Digital Wealth Managers Threaten Dominance of Traditional Players – BCG Report –

According to a Boston Consulting Group (BCG) report, online platforms offering wealth management services and offering faster customer growth, cheaper cost structures and superior innovation, command a significant market premium, threatening the market dominance of traditional players.

The 22nd edition of the annual Global Wealth Management Industry Report, ‘Global Wealth 2022: Standing still is not an option’ states that Digital Wealth Managers attracted $14.5 billion in funding in 2021, representing 11% of total global investments.

These digital wealth managers have an advantage over traditional wealth managers as they democratize investment opportunities for a large group of investors, automate operations, provide customizable discretionary mandates at scale, use hybrid models for advisory in investing and building teams that use data for client acquisition and supply. exposure to cryptocurrencies.

The report says the Middle East and Africa (ME&A) could experience the biggest jump in wealth growth. Backed by the region’s huge energy holdings, wealth is on track to grow at a CAGR of 5.4% over the next five years.

The report predicts that heritage assets will continue to increase in value across all regions. But Asia-Pacific will maintain the fastest wealth growth rates, with asset values ​​poised to increase by a compound annual growth rate (CAGR) of 8.4% through 2026. If this rate continues, the region could be home to almost a quarter of the population. global wealth by 2026.

In North America, wealth growth will be slower than in previous years, with an estimated CAGR of 4.7% through 2026, down from a previous five-year average of 9.1%. Similarly, in Western Europe, wealth growth is expected to slow from around 4.5% over the past five years to less than 4% per year until 2026.

Global financial wealth hit an all-time high of $530 trillion in 2021, fueled by strong stock markets, strong corporate earnings and rising demand for real assets.

The results showed that despite geopolitical and economic destabilizers such as inflation and Russia’s invasion of Ukraine, around $80 trillion in new wealth is expected to be created over the next five years.

In a notable industry shift, Hong Kong will likely overtake Switzerland in 2023 as the domicile handling the largest amount of cross-border private wealth, ending a streak of more than 200 years of Swiss dominance.

Phillipa Osakwe-Okoye, Director, BCG Lagos, said: “As a new generation of technology-focused investment firms offering dollar-denominated investments to a wider group of investors emerges in Nigeria, managers of traditional assets can better take advantage of evolving trends in private equity, digital. wealth and crypto to embrace a digital service model and compete more effectively.

“Sustainable wealth creation is possible and an attractive proposition, as shown by the growing number of fintech companies in Nigeria and the growing scale of investment they attract and manage. Nigerian fintech firms raised $800 million in 2021, boosting the valuation of some of these fast-growing start-ups and turning them into unicorns amid local and global economic headwinds.

Digital transformation now essential for wealth management companies

“Wealth development is extremely resilient, and even amid geopolitical turbulence, the rate of growth will remain positive,” said Anna Zakrzewski, global head of BCG’s wealth management segment and co-author of the report. “Although this stability offers tremendous opportunities for wealth managers, they must make strategic choices to remain competitive.

Anna Zakrzewski, Global Head of BCG
| Anna Zakrzewski

High net worth customers are looking for next-gen offerings and next-level service, including net zero, crypto, personalization, and digitization. The most important question facing wealth managers today is not which initiatives to prioritize, but how best to implement them.

Net Zero is an immediate imperative

Sustainable investing – of which net zero is a key component – ​​is growing three to five times faster than traditional investing, and by 2026 this asset class could account for 8% to 17% of privately invested wealth. , rising from 4% to 11% today. Although people tend to see net zero as a goal for 2050, the report notes that wealth managers must act immediately to embed sustainable investing throughout the client lifecycle.

Crypto: An Untapped Market for Wealth Managers

Non-traditional wealth managers currently manage up to $1 trillion in crypto-related wealth, and the crypto market capitalization could increase four to five times by 2030.

The opportunity for wealth managers is clear: nearly 80% of clients surveyed said they would consider increasing their crypto holdings if wealth managers offered advisory and education services.

Two-thirds of clients who purchased their crypto investment from third parties said they did so because they did not believe their wealth managers offered such services.

To determine if crypto is right for their businesses, wealth managers need to consider if, when, and how they want to participate.

Personalization as a driver of revenue growth

On average, wealth managers who excel at personalizing offers and interactions see higher customer satisfaction rates and lower churn rates than others. While these metrics result in increased returns on client assets and liabilities, as well as double-digit annual growth, wealth managers who outperform in personalization are the exception rather than the rule.

Personalization is a complex undertaking that requires introducing new data and analytics, connecting processes across the front, middle and back offices of the business, and changing ways of working.

In the report, BCG identifies three actions that wealth managers vying to deliver individualized service at scale can take to improve personalization: prioritize the abilities that are reproduced through the pathways; design for value and scale; and support the right ideas with the right facilitators.

The digital wealth management premium is real

The valuation multiples of digital wealth management companies are six to seven times higher than those of traditional wealth managers. Additionally, private funding in wealth management technologies has increased, with digital wealth management companies attracting $14.5 billion in funding in 2021 (11% of total global investment).

Digital wealth management institutions offer faster customer growth, cheaper cost structures, and higher rates of innovation.

To protect their future profitability, traditional wealth managers must move with the times.

“Traditional wealth managers have known for years that they need to pick up the pace of their own digitalization,” said BCG’s Zakrzewski. “Now they have added incentive to emulate the practices of these digital leaders as they look for ways to secure future growth and increase customer value.”

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Dolores W. Simon