The wealth management industry has had to respond at several levels to fairly tectonic shifts in the way we do business due to covid-19. This period was characterized by responses at two levels—to ensure that business continued as usual and to manage client expectations as markets turned extremely volatile and unpredictable.

We now need to start looking ahead, towards the opportunities and challenges that covid have presented us. As I do some crystal-gazing, I believe wealth practitioners will have to respond to three key themes. One, the shift to advisory services from distribution for a segment of the population. Two, changing investment patterns that reflect lower cost of investing for clients. Three, themes around sustainability and greater dependence on technology and digitization by wealth management firms.

Shift to Advisory

According to a recent study published by McKinsey & Co., Asia accounts for $34 trillion of assets. Of these, only 15-20% are under advisory or managed accounts. This is expected to shift significantly to close to 50% considering two key factors.

The first is regulation. In 2013, the Securities and Exchange Board of India (Sebi) announced investment adviser guidelines, providing the legitimacy of a regulatory umbrella for advisory services, clearly indicating their intent to curb mis-selling and address the misalignment of interests between bankers and clients. This was a game-changer for the industry. In 2020, the regulators refined these guidelines further, pushing wealth firms to have clearly demarcated lines between advisory and distribution.

The second factor that is influencing the rise of advisory services is client behaviour. Clients are now seeking more from wealth managers, be it transparent fee structures, the cost of investments or true open architecture that allows for the right financial products to be allocated to their portfolios.

Changing Investment Patterns

Covid-19 has also irreversibly changed investment patterns with three big shifts underway. What is now clear is that “black swan” events which were considered to happen once-in-a-generation are now likely to be more frequent. My own generation has seen three big market meltdowns—the dotcom bubble in 2001, the financial crisis in 2008 and now covid-19. This means portfolios have to be better positioned to weather these storms. Allocations are now likely to happen at three levels—risk, asset and product—and staying true to one’s strategic asset allocation will be the key.

When the dust settles, the society at large will be looking for a better post-covid world. This will drive sustainable and responsible investing by asset owners. Investing on sound ESG (environmental, social and governance) principles will be the norm rather than the exception. While 80% of global institutional investing is based on ESG, we have yet to see this trend percolate to individual investment decisions, particularly in India. Covid will accelerate that change and family offices, with larger pools of capital, can play a role in leading the way on responsible investing.

The other shift we will witness is the rise in passive investments (through exchange-traded funds and index funds) and smart beta investing (quant-based strategies), which will provide lower cost of investment. While new to India this is a significant market in the developed countries.

Another likely change will be the increased allocations to alternative investments, an asset class that will remain largely confined to high net-worth individuals (HNI) and ultra HNIs, as it requires clients to be comfortable with a certain portion of their portfolios remaining in long-term and illiquid opportunities.

Digitization and Technology

With the onset of covid-19, wealth management firms faced two challenges—engaging the clients on their portfolios and ensuring that their employees could work from home and clients could transact digitally from home. The latter was particularly challenging because the industry in India has been more about executing transactions in physical form and face-to-face client meetings. Covid-19 has irrevocably changed that, with a greater acceptance to virtual meetings.

The future though is not about just digital client experiences but also about greater analytics capabilities and using AI (artificial intelligence) and ML (machine learning) for curating portfolios and providing access to investment products that are tailor-made to a client’s risk appetite, investment horizon and liquidity requirements. Technology will rewrite how we build scale and the future is about how we use the power of technology to build a highly curated and personalized client experience.

The next 10-15 years will be very challenging for wealth practitioners, as they try to adapt to the changing needs of their constituents and work on building sustainable businesses.

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