Practical analysis for investment professionals
05 January 2016

Outlook for the US Wealth Management Industry: The Predictive Analytics Era

As 2016 gets under way, we asked April Rudin, founder and president of The Rudin Group, a professional services firm that specializes in building integrated marketing, branding, and communications strategies for the financial services industry, to share her thoughts on the outlook for the US wealth management industry.

CFA Institute: How would you describe the landscape of the wealth market in the United States? 

April Rudin: In my conversations with friends and colleagues in the wealth management sector, I usually find them to be an optimistic group, especially at the start of each new year. The consensus outlook for 2016 within the industry is predictably positive. The confidence that strategies and models will allow managers to outperform benchmarks defies the reality facing investors. In fact, the landscape has never been more crowded or more fragmented. Product differentiation efforts are routinely undermined by generic messaging confusion regarding the benefits and risks of emerging asset classes.

As advisers introduce a wider range of sophisticated strategies to audiences that are unfamiliar and naturally skeptical of sector practices, investors are often confronted with a confusing array of options, with mutual funds that resemble [exchange-traded funds] ETFs that replicate alternative funds. The astute advisers are realizing that the days when investment product margin incentivized firms to create investor demand are history. As risk/return analysis equations come into focus, smart firms are making a concerted effort to build engagement among key audiences. They are looking at omnichannel distribution platforms to create a bilateral flow of information.

Women control about half of the wealth in the United States, but they’re expected to be in control of two thirds of the wealth by 2020. Is the wealth management industry prepared?

Sadly, some in the wealth management industry might not be quite ready for 2020. It’s well documented that opportunities for women in the investment management space are still scarce in relation to overall employment figures, with the disparity growing as one ascends the leadership ranks. This has resulted in a relative dearth of prominent accessible role models for young women seeking to build careers in the sector. A lack of female perspectives clearly contributes to the tired and somewhat stereotypical attitudes apparent in marketing efforts. “Women” is not a meaningful niche any more than “men” when it comes to product strategy. Overall, the financial services industry is moving toward an understanding that there is a danger in demographics, and that each client situation is a unique puzzle requiring a customized solution. It’s time for the advisory community to stop telling women that they can “have it all” and start listening to what they want specifically as individuals and for their families.

And what about millennials?

The question of 2013, 2014, 2015, and now 2016 — it seems that nobody has this demographic quite nailed. This is not from a lack of effort. Countless surveys into attitudes, financial acumen, and investing have yielded disparate results, with findings often rejected by those they purport to evaluate. This is simply more evidence that the days of marketing to the mass affluent client have ended. Perhaps the one unifying trait is a desire to understand how investments relate to personal and financial goals. As much as regulatory and advocacy efforts, this new push for transparency is likely to raise awareness of suitability standards in relation to portfolio modeling.

At this point, the advisory industry itself is becoming increasingly populated by millennial managers. Their impact has been most immediately seen in the wholesale abandonment of dated sector lexicon, messaging, and iconography, including images of yachts, resorts, and luxury items.

Of course, a major trend has been the rise of the robo-advisers.

If there has been a winner in the robot wars so far, it’s got to be the trade press. Endless coverage of the future of automated investing has created a buzzword with such cache that nearly every individual with a wind-up monkey toy can now claim to have perfected the concept. In fact, most solutions fall well short of the promise of completely removing emotion and other human elements from the equation. Over the course of 2015, a counterculture to the robo-movement began to emerge. The theory is that millennial investors are not sold on automation but [on] customization. In addition, many established ultra-wealthy families, particularly those who are committed to socially responsible investing goals, are not ready to abandon the personal touch of a more hands-on approach.

What are some of the other major trends you see?

2016 will be a huge year in the advancement of predictive analytics. The past year saw the introduction of new and innovative algorithmic trading strategies that challenge the conventional wisdom of “buy and hold” investing. The improved ability to distinguish news from noise is leading to a new age of data as a differentiator, as interpretive strategies allow greater portfolio customization in relation defined to risk profiles.

Over the course of the next 12 months, the lessons of the 2009 downturn will become more distant, as cyclical forces of the global markets are reasserted. As investors again focus on performance, predictive analytics will influence risk/return ratios by identifying repeatable, projectable events with the power to move markets.

