The coronavirus will accelerate the changes to the wealth management industry predicted by McKinsey & Co.
It’s hard to think about how any business will be operating in 10 years when coronavirus is so dramatically disrupting our daily lives, and the economies and markets around the world. Advisors are already strained answering many more calls from clients. If the crisis continues for months, some advisors won’t be able to survive sustained reductions in portfolios that will cause dramatic drops in AUM revenue.
Yet for those advisory firms that endure the storm, planning for the long term, as most advisors tell their clients to do, will position themselves in a business that was expected to undergo significant changes even before the coronavirus hit. A McKinsey & Co. report, “On the cusp of change: North American wealth management in 2030,” provides many ideas on what may be in store and how advisory firms will want to refocus their businesses. Some trends in the report, released in January, will accelerate as consumers adjust to the longer-term impacts that the COVID-19 crisis created.
According to the report, in 2030 the wealth management industry will offer hyper-personalized advice that is much more goal-based than it is today. The number of clients will grow at unprecedented rates, with a handful of very large wealth managers attempting to serve “everyone” and the rest providing “exclusive” service to high-net-worth clients. About half of advisors across all channels in wealth management will be women and 40% will be minorities, up from 33% and 20%, respectively, today, the report predicts, and advisors will be more like life coaches than investment managers.
On March 20, I interviewed two of the report’s co-authors, Jill Zucker, a McKinsey senior partner who runs the firm’s New York office and previously led its wealth management practice in North America, and Vlad Golyk, an associate partner in New York who conducts surveys of the wealth management industry. Although Zucker and Golyk said they hadn’t assessed how the coronavirus would affect their findings, their views of the long-term prospects for wealth management are still very relevant and insightful. (McKinsey has published some other research about how the coronavirus is affecting the wealth management industry in Asia, as well as other pieces on how to provide leadership during the crisis.)
The report predicts that most new wealth management clients, “will want to access advice in a Netflix-style model – that is, data-driven, hyper-personalized, continuous, and, potentially, by subscription.”
“We really mean thinking about an audience of one,” Zucker said. “Marketers have really begun to narrow their focus and think about offerings that are very personalized for each individual consumer, and we are seeing that across industries. We believe that will come to wealth management.” She added in-person advice won’t disappear; more than 80% of clients still want advice delivered by a human, at least part of the time.
Advisors throughout their firms will learn how to use data to provide clients with consistent advice, much as retailers have already done, Zucker maintains. “How do you have consistent advice for different cohorts by age? What about for professionals who have large restricted stock portfolios from their employer? What about the business owners who are taking most of the risks in their business and want a much more risk-free investment portfolio? You’re coming up with consistent offerings that are leveraging data that exists in the advisor’s head today, but aren’t shared broadly across a firm,” she explained.
A few wealth management firms have started using this approach today, Zucker and Golyk said, although they declined to identify them. “It all starts with reporting and understanding your clients,” Golyk added. “I don’t think it’s about the size; I think it’s about the technology platform. I think it’s about the culture. It’s about how you onboard clients, questions you are asking, whether you’re executing on their preferences and whether that goes beyond pure financial investments. There already are firms who have the technology and advisors who just follow the approach.”
Firms that routinely engage with clients – beyond quarterly statements – and use data to provide clients with a consistent, systematic approach will have a competitive advantage, Golyk added. Even small RIAs can find a vendor to build a data analytics engine for a reasonable price, although small firms will need a niche to effectively compete, he and Zucker agreed.
The report predicts by 2030, at least 80% of advisors will offer goal-based advice, and about half of clients will want to pursue “bite-size” goals. Zucker said the goals would vary depending on how affluent a client is. “Depending on where you are on the affluent spectrum, we could imagine different things. College education in the U.S. is obviously a huge expense for most families,” Zucker noted, “and it feels like a large, looming, asset pool you have to build up. But what if you broke it down by semester, by room and board, by books versus the tuition payment?”
Depending on an individual’s finances, bite-size goals might include saving for a semester of a child’s education, a home renovation, or a second home in retirement, Zucker said. “It’s the Fitbit, fitness tracker concept, so that people feel a sense of accomplishment along the way.”
Advice firms are not offering anything like this today, McKinsey claims, although many are starting to move in this direction, she added.
Firms will also use gamification to offer advice on even smaller goals, and that may provide them with a competitive advantage, Golyk said, although it won’t necessarily be the only successful approach. “It sounds more stressful to some people and incredibly exciting to other people,” Golyk said. “All we’re saying is in the future, you could imagine having a mobile app that would literally be telling you these kinds of things and making some kinds of recommendations. ‘This week you are down in your spending by X; you might want to cut it down because otherwise you are going to push down Y.’ Having these kinds of experiences are what we are trying to get at.”
As advice becomes increasingly analytics-driven and automated, the number of advisors will drop by a fifth, partly driven by advisor retirements, the report says. McKinsey believes that the skills needed of advisors in 2030 will go beyond what is required to become a Certified Financial Planner today. “In the next 10 years, advisors will gradually shed their role as investment managers and become more like ‘integrated life/wealth coaches’ who advise clients on investments, banking, healthcare, protection, taxes, estate, and financial wellness needs more broadly. As the industry undergoes this shift, wealth managers will need to fundamentally rethink their recruiting strategies and training programs,” the report says.
Golyk added he believes expertise that CFPs have today will still be needed. “But now many advisors still lead with the value proposition, ‘I am going to be your PM,’” Golyk said. “What we are trying to say is that in the future, people will lead with holistic financial planning, not just delivering a plan but being a coach to a person. But it won’t be a universal recipe.”
The coronavirus crisis struck at a time when most leaders of advisory practices are at or nearing retirement age. As leadership transitions to the next generation, they will serve a client demographic with vastly depleted retirement savings. It makes sense that planning will be more goal-oriented, even though clients’ financial goals will seem far less achievable than prior to the crisis. The market correction will also serve as the first real test of robo-advisors. Those platforms will now be tested over a full market cycle. If their performance results disappoint, assets will flow back to human advisors.
Thus, two of McKinsey’s central themes, the dominance of goal-based and human-delivered planning, will be accelerated by the virus that has disrupted our lives.
Dorothy Hinchcliff is the editor at Advisor Perspectives.
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The coronavirus will accelerate the changes to the wealth management industry predicted by McKinsey & Co.
