Although wealth managers have historically segmented their clients on the basis of wealth level, service models for the various segments have remained fairly uniform. (See Exhibit 1.) Yet demographic and socioeconomic shifts are setting the stage for the rise of nontraditional, underserved segments that do not fit the standard approach.
The vast majority of wealth managers still try to fit nontraditional segments into the traditional wealth-based framework, grouping them with clients whose investment and service needs may be significantly different. By not taking a more customized perspective, wealth managers risk client attrition and will potentially miss out on future growth opportunities. Existing cost-to-serve models often reveal a lack of understanding of what nontraditional segments are specifically willing to pay for, resulting in forgone revenues. Filling this gap presents a significant opportunity.
There are two client groups whose investment needs and market potential merit special highlighting: female investors—whose wealth levels have increased significantly owing to their success as corporate executives and entrepreneurs, in addition to inheritances and legal settlements—and millennials (people born between 1980 and 2000), whose overall wealth accumulation is rising steadily.
Our surveys of both wealth managers and wealth-management clients helped us analyze the exact nature of these two underserved segments. Broadly speaking, the wealth-management needs of these two groups fall more into a behavioral construct than one based purely on wealth level. Although segmentation based on wealth still has its place—ultra-high-net-worth (UHNW) investors will always have different needs than the affluent segment, for example—banks need to extend their current segmentation to include the behavioral axis as an important step toward understanding and addressing the needs of not only these emerging nontraditional segments but also the resulting combinations, such as UHNW women, affluent millennials, and UHNW millennials. Female millennials in particular represent an opportunity for wealth managers willing to customize their offerings to a high degree. Wealth managers must define and deliver tailored value propositions that are appropriate for both the wealth band and behavioral characteristics of their clients.
In 2015, women held an estimated 30% of global private wealth, with the share slightly higher in developed markets than in emerging ones. Their wealth, which is expected to grow by 7% annually (slightly above the global average) is increasingly self-generated, although much of it also originates from both inheritances and legal settlements. Efforts to target women in a concentrated and engaging way continue to lag among wealth managers. Indeed, only 14% of our wealth-manager survey respondents said that they had conducted some degree of marketing (such as seminars, events, or forums) directed at current or prospective female clients in the past year, and only 2% said that they actually considered women to be a specific client segment and had adapted their service model accordingly—such as by dedicating specifically trained RMs to women.
In our view, the key to answering the question of what women want in wealth management, and to delivering what is required, lies not in gender-specific products but in discovering women’s true investment needs (especially those that are presently unmet), developing the right service models, and marketing those capabilities efficiently and effectively. Our survey found that female investors’ needs are diluted when they are allocated to segments solely on the basis of wealth level, leading to dissatisfaction and ultimately to switching. Roughly 65% of our female survey respondents who had switched wealth managers reported doing so because of unhappiness with customer service and feeling misunderstood.
Female investors have unique needs across the entire value chain, particularly in their reasons for choosing a bank, in how they approach making investment decisions, in the investment objectives they pursue, and in how they interact with their banks. According to our survey, 44% of women depend highly on referrals from trusted people in their environment when choosing a bank or wealth manager. More than 30% of female respondents listed friends and family as their primary source of investment advice (compared with 11% of all respondents), and just 10% of women listed their RM as the top source. This finding suggests that banks should invest in training RMs to create better, more productive connections with their female clients. In the same vein, more than 50% of women surveyed strongly agreed that they wanted their RM to know them on a personalized level, and more than 40% strongly agreed that they would like to see marketing campaigns that featured people like themselves and that discussed challenges similar to those that they face. A bank’s track record of stability was also key to 55% of respondents, more than twice as important as the range of products provided (26%).
Many banks are losing female clients because their service models lack the required level of customization across the value chain. In order both to repair the damage and to profit from the opportunity, banks need to further develop client insights (such as through smart analytics and reaching out to current and potential female customers) and adapt their value propositions accordingly.
In contrast to the female investor segment, many millennials are not yet wealth management clients even though the segment holds an estimated 10% of global private wealth. As these young professionals, entrepreneurs, and inheritors significantly increase their wealth—at a 16% estimated annual growth rate, reaching 16% of global private wealth in 2020—it is imperative for wealth managers to understand and address their needs and to position themselves as the ideal partner.
