Digital Wealth Managers Threaten Traditional Players’ Dominance—BCG Report

digital wealth managers

A report by Boston Consulting Group (BCG) has revealed that online platforms offering wealth management services and delivering faster customer growth, cheaper cost structures, and superior innovation, command a significant market premium, threatening the market dominance of traditional players.

According to the study, these digital wealth managers have an edge over their traditional counterparts as they are democratising investment opportunities for a large group of investors, automating operations, providing customizable discretionary mandates at scale, using hybrid models for investment advisory and creating teams that use data for client acquisition and offering exposure to cryptocurrencies.

In the report titled Global Wealth 2022: Standing Still Is Not an Option, it was observed that in 2021, digital wealth managers attracted $14.5 billion in funding, representing 11 per cent of total global investments.

The 22nd edition of the annual report on the global wealth management industry report further disclosed that the Middle East and Africa (ME&A) could see the biggest leap in wealth growth. Buoyed by the region’s massive energy holdings, wealth is on track to rise by a CAGR of 5.4 per cent over the next five years.

The report predicts that wealth assets will continue to rise in value in all regions. But Asia-Pacific will maintain the fastest rates of wealth growth, with asset values poised to increase by a compound annual growth rate (CAGR) of 8.4 per cent through 2026. If that rate holds, the region could be home to nearly one-quarter of the world’s wealth by 2026.

In North America, wealth growth will be slower than in years past, with an estimated CAGR of 4.7 per cent through 2026, down from a prior five-year average of 9.1 per cent. Likewise, in Western Europe, wealth growth is likely to slow from roughly 4.5 per cent over the past five years to less than 4 per cent annually until 2026.

Global financial wealth reached a record high of $530 trillion in 2021, fuelled by strong equity markets, healthy corporate profits and a surge in demand for real assets.

Findings showed that despite geopolitical and economic destabilizers such as inflation and Russia’s invasion of Ukraine, approximately $80 trillion in new wealth is likely to be created over the next five years.

In a notable industry shift, Hong Kong will probably overtake Switzerland in 2023 as the domicile managing the largest amount of private cross-border wealth, ending a run of more than 200 years of Swiss dominance.

“As a new crop of technology-driven investment firms offering dollar-denominated investments to a wider investor group emerge in Nigeria, traditional wealth managers can better leverage evolving trends in private equity, digital wealth and crypto to embrace a digital service model and compete more effectively.

“Sustainable wealth creation is possible and an attractive proposition as shown by the growing number of fintech firms in Nigeria and the increased scale of investments they attract and manage. Nigerian fintech firms raised $800 million in 2021, boosting the valuation of some of these fast-growing start-ups and turning them into unicorns amid local and global economic headwinds.

“Wealth development is resoundingly resilient, and even against the backdrop of geopolitical turmoil the growth rate will remain positive,” said Anna Zakrzewski, global leader of BCG’s wealth management segment and a co-author of the report. “Although this stability provides a tremendous opportunity for wealth managers, they must make strategic choices to remain competitive. Wealth clients are looking for next-generation offers and next-level service—including net zero, crypto, personalization, and digitization.

“The most important question facing wealth managers today is not which initiatives to prioritize, but how best to implement them,” Phillipa Osakwe-Okoye, Principal, BCG Lagos, said.

Net Zero is an Immediate Imperative

Sustainable investing—of which net zero is a key component—is growing three to five times as fast as traditional investments, and by 2026 this asset class could account for 8 per cent to 17 per cent of privately invested wealth, up from 4 per cent to 11 per cent today.

Although people tend to think of net zero as a 2050 goal, the report notes that wealth managers must act immediately to embed sustainable investing across the entire client life cycle.

Crypto: An Untapped Market for Wealth Managers

Non-traditional wealth managers currently manage up to $1 trillion in crypto-related wealth, and the market capitalization for crypto could increase four- to fivefold by 2030. The opportunity for wealth managers is clear: nearly 80 per cent of clients surveyed said that they would consider increasing their crypto holdings if wealth managers offered advisory and education services.

Two-thirds of clients who sourced their crypto investment with third parties said that they did so because they didn’t think their wealth managers offered such services. To determine whether crypto is right for their businesses, wealth managers must consider if, when, and how they want to participate.

Personalization as a Driver of Top-Line Growth

On average, wealth managers that excel at customizing offers and interactions see higher rates of client satisfaction and lower rates of churn than others do. While these metrics translate into increased returns on client assets and liabilities, along with annual growth of more than 10 per cent, wealth managers that outperform on personalization are the exception rather than the rule.

Personalization is a complex undertaking that requires introducing new data and analytics, connecting processes across the firm’s front, middle, and back offices, and changing ways of working.

In the report, BCG identifies three actions that wealth managers vying to deliver individualized service at scale can take to improve personalization: prioritize capabilities that recur across journeys; design for value and scale; and back good ideas with the right enablers.

The Digital Wealth Management Premium is Real

The valuation multiples of digital wealth management firms are six or seven times as high as those of traditional wealth managers.

Furthermore, private funding in wealth tech has increased, with digital wealth management firms attracting $14.5 billion in funding in 2021 (11 per cent of total global investments). Digital wealth management institutions are delivering faster customer growth, cheaper cost structures, and superior rates of innovation. To protect their future profitability, traditional wealth managers must evolve with the times.

“Traditional wealth managers have known for years that they need to accelerate the pace of their own digitization,” said BCG’s Zakrzewski. “Now they have an additional incentive to emulate the practices of these digital leaders as they look for ways to secure future growth and increase their value to clients.”

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