Advisors Face Digital 'Inflection Point' - Report

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Wealth managers need to ramp up their use of digital technologies immediately, according to Boston Consulting Group's annual global study of the industry.

"We're clearly seeing an inflection point around digital," said Brent Beardsley, a senior partner at BCG, speaking at a press conference in Manhattan  on the release of this year's report, "Riding a Wave of Growth: Global Wealth 2014."

The rapid evolution and adoption of digital communication "will reshape the way products, services and advice are provided to wealth management clients," according to the report. But change "is coming more slowly to wealth management than to other industries," the report goes on to warn, "with many players unable to leverage digital technologies in a way that truly enhances their offering."

As client expectations rise, wealth managers need to develop sophisticated digital capabilities at once, the report states. "Taking a wait-and-see approach is not a viable option," it warns.

The rewards of acting fast will be substantial, the report promises. "Early movers that best balance traditional, relationship-led wealth management with intuitive, simple-to-use digital products and services will gain an unparalleled competitive advantage over the next few years," according to the report.


Indeed, the gap between what wealth managers offer and clients expect is expected to widen even further, Beardsley said. "It's imperative for wealth managers to react to what clients are demanding," he emphasized.

According to a survey conducted for the report, advisors' digital services are still predominately Web-based. While the use of tablets and smartphones by wealth management firms is picking up, those devices aren't expected to "reach the same level of trust and usage" as Web-based digital services among wealth management clients for another two to three years, according to the report.

Only 1% to 2% of any wealth manager's employees are dedicated to managing digital interfaces, and only 30% of firms responding to the survey offered "at least one social media function specific to wealth management."

And while wealth management clients can access portfolio and account information, make payments and trade digitally, more sophisticated digital deployments -- such as personalized portfolio monitoring, simulations and identifying investment opportunities -- "are far from typical," the report states.

Digital deployment by independent RIAs in the U.S. remains "pretty basic," said BCG senior partner Bruce Holley. But for advisors targeting clients with $1 million or more in investable assets, there's not much threat from online advisory services "at this point in time," Holley told Financial Planning in an interview after the press conference.

"The business is still relationship-based for those clients, who want a multi-channel experience," Holley said. "But for the broader retail market, it's a different story."


More broadly, the BCG report gave an update on the wealth market.

The U.S. had the highest number of millionaire households (7.1 million) globally, BCG reported, as well as the highest number of new millionaires (1.1 million). By contrast, millionaire households in China jumped 60% to 2.4 million in 2013 from 1.5 million in 2012.

The U.S. also had by far the largest number of ultrahigh-net-worth households, accounting for 4,754 with more than $100 million in private financial wealth in 2013. The U.S. was followed by the United Kingdom with 1,044, China with 983, Germany with 881 and Russia with 536.

And although the U.S. remained the largest wealth market last year with $46.1 trillion -- followed by China, Japan, Germany and the U.K. -- BCG estimates that China will overtake the U.S. as the world's wealthiest nation by the end of the decade.

In North America, BCG estimates wealth will grow moderately by 3.3% annually, driven by growth of existing assets through market performance and a more stabilized economic outlook in the U.S.

Those existing assets, the report says, underscore the emphasis of "share-stealing" as a primary means of growth for wealth managers.


Overall, global private financial wealth grew by 14.6% in 2013 to reach a total of $152 trillion, the BCG study said.  In 2012, global wealth grew by 8.7 %. Booming equity markets and the creation of new wealth in rapidly developing economies were the key drivers for both years.

Asia-Pacific (excluding Japan) posted the strongest growth in private wealth (30.5%), and is expected to overtake Western Europe as the second-wealthiest region in the world this year.

Assets under management for wealth managers globally rose 11% last year, following a 12% rise in 2012, "driven mainly by asset appreciation owing to rising equity markets," according to the study.

Profit margins, however, remained largely flat as wealth managers continued to grapple with rising regulatory and compliance costs.

After years of cost-cutting, the report counsels, wealth managers need to invest in strategic positioning, focusing on segmentation and scale, differentiation -- including digital services and their "investment value proposition" -- and efficiency, via more locations and outsourcing.

Despite the industry's considerable challenges, BCG principal Anna Zakrzeweski said at the press conference, wealth management remains "a very good business to be in."

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