Fully 50% of the wealth managers we surveyed did not possess a clear view on how to address millennials in terms of service model, products, and overall approach. Not surprisingly, roughly 75% of millennial survey respondents who had switched banks said that dissatisfaction with customer service was the main reason. Millennials express specific needs that are not addressed by a segmentation approach that is based purely on wealth level. Of key significance are competitive and transparent pricing schemes, the bank’s financial track record, and the sophistication of the digital offering. (See Exhibit 2.)
While an enhanced digital offering is imperative for all wealth clients, millennials in particular have grown up in an era of rapidly advancing technology, and both their private and professional behavior has been shaped by platforms such as Google, Alibaba, and Facebook. They are constantly connected and are always aiming for the highest speed and quality of information transfer. The vast majority already use online banking and mobile apps with their retail banks, and they expect flawless digital delivery from their wealth managers that is of a higher order than what is typically sought by traditional segments.
Although select banks are meeting millennials’ digital needs in some areas—such as transaction views, reporting, and execution—there is still a measurable mismatch in others. For example, millennials are keenly interested in receiving many services currently provided by their RM—such as investment recommendations and portfolio analysis—through a digital channel, including chat or automated advisory. It is critical that the digital offering be easily integrated into millennials’ instantly updated, interconnected world.
Of course, going digital in the millennial segment does not mean that wealth managers should replace RMs with technology. Instead, they should identify the areas in which millennials consider the RM a “value add” and focus their efforts there. For example, only 6% of millennials said that they relied principally on RMs for investment advice, and most did not care if their RMs knew them on a personalized level. But millennials do rely on their RMs to learn about and better understand new products (63%). In addition, millennials are likely to rely on their RMs more heavily as their wealth accumulates and their investment strategies become more complex. Wealth managers must invest in building the next generation of talent in order to meet the growing expectations of their future clients.
According to our survey, millennials are highly sensitive to competitive and transparent pricing. Having lived through the 2007–2008 financial crisis as young people, they are perhaps more skeptical about the financial industry than previous generations, prompting them to seek full transparency on both management fees and investment performance, especially in the current low-return environment. In our survey, 70% of millennials chose pricing as their top criterion in choosing a financial institution. What’s more, with globalization and the Internet allowing investors to easily compare all major banking players and seek the best offering in terms of value, tech-savvy millennials are inclined to do extensive research. Wealth managers will therefore be increasingly challenged to clearly define, articulate, and deliver a differentiating value proposition that provides clear value-added for this highly discerning segment—one that justifies the price for services received.
Furthermore, since millennials are often socially and professionally connected across different regions and cultures, they are frequently marked by a wish to invest in socially responsible products. Nearly 70% of millennial survey respondents said that they would like to invest in such products, which include renewable energy indexes, microfinance, and conservation finance. This wish plays an important role in their choice of wealth manager as well (58% of millennials versus 44% for all respondents). Socially responsible investing therefore represents another opportunity for fast-moving wealth managers.
Overall, millennials represent a growing pool of prospective clients who are highly discriminating, skeptical, and inclined to carry out their own proactive research. Their needs in the areas of digital capabilities, transparency, and socially responsible products demonstrate their self-directed drive. In order to measure up to the demanding attitudes of this younger generation, wealth managers must ensure that their value propositions are “battle tested.”
Ultimately, from a strategic viewpoint, segmentation approaches that are based mainly on wealth level and cost-to-serve models—both of which continue to be used by the majority of players—neglect what many clients are truly willing to pay for. Such approaches no longer allow wealth managers to capitalize on the full potential of the market. As new segments with needs related more to their client experience and behavioral preferences continue to grow, the flaws of the current approaches and models will become more visible. In order to succeed, wealth managers will need to adopt a more comprehensive client-centric approach, decide how to sensibly segment their current and prospective clients, clearly identify their clients’ needs, and define value propositions accordingly. Some wealth managers have already embarked on this journey, partly by leveraging insights from big data—but for most the first step has yet to be taken.
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