Wealth 2020 Outlook - Platform Targets

February 2017 Archived Article: Alternatives as a major source of differentiation. Disruption as a major stream for alternatives

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Alternatives – including Managed Funds, Private Equity, Real Estate, Structured Products, and Commodities – have been the only source of material alpha generation over the past decade, and we expect this to continue going forward. Moreover, access to these products is a significant source of differentiation, which Wealth Managers still hold, unlike traditional asset classes where low-cost beta offerings are growing in popularity. Winning will hinge on the ability to overcome regulatory hurdles to selling these products, in particular in CEE /SEE where AIFMD is starting to reduce leading players’ incentives to seek distributions solutions. As a result, the available product range may narrow.

Offshore banking becoming a growth engine again

After a period of cleaning up their offshore businesses, Wealth Managers will need to re-focus on their offshore strategies to capture faster-growing Emerging Markets assets. Beyond a small group of global leaders and a few specialist firms, offshore offerings often lack product shelf depth and offerings corresponding to core client needs, e.g. hard currency investment products, FX and mortgage / asset-financing capabilities. Wealth Managers will need to differentiate through specialization and targeting niche segments like entrepreneurs with international reach or ‘digital-minded’ clients if they are to compete successfully for a wallet with local players.

TRANSFER AND TRUST

Most Wealth Managers see the inter-generational wealth transfer as an asset retention play. This constitutes a significant problem since the task is then passed on to the exact Relationship Manager whose client is going to transfer assets to the next generation.

Wealth Managers need to better align their product offering with client product demand

In particular, upper HNW and UHNW clients are increasingly looking for “hard to find” or “hard to access” assets rather than core Equities and Fixed Income-based exposure. These ‘Alternative’ asset classes include Real assets (including through Real Estate Investment Trusts REITs), Private Equity vs. /towards Managed Funds via Unit Trusts, and to a lesser extend Commodities and Structured Products. Our survey of HNW individuals also revealed client appetite for Alternative investments, especially in business regions EMEAC and APAC.

Wealth Managers must, therefore, increase access to, and penetration of Alternatives products.

Strategic levers

Transforming traditionally non-monetized direct investments into revenue generating propositions through a new platform model and implementing “Pay for Advice” models are the most relevant strategic options to tackle the shrinking wallet of traditional Wealth Management services.

Monetize direct investment appetite

HNW/UHNW wealth direct investments are one of the fastest growing but still largely untapped opportunities for Wealth Managers. While the industry has had limited success in monetizing this revenue potential to date, many of the necessary tools and expertise already exist in-house, making this a viable and attractive opportunity. Particularly in Europe, we expect to see an accelerating trend of largely UHNW clients looking to grow their direct investments at the expense of traditionally managed portfolios. Wealth Managers that can successfully build a direct private market access platform will be best positioned to tackle this shift in wealth pools. A large percentage of HNW wealth is at present invested directly in private businesses and non-primary residence Real Estate.

The new service model

As a result of the significant shifts in the industry, wealth managers will need to offer and support a broader range of financial products, a task made more complex by the need to maintain a consistent wealth management experience and manage across disparate providers, regulatory environments, and processing backends.

As part of their current business models, Wealth Managers typically have a very limited product shelf for addressing this client appetite. The only banking products that come close to serving these needs at present are distributed shares in Venture Capital funds, Private Equity funds or pre-IPO share allocations. As these examples already show, Wealth Management platforms are not yet suited to provide direct private market access. Winning in this space will require a dramatically redesigned platform model.

The key to success will be to create an open platform that can on-board a host of specialized third-party providers providing deal flow.

Direct market access platforms need to be open to accommodate a host of specialized third party providers who can provide flow in a broad variety of private market deals. Specific opportunities to target include growth-stage equity and debt financing, Real Estate development or rejuvenation projects.

2020 PLATFORM TARGETS

Non-listed boutique Real Estate developers or Angel investor networks could be platform targets. In addition to these niche players, third party service providers that serve the broader market could be on-boarded as well to create an ecosystem that provides end-to-end solutions out of one hand, for this would be specialized law firms, LPs, accountants and(or) tax consultants:

  • Wealth and Investment Robo-advice, whether you’re an investor with a lump sump.
  • Suite of over diversified investment funds to ensure that distribution is placed effectively as possible.
  • Investments can be held within ISAs, Investment bonds, Unit Trusts, OEICs, REITs, ETFs, Offshore Investments, VCTs, EISs and discretionary fund managers.