Ben Covey argues that those in the process of building and acquiring wealth are very much in need of personalised advice and planning and should not be left entirely in the realms of self-service.

The mass affluent and how best to serve them has long since been a perplexing challenge for the banking industry as a whole. Not quite into the wealth levels required to be profitable for private banks and wealth managers, and yet above the average offering of a retail bank, this segment can become woefully underserved.

This has been augmented, in the UK at least, by the advice gap created by the Retail Distribution Review (RDR), and the move to an advice-based business model as opposed to a commission-based one. The RDR was later transported to continental Europe in the form of MiFID II. The result was a large swathe of the population that could not, or did not want to, pay for advice and yet had investible assets.

“Wealth managers, most of whom are looking for growth, need to find cost-efficient ways to engage with the mass affluent client with the idea of capturing them in the wealth creation journey and then moving them into the full-service private banking or asset management offerings once assets grow sufficiently.” Ben Covey, Managing Director, Private Clients 7IM

Covey says: “There is a huge need in the UK market for advice, particularly for those with between UK£20,000 to UK£500,000 to invest. I think the RDR, which came into play in 2012, immediately created an advice gap because it was not commercially viable for many firms to service clients at the lower end of the wealth spectrum. That is something that the banks and wealth managers are all grappling with and the more they can find ways to service such clients efficiently and in a cost-centric way, then the more success there will be in closing the gap.”

Theoretically, the advances in technology that dovetailed with the emergence of the advice gap should have solved the issue. Robo advisers were once touted as the solve-all solution for those with money to invest but not able or willing to pay for advice. While Robos are a partial solution they only plug the investment gap and still leave people without proper financial planning that takes into account the whole of life, and incorporates goals and things like pensions and inheritance.

So, although Robo-type technology has made a start in catering to the mass affluent it has not totally resolved the issue. Meanwhile, wealth managers, most of whom are looking for growth, need to find cost-efficient ways to engage with the mass affluent client with the idea of capturing them in the wealth creation journey and then moving them into the full-service private banking or asset management offerings once assets grow sufficiently.

Mass affluent rewards
Indeed, not catering to this massive segment looks shortsighted when the size of the segment overall is taken into consideration. Mass affluent assets accounted for some UK£3.8 trillion as of the end of 2022, accounting for about 67% of UK investable wealth and have liquid assets of UK£3 trillion. Royal London meanwhile estimates that there are approximately 13.1 million individuals in the mass affluent market in the UK, including 3.7 million who are currently non-advised but are open to receiving financial advice.

67% of total Assets Under Management (AUM) is well worth chasing and thus this segment is an obvious opportunity - not just for the traditional advisory community but also for wealth managers to leverage technology to reduce the cost to serve and to come down the value chain to service this segment.

There is also another clear case for appealing to the younger generation. With the ‘Great Wealth Transfer’, a 66% increase in annual intergenerational wealth transfers will occur, rising from UK£69 billion to UK£115 billion from 2017 to 2027. Some 5.5 trillion will pass between generations within the next 30 years, according to the Kings Court Trust.

Covey comments: “The big universal banks in the UK like to have private banking and wealth management arms because of the diversification of revenue that the private bank business will bring because of fees and annuity incomes. And all private banks are looking for greater share of wallet, profitability, and growth, and so the mass affluent sector is clearly an attractive segment for them.”

The challenge then, is to find a way to service this segment in a way that is both commercially viable, probably with the use of technology and some self-service, as well as providing some sort of planning that is more holistic and goals-based. The cost of service and the quality of service need to be met in the middle.

Covey says that there is no shortage of individual stock recommendations, research on what to look out for, thematic trends, and other opportunities that can be accessed online, and trading too, can be done online. But what is missing is the advice, the identification of goals, and the financial planning to realise those goals.

“What clients really want is guidance on what is realistic given their risk appetite and the amount of money they have. The conversations should revolve around the big picture. What are their aspirations? Is it retirement overseas, or is it paying for grandchildren's education? Or is it something else? Whatever the big picture is an investment plan to fit can be built.”

He also argues that in the context of big-picture planning, too much access to technology can be a bad thing. For example, if someone is logging on to see market movements on a daily basis then they are likely to be hypervigilant and triggered by small amounts of volatility that have no bearing on the result over the long term.

He says: “The key message is to take the long-term view. Do not worry about short-term market volatility and look at things over five years or longer, do not panic when you see market swings and therefore, the less you look at it, the better, in fact!”

Modelling a client’s cash flows and asset accumulation will help set foundations for longer-term planning. Coupled with a holistic understanding of a client's financial requirements the right investment plans can be made utilising tax-efficient solutions, long-term investment and pensions planning.

Indeed, technology can assist the adviser in providing all of that and thus provide a cost-efficient model to serve. It will not be as cheap as a self-directed and self-service model, but the value in doing this is over the long term, and that is where the ambitions of banks and wealth managers lie, in growth via client acquisition and retention.

“Although technology is great, it is not the be-all and end-all and it all relies on having the right advice in the first place. If the technology can mitigate the cost of its delivery, then that is a force for good and something banks and wealth managers would do well to embrace,” he concludes.

Interested in reading the full report? You can read this edition of the WealthTech 2024 Annual Report online here.