2022 was a bad year in wealth management. In fact, one of the worst years in investment performance across most asset classes ever. But despite the extraordinary market conditions and macro-economic challenges, underlying gigatrends remained the same: demographics, the generational wealth transfer, and the evolution of client expectations regarding products and services.

In 2023, the combination of expectations and demands will continue to be demanding for wealth professionals; they will need to find ways to provide the holistic advice that is so demanded. Accordingly, pressure on traditional wealth managers and private banks continues. The need for transformation has become evident.

Assets – the need to offer more
First of all, wealth managers will have to start offering their customers a broader range of investment products and services. For example, private market investments in equity, debt, and exotic assets, including art, luxury items, etc., but also crypto and digital assets.

The wider access to alternative asset classes is now a reality. Existing and new private asset managers have already started to offer private market assets to a larger customer base, putting pressure on incumbent wealth managers. Specialisation in managing alternative assets is critical and experienced experts are not easily available. This is not just a growth, but also a retention opportunity to remain attractive for new and existing customers.

New investment strategies and mass-personalisation supported by AI
Driven by the need for personalised investing strategies, new investment and portfolio optimisation techniques are also in high demand by investors.

Portfolio optimisation technology products and service providers offer an increasing number of strategies which include mean-variance, benchmark optimising, reducing tracking error, i.e., active risks, and alternative models. Advanced investment tools apply algorithmic and artificial intelligence (AI) technology, such as natural language processing (NLP) and other methods, to automate the investment processes.

But the mass personalisation of investment strategies requires a suitable technology architecture, performant operational processes, and scalability with a seamless integration into market data providers, order execution platforms, and core systems. The substantial investment required will lead some firms to seek collaboration and partnerships, e.g., outsourcing, to achieve efficiency gains and scale. Fortunately, there is a growing number of solution providers that allow such services to be consumed as a service via Cloud computing and open interface standards (APIs). Such services are contributors to the rapidly evolving WealthTech ecosystem.

ESG and values-oriented Investing
The trend for investing in considering environmental, social and governance (ESG) factors as well as personal values is continuing. This is despite the recent headwinds from so-called greenwashing and geopolitical factors. New regulations will aim to improve this situation.

One way to support investing along personal preferences and values is direct indexing, as described above.

But it is more than just the tools required to help and advise investors on their journey of values-oriented investing. Another factor which can make a difference is communication. Traditional advisers need to upskill themselves to guide their customers or bring in new talents to provide assistance.

The digitisation of real-world assets
Digital assets, i.e., assets represented in a digital form (in comparison to native crypto assets), will become more popular in 2023. The issuing of tokenised assets will be driven by traditional banks building up and providing the infrastructure to issue, trade, settle, and custody digital assets.

Alternative asset classes represent a large potential for tokenisation. Applying Blockchain technologies, such as distributed ledger technologies (DLT) and smart contracts, can remove the high administrative costs of managing the typically illiquid assets across the long-term product lifecycle.

Customer centricity - digital private banking & neo-private banks
Providing wealth advice, services, and products is more complex than basic banking offered by neobanks and FinTechs. A successful value proposition consists of digital services with a human touch, enabling hybrid advice (see Figure 1).

Designing a personalised customer experience needs deep elaboration of client life stages and goals by applying design thinking and agile development. Embedding a superior digital user experience in combination with human advice and assistance will need, besides human talent, appropriate technology platforms, analytics, and integration capabilities.

Figure 1: Customer Journeys Deliver Outcomes Through the Intersection of Humans and Technology / Source: BCG Analysis

Customer journey through the intersection of humans and technology
For neo-private banks, this is critical to attracting underserved affluent and Low-HNW segments. For traditional wealth managers, this can, if well done, lead to higher customer satisfaction and, at the same time, lower costs. Neo-private banks have a natural advantage as they do not need to consider an existing culture and legacy technology and process environment. Their challenge is to win enough customers to become a sustainable business in the expected timeframe.

Outsourcing – Wealth-as-a-Service
Family offices, independent wealth advisers, small and large wealth managers, will increasingly require specialist services, including operational service and specialist investment solution managers. The need for scale will favour specialised providers and require modern technology platforms which can be easily integrated into the legacy systems and operational processes. To offer access to alternative investments and services, wealth managers will seek partnerships with product providers to focus on holistic customer advice and acting as a distribution channel.

