A new survey from independent investment consultancy, bfinance, has identified significant changes in wealth managers’ investment capabilities and practices. Firms are innovating too as they fight to maintain market share and profitability in an era of fee compression and new tech-based competition, the firm says.
The Wealth Manager Investment Survey gathered data from 120 wealth managers in 29 countries across five continents. Major developments are divided into three key areas: expanding investment capabilities, the rise of ESG and impact investing, and—finally—evolution in structures, systems and service providers.
Wealth managers are expanding the range of investment strategies available to clients, particularly within alternative asset classes. More than two thirds (69 per cent) have added new asset classes for wealth clients within the last three years, with 52 per cent stating they will do in the next two years. Fully 60 per cent now provide exposure to private equity, 52 per cent use emerging market debt, 52 per cent use private credit, 48 per cent use infrastructure and a further 42 per cent provide access to hedge funds.
When looking at allocations, the majority of wealth managers have reduced the proportion of wealth client assets invested in fixed income (63 per cent) while 66 per cent have increased allocations to equities and 61 per cent have increased allocations to private markets strategies. The shift towards alternatives is set to continue strongly in the next two years, with improving sentiment towards liquid alternatives such as hedge funds, but only a minority plan to increase equity exposure. The surge of passive investment is also slowing. Just 21 per cent of wealth managers expect to increase their use of passive strategies in the next two years, compared to 50 per cent in the last three years.
When it comes to the ESG agenda, three strategic camps have emerged: those planning integration of ESG across all wealth client strategies (55 per cent), those who seek to create specific ESG offerings for those clients that seek this dimension (35 per cent) and those who have no intentions in the space (10 per cent).
With this, four in five (80 per cent) wealth managers now integrate ESG considerations as part of their offering, up from 37 per cent three years ago (a 116 per cent increase). Half of wealth managers also integrate impact considerations, up from 18 per cent three years ago (a 177 per cent increase), while a third (33 per cent) state they are actively considering doing so – showing that the impact theme is moving rapidly up the priority list both in terms of demand and delivery.
However, ESG integration still only applies to the minority of wealth client assets. Only 13 per cent of those who do integrate ESG say this applies to ‘all’ of their wealth assets, while 27 per cent say it covers the ‘majority’.
The study found that wealth managers are planning to digitalise their capabilities and are looking to new technologies to develop their offering further. 87 per cent of wealth managers have added new technologies for clients to use within the last three years, with 90 per cent suggesting they will in the next two years.
Cost efficiency is high on the priority list, with many respondents citing fee compression: 46 per cent say that charges to wealth clients for the same or similar services have decreased in the last three years, with just nine per cent suggesting they have increased. Wealth managers are seeking to defend fee levels, in part through the introduction of new investment strategies described above, but are also seeking ways to save money.
In this regard, 57 per cent of wealth managers state that fees paid to external fund managers have fallen, as a percentage of assets outsourced to external fund managers, with only 9 per cent noting rise. The study also identifies a trend in favour of outsourcing more investment management to external asset managers—a shift which can help to support improved cost efficiency as well as adding differentiated investment capability.
There is also a modest trend towards managing assets in collective vehicles. 34 per cent (including half of firms with more than USD5 billion in wealth assets) have a higher proportion of assets in collective vehicles than they did 3 years ago, while only 14 per cent have less.
Kathryn Saklatvala, Senior Director and Head of Investment Content at bfinance, says: “It’s fantastic to see the breadth of investment capability that many wealth managers are now able to offer to clients—the results of this survey show a significantly higher usage of strategies such as private equity, infrastructure, private credit and hedge funds than we’ve seen in other studies, and far more widespread integration of ESG factors into investment. These capabilities have clearly evolved a great deal in recent years, supported by the development of in-house teams and the growing use of external asset managers. Wealth managers are under real pressure to create high-value, differentiated product offerings as well as find new scale-driven efficiencies that can support profitability— the market is increasingly competitive, and this report highlights significant downward movement in fees. Perhaps the most widespread current trend among wealth managers is the introduction of new technologies: we are watching with interest to see whether digitisation can help to deliver the magic combination of scalability and true personalisation that many of these firms seek to achieve.”