US Wealth Managers Converge as Industry Contracts

New technology and the evolution of client and adviser needs are the catalysts for creating a new US wealth management industry structure.

A report from McKinsey & Co. found the wealth management market has converged across multiple axes and the industry’s traditional delivery models may soon cease to exist.

It recognized that this convergence is a “long-brewing” trend in the sector, but said that it was now on the verge of becoming a permanent feature.

The report found that as convergence accelerates, competition intensifies. This means the firms that have over-relied on external forces and market-driven growth in assets will suffer relative to those that remained operationally sharp.

Market contractions

The report identifies severe financial market contractions as one of the causes for this convergence. It found the US wealth management industry experienced a significant contraction in assets during 2022. Client assets overseen by the industry declined by $6.2 trillion, erasing almost a year and a half of market appreciation.

Market performance accounted for $7.6 trillion of the decline and was offset slightly by $1.4 trillion of net inflows, of which 2.8% was organic growth.

This compares with 6.2% or $2.6 trillion organic growth in 2021, which was bolstered by favorable economic conditions and federal stimulus money.

Despite this, high interest rates during 2022 meant wealth management revenues, profits and profit margins continued their growth trajectories.

Investment performance in the first three quarters of 2023 has remained positive, albeit not as strong as in 2022.

Interest rates increased by a further 100 basis points, and equity markets briefly achieved full recovery before sliding again. The S&P 500 was up 9% at the end of the third quarter, compared with 20% at the peak.

The report recommends wealth managers should be “clearheaded about the temporary nature of this reprieve and may want to invest now in preparation for a more challenging environment”.

The four axes of convergence

Most end-clients are not very aware of the differences between asset management firms’ delivery models, and they evaluate their advisers and wealth managers based on their direct experience.

The report stated: “After decades of convergence, many wealth management platforms are starting to look more like one another, and the delivery channels based on business models, affiliation, type of relationship, product focus and ownership are becoming less relevant.

The first axis of convergence the report identified was that wealth management firms are increasingly offering a wider range of services to become a ‘one-stop shop’ for clients across all their management teams.

When McKinsey surveyed wealth clients in 2018, 29% said they prefer holistic advice across adjacent needs; in its 2023 survey, the figure jumped to 47%. It said the largest growth in adjacent needs has been in lending and banking services.

Secondly, there has been a rise in multi-segment platforms, where clients are divided into groups based on similar needs, as wealth managers seek to expand into wider asset and revenue pools.

On the adviser side, more individual advisers want the freedom to choose the affiliation that best serves their needs, and many are opting for independent models. As a retention mechanism and a recruitment strategy, wealth management firms are catering to as many clients' affiliation preferences as they can.

Thirdly, wealth management firms are rethinking their client acquisition strategies. While traditional methods such as M&A, adviser recruitment and client referrals are still in use, many firms are turning to centralized lead generation to boost organic growth.

The report said firms with multichannel client acquisition engines would lower the cost of customer acquisition, achieve greater organic growth and enhance their value proposition.

Lastly, the advances in technology, data and analytics, and the rise of AI boosted client and adviser expectations, with clients now expecting a personalized online experience.

As a result, firms have increased their investment in technology, with spending on technology outpacing revenue and cost growth in the industry over the past five years, with a significant increase in 2022 of 19% year-on-year growth.

Future-proofing strategies

The report noted that wealth managers will be operating in a landscape shaped by new competitive dynamics as the distinctions between delivery models evaporate.

It said wealth managers can position themselves in the shifting landscape by focusing on six key areas: expanding their offerings, building and scaling centralized lead generation capabilities, a competitive adviser talent attraction strategy, leveraging generative AI, adjusting resource allocation and improving their operating models.