Three Predictions Leading to Success in Wealth Management

Three Predictions Leading to Success in Wealth Management

The wealth management industry is very sluggish when it comes to innovation. Success depends on answering two key questions: i) What jobs are customers trying to get done and i) what are they willing to pay for? I predict that any successful answer to these two questions will focus on three areas: 1) after-tax goal-based investment performance, 2) value-based fee models, and 3) automated portfolio construction for everyone. Wealth managers who design their strategies around these three areas and successfully execute these strategies will be able to significantly increase their revenues and sustain high profit margins.


Those of you reading these insights and who follow the wealth management industry closely know that it is very sluggish when it comes to innovation. Exchange traded funds (ETFs) are probably the most recent innovation to go mainstream. Although Blockchain has been more recently named the next big disruptor in the industry, it still must prove itself. Other innovations like RoboAdvice evolve around technology rather than business model changes and are therefore often limited in scope.

Two one-million-dollar questions

There are two key questions that need answering when trying to predict the future of any industry, including the wealth management industry.

  • What “jobs” are customers trying to get done? Or, in more traditional words, which goals do they want to achieve, what needs to they have, what pains to they want to have alleviated, and what gains are their looking for?
  • Which benefits do customers see as valuable and are willing to pay for? What features are they willing to pay for?

Contrary to what many thought leaders advocate, none of these questions are fundamentally about technology. They are all about customers, their needs, and their willingness to pay for the fulfillment of those needs. I am not arguing that technology can safely be ignored. That would be foolish. However, in many cases, technology is a means to an end rather than the end itself. Think for example about Blockchain: innovative technology, for sure. Yet there are no real answers to “what job does it help to get done and why would customers be willing to pay?”

Three predictions leading to success

Prediction is very difficult, especially if it is about the future, as Niels Bohr once said. Nevertheless, I take up the challenge. I forecast three key characteristics that wealth management customers will be predominantly looking for and any successful wealth manager therefore should follow:

  • Customers will seek after-tax goal-based investment solutions, focusing on tangible investment performance aligned with their idiosyncratic goals.
  • Customers’ willingness to pay will focus on the value delivered, that is, they will look for value-based fee models.
  • Customers will seek out automated portfolio construction and implementation at little to no cost. The execution part of wealth management will become a commodity.

I am convinced that contrary to what many proclaimed innovation experts say, the future in wealth management will not be about technology. It will be about customers, their needs, and their willingness to pay for getting their needs satisfied.

Let me now take a closer look at the three characteristics mentioned above.

After-tax goal-based investment solutions

This expected property can be broken up into three sub-characteristics:

  • First, taxes will play an ever-growing importance. This is on one hand due to a progression toward tax transparency and associated automated exchange of information (AIA). On the other hand, nations tend to focus more on achieving balanced budgets, meaning the money they spend must come from somewhere. Successful wealth managers will have to include tax advice in their offerings. This will require deploying country specific tax expertise, like what the Big Four audit companies provide. Focus will be key as it will not be possible to cover every situation for everybody. In addition, elevated trust is needed for customers to be willing to disclose their taxable situation. This will probably put boutiques, family offices, and trustees at a competitive advantage.
  • Second, traditional market-capitalization-weighted benchmarks or purely risk-profile-based goals will be replaced by needs- or liability-driven benchmarks. Successful wealth managers need to gain a holistic view of the goals to be achieve, including, assets, liabilities, and uncertainty. For example, customers seeking to indirectly amortize a mortgage will be looking for solutions that benchmark both mortgage interest rates as well as property value.
  • Third, investment performance related to the goals to be achieved will become a key decision criteria used by customers to select their wealth management firms. Successful wealth managers will exhibit their capabilities, within given risk boundaries, of achieving sustainable investment performance needed to achieve the stated goals. Consider a family setting up a trust for financing the college tuition of their newborn child in the future. What would be the required contributions and related investment performance to achieve the targeted tuition fees 18 years into the future?

Value-based fees

Over the past years, driven by technology, competition, and especially regulatory transparency requirements, wealth management customers have become increasingly capable of distinguishing between commodity and value-added services. Pricing models based on traditional assets under management (AuM) are no longer sustainable, especially for those services that are seen as commodities. Successful wealth managers will design and offer pricing models that charge for the value delivered rather than for efforts incurred or AuM. For example, the fee of managing a portfolio of stocks could be based on the risks underlying the portfolio rather than its value. Crafted intelligently, such pricing models will allow increasing revenue and ensure sustainable profitability.

Automated portfolio construction for everyone

Implementing a portfolio, reinvesting cash-flows, or rebalancing holdings based on risk considerations is a tedious and time-consuming task. Regulatory transparency constraints and best execution requirements challenge both customers and wealth managers. In recent years, wealth managers have learned a lot about how to use technology to automate these processes internally. Successful wealth managers will make their automated portfolio construction and implementation services available to their customers, allowing them to save time and money.

Your takeout

Although trust will still play a key role in any wealth manager/customer relationship, customers are becoming increasingly educated. Successful wealth managers will leverage this evolution to their advantage by focusing on three key characteristics:

  • Advising on after-tax investment solutions supporting customers in achieving their goals rather than selling before-tax benchmark performance.
  • Charging fees related to the value delivered rather than costs incurred.
  • Supporting customers to save time and money by making available to everyone portfolio management technology that handles tedious repetitive tasks.

Wealth managers designing their strategies and business models around those three characteristics and successfully executing upon them will be able to increase their revenues as well as their profit margins in a sustainable way. They will understand that satisfying customer goals and making them save time and money has value that can be monetized.

If you’re interested in learning more or want to discuss how to customoze these opportunities for your business, please don’t hesitate to contact us!

  1. Comment by Walter Grimm on September 29th, 2017 | Reply

    [Original German comment] Du sprichst mir und den Anlegern aus dem Herzen, ja sowas ist Wesentlich und Entscheidend. Noch ist das in den Kinderschuhen und die Kultur und das Verhalten erst im Aufbau, die Zeit drängt, sonst… Die letzte Video- Aussage “Let’s think about” sollte lauten “Do it very soon/now”. Dazu braucht es aber m.E. auch adäquate und versierte Leute mit wahrenr kundenbedürfnisse-Ausrichtung diese gilt es noch zu “züchten”. Lehren sind zu ziehen und Einsichten sind zu ändern (Einbildung ist keine Bildung). Wünsche, dass es gelingt und Erfolge bringt all jenen die das beherzigen und in der Praxis auch umsetzen und nicht nur “schwatzen”
    [English translation] You speak to me and the investors from the heart, yes this is essential and decisive. The last video statement “Let’s think about” should be “Do it very soon / now”. For this, however, I believe adequate and savvy people with true customer needs-orientation are required, this still has to “breed”. Conclusions are to be drawn and insights are to be changed (imagination is not education). I wish that this succeeds and achieves success to all those who take heed and practice and not only “chatter”

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