Overall, is the market growing? Why? 

The space continues to expand for a variety of reasons, most notably the sheer number of ultra-wealthy families around the world. The nearly universal demand among this community for unified solutions has compelled hundreds of advisers and service providers to develop specialized offerings for ultra-wealthy families. Low barriers to entry and potentially high-margins have left ultra-wealthy families confused regarding the best models, providers, and competitive fee structures. Tenuous relationships with third-party providers can further complicate service models and cannibalize market share. While the market is growing, the consistency in the quality and scope of services offered has never been more perplexing.

What about on the talent side? Is there a talent shortage?

Talent is not an issue for the advisory community. Competitive compensation and exciting career options guarantee a steady stream of capable individuals will be drawn to the sector. What we have seen is a severe lack of training among even some of the most prominent firms.

In addition to essential skills coaching, engaging prospects and clients today requires a strong personal brand, consistent with corporate standards and messaging. In many cases, it’s less a question of commitment than resources.

One area of some concern remains succession planning. Many firms are light on middle management following attrition of recent years. At the same time, many critical executives and founders reaching generally accepted retirement ages. In the absence of adequate succession planning, it seems likely that many managers will find it more difficult to make the transition exactly as intended. This is one reason that buyout firms are likely to become even more active catalysts for consolidation in the year ahead.

What segments (RIAs, family offices, etc.) are growing? Is there a market share shift? 

All segments of the wealth management space are poised for continued growth. The challenges might be keeping all of the entities straight. In recent years, RIAs have increasingly expanded to offer family office services, while family offices have partnered with RIAs [registered investment advisers] as outsourced advisers. The concept underlying all this activity is the unified wealth solution. As imitators and incompetents join the universe of qualified providers, industry definitions will continue to be conflated in the minds of investors overwhelmed with appeals for allocations. For innovation firms, this is a chance to redefine existing terminology and reorganize offerings to deliver value.

One area of growing interest to emerging next-generation investors is club deals private investment opportunities that allow individuals to put financial resources behind causes and projects of personal importance. While most firms claim to offer assistance in this area, few have articulated models for completing transactions to date.

Who are the major players now? Do you see that changing in the future? 

While there are some strong legacy brands, past achievement means less to an emerging generation of wealth. Traditional banks are under pressure from crowdfunding, for example. In the wealth management space, virtually every single professional services firm is now marketing some level of “unparalleled expertise” in service to ultra-wealthy families. Historically, this level of exuberant expansion is followed by a period of intense consolidation. When the dust settles, some of the most familiar names might be gone from the landscape forever, while upstarts have an inside track to prosperity. Visionary leadership is only one determining factor for success in a fast-paced environment. Without a solid brand strategy and marketing plan for reaching key audiences, solutions will inevitably fall flat.

Based on what you’ve heard and where you sit, what types of analytic tools do you think would be beneficial? What are the “critical” needs?

Many firms seem to believe that “dashboard tools” aggregating data and reporting are the key to a satisfied customer base. Certainly this level of transparency is beneficial and preferred. Proprietary research is still viewed as a value-add resource among less-sophisticated investment audiences.

The newest tools that are gaining traction are those that provide news and data aggregation that can be distilled into actionable investment advice. Meanwhile, most firms are also exploring third-party or internally developed lead management/generation functionality. Digital media advertising enabled by Dodd-Frank has yet to capture the imagination of most traditional firms. Such initiatives will be needed for ongoing engagement with target and niche demographics. Thought leadership without established platforms for omnichannel distribution creates challenges in measuring ROI for strategic initiatives and integration with CRM [customer-relationship management] components.

The 2016 CFA Institute Wealth Management Conference will be held on 16–17 March in Minneapolis, Minnesota, and is open to both CFA Institute members and non-members.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Lauren Foster

Lauren Foster was a content director on the professional learning team at CFA Institute and host of the Take 15 Podcast. She is the former managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Lauren spent nearly a decade on staff at the Financial Times as a reporter and editor based in the New York bureau, followed by freelance writing for Barron’s and the FT. Lauren holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.

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