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McKinsey's ‘Two Winning Models’ for Wealth Management

Is your company in danger of being neither?

Only a handful of big wealth managers will reach the necessary scale to be everything to every customer. All others will have to remain focused on the wealthiest investors, according to McKinsey & Company.

Those are the two “winning models” that will emerge in the next decade as the wealth management industry continues to evolve, the management consultant says.

The list of at-scale companies capable of offering a full spectrum of services to all types of investors will be relatively short because they will need to be massive, in terms of the number of clients they have.

“Over the last several years wealth managers of all sizes and types, from robo-advisor start-ups to private banks, have raced to offer a broader spectrum of advice models to appeal to the mass affluent segment. To be competitive and economically viable over the longer term, a firm will likely need to serve a few million households,” the consultant wrote in a January report.

If that’s the case, even some of the biggest companies still have a way to go. Betterment, one of the largest and most recognizable robo-advisory services, had a total of $16.4 billion across 542,046 accounts, according to a Feb. 4 regulatory filing. Wealthfront, a competing robo-advisor, last reported in November that it managed $13.6 billion across 315,643 accounts.

“Only a select few will emerge as winners in this segment” since there are only about 30 million U.S. households with $100,000 to $1 million in investable assets, McKinsey says.

Wealth managers that can’t reach the necessary scale to serve millions of smaller accounts can still be successful.

Independent wealth managers have been siphoning the wealthiest clients away from the so-called wirehouse brokerages and private banks. Independent firms now account for 13% of assets belonging to high-net-worth investors, up from 11% five years ago, according to McKinsey. 

But independent firms need to think hard about their value proposition. The management consultant expects they will continue to add high-touch, white-glove, services and deepen their relationships with high-net-worth households in an effort to maintain them. Catering to the wealthy can be lucrative; the high-net-worth segment has fewer total clients but accounts for more than 60% of the industry’s revenue pool.

“Over the next decade, we expect the continuation of consolidation in the industry, especially among direct firms that fail to ‘crack’ the HNW segment and struggle to differentiate ‘upward.’ In addition, we expect that many traditional firms will fail to integrate 'downward' and will remain completely upmarket, with a family office/private bank model serving only the wealthiest clients and continuing to charge premium fees justified by highly bespoke products and services,” McKinsey says.

The foretold convergence of banking and wealth management is also finally beginning and will create “ecosystems” with unique competitive advantages, according to McKinsey.

Customers have a real desire for a one-stop shop when it comes to their finances.

Almost half of all wealthy clients (49%) say they would prefer a single financial institution to serve most of their needs, including investment management, financial planning, and banking. But only one third of them are engaging a company that way, according to a report by Cerulli Associates.

Both wealth managers and banks are working to provide their customers the services of the other. Betterment and others are adding checking and savings accounts to accompany investment management. New cash management solutions for the clients of RIAs have popped up and gained traction

Meanwhile, Morgan Stanley acquired E*Trade for $13 billion to increase the scale and breadth of its wealth management business and be capable of serving more clients across all channels and wealth segments, according to the bank. In January, during its first-ever investor day, Goldman Sachs announced the creation of its new consumer and wealth management unit, built with the intention to serve clients across all wealth segments.

They are new to working with more clients who have less to invest, but it might be too early to count out some of the big banks. Brand recognition is a powerful force and seems to translate into perceived trustworthiness; Perhaps that’s why this company has been dubbed “the most formidable brand’ in wealth management.”

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