The development supported by technology and digitalised processes will especially benefit small family offices and previously only available for UHNWI and family offices. This trend will further increase the pressure on traditional service providers and allow wealth managers to drive their operational and digital transformation to better and more efficiently serve their customer base.

The digital transformation of wealth management will steadily evolve into open wealth ecosystems. Open platform architectures are easier than ever to integrate into the core processes, for example, by opening banking and open wealth APIs.

Cost to serve
Considering that wealth managers’ highest costs are their staff, the conventional cost reduction approach was cutting headcount.

Looking at the cost-income ratios of Swiss private banks, we can observe that large and mid-sized banks achieved significant improvements in their cost-income ratios (CIR) in 2021. Small banks, by contrast, have seen the highest cost-income ratios. And the spread of CIR between small banks and large banks will further increase unless small banks are able to substantially improve their operational efficiency.

Average cost-income ratio of Swiss private banks (in %)
Although improving operational efficiency by reducing costs is necessary, it should not be done for its own sake. The same is true for increasing service fees without providing a higher customer value. Reducing costs must go hand in hand with process automation which ultimately serves the customer.

According to McKinsey, relationship managers spend 60-70% of their time on non-advisory activities (see Figure 3).

Figure 2: Private Banking Switzerland Market Update / Source: PwC, 2022

Figure 3: McKinsey interviews with private banking RMs / Source: McKinsey, 2021

Relationship managers spend 60-70% of their time on nonadvisory activities
To improve efficiency, one should be focussed on the following areas: acquisition and onboarding, engagement and deepening of client relationships, and servicing and retention.

The role of technology in reducing costs to serve the customer and increasing service quality
The cost situation requires process automation with suitable technologies to reduce costs to serve the customer base. Meeting the needs of today’s customers must be based on a business model that is, at the same time, cost-efficient and adaptable to individual clients.

The factors driving change can be grouped into three streams in terms of transformation: new products and services, customer experience and operational efficiency, and digital transformation, including data-driven wealth management.

The three streams will require changing the way of doing things today, at minimum, the operating models, if not also the business models. Either way, technology has a key role to play.

Using a data-driven approach enables the application of AI and ML, allows for the mass personalisation of offerings and overcomes the bottleneck of human capacity. This is not by replacing human advisers, but by equipping them to effectively service a greater number of clients and increase customer value and satisfaction. I am convinced that many customers would be happy to provide their personal data if they can expect a semi-automated user experience and self-service together with human coaching and expert advice. Such an approach is also known as the hybrid advisory model.

For those wealth players with a pure customer focus, building an open platform which can easily integrate third-party services is a necessity. The increasing number of available services in wealth management leads to ‘Wealth-as-a-Service’ providers. But given the complexity and breadth of products and services in wealth management will not create one player being able to offer a complete offering from one single platform.

The offerings in each segment can be roughly described as follows:

• UHNWI: very personalised, special investment solutions, (semi) institutional services.

• HNWI: hybrid advisory approach including self-service and human advice, competitive pricing.

• LHNWI, affluent and retail investors: self-service and semiautomated customer experience, affordable and attractive pricing.

In the affluent segment, the winners will be platform-based wealth advisers including neo-private banks, which can build a cost-efficient yet mass-personalised service and product offering. Traditional wealth managers who successfully design and implement a holistic and consistent customer experience will continue to be among the wealth management leaders.

The key success factors for becoming future-ready in wealth management
The key success factors are strategy, culture, people (the complexity is high and meeting ambitious goals can only be the result of teamwork), and technology.

These factors need to be orchestrated to (re)create a value proposition, process landscape and architecture blueprint, quite like an assembly line in industries for high-value and high-tech technology goods such as the automotive industry.

The integration with the legacy core technology is challenging and will not become easier over time because the complexity and number of new products and services will increase. This requires an open technology architecture which allows fast integration of old and new services. A stepwise migration to such a service integration platform will enable wealth managers, private banks and independent wealth advisories alike, to ready themselves to operate in an ecosystem environment.

New and increasingly complex customer requirements, as well as technology, will be the key drivers in the development towards an open wealth ecosystem. More customers will have access to a wider range of products and services than ever before. I am curious to see how 2023 will develop.

You can read and download the full WealthTech 2023 Report here.