reignite growth. The most successful firms will take their business models to the next level by focusing on high-growth opportunities, amplifying advisor impact, and employing data and analytics to deliver value at scale. Surface-level changes will not suffice. To meet the heightened expectations of their sophisticated clientele and defend their market share against able and determined competitors, wealth managers will need to invest in product innovation, advanced analytics, and a robust set of digital tools and platforms to extend their reach, personalize their service, and differentiate their offerings.
The asset management industry is at a critical juncture. Following a record year, 2018 saw a combination of market volatility and ongoing pressure on margins and fees. Growth in demand for passive strategies and the impact of regulatory initiatives had similar effects. Many firms, meanwhile, struggled to bring down costs, few fully grasping the potential of digital. In the worst case, by 2023, profits will have decreased by nearly one-third. However, the outlook is not entirely gloomy. Challenging periods present opportunities for change and, in a largely winner-takes-all world, the chance to get ahead of the competition.
Asset managers must take forceful action, and there are two strategic approaches: shoring up defenses and adopting more aggressive strategies. Defensive moves include focusing intently on costs, reviewing the portfolio, and optimizing pricing. Aggressive strategies, meanwhile, may comprise refocusing on client retention, leveraging data and analytics, and seeking M&A opportunities. In truth, neither approach alone is sufficient: leaders must embrace both. In a time of adversity, the most unwise choice is to do nothing.
The time is ripe for radical transformation in China’s wealth management market. Indeed, the complex and ever-changing environment has created confusion and raised questions. What is the essence of wealth management? Which key changes has technology brought? How will technology reshape the market? To understand the current state of play in the Chinese market, it is necessary to take a value-creation perspective on digital wealth management. A new report coproduced by BCG and Lufax Holding examines the issues and provides guidance on winning strategies.
Even tiring runners accelerate when the road turns downhill, because gravity works in their favor. That was the story of asset management in 2017. Assets under management (AuM), net inflows, and revenues were all well up, but not because asset managers made equally impressive improvements in their business models. Market gravity was on their side. The bull market in equities increased the value of assets already under management and attracted much new money.
Asset managers should celebrate a banner year for the industry. But they should also use this moment of strength to position themselves for a business environment that may look very different in five years, transformed by new technologies and changing customer demands. If they do not, they face a future of persistently eroding margins.
Some bold moves will be required —radically overhauling technology, entering new markets, and making acquisitions, among others. These are daunting challenges, but the extraordinary market-led performance of 2017 puts many players in a robust position to take them on.