Wealth Industry Mega Trends

Roné Swanepoel, Head of Sales & Shelley Hartman Sales Associate at Morningstar Investment Management South Africa 

It’s a great time to be a financial adviser, but focusing on the right areas of your business is important to ensure future growth 

The financial advice industry in South Africa is ever-changing and full of opportunity. We often think that the industry globally is vastly different to our local market but the trends, opportunities, changes and challenges we are seeing emerge in countries like the U.S., Australia and the UK are very similar to what we face in South Africa today. 

Nick van der Schie, Morningstar’s Global Head of Strategy and Execution, shared a few of the wealth industry mega trends he is seeing impact the advice industry at this year’s Morningstar Investment Conference South Africa. 

Trend 1: Practice Scalability and Efficiency 

It is widely recognised that between a decrease in the global birth rate and an extended life expectancy due to medical advancements, we do have an ageing population. What isn’t often top of mind is that an ageing population does have an impact on our industry. The average global adviser age is increasing, with projections suggesting that a third of advisers will retire in the next ten years – making practice scalability and efficiency of established businesses more important than it has ever been in the past. 

Research shows us that the number of advisers, both globally and in South Africa, is not growing which means that the supply of good quality, independent advice is stagnating. With household wealth increasing, and more and more people looking for independent financial advice, one would think that this would provide an opportunity for new advisors to enter the market. However, research in the U.S. has shown that the new adviser failure rate is at an all-time high of 72%, meaning 72% of advisers fail within the first year. With barriers to entry being quite high and the need for good quality financial advice increasing, established practices have an opportunity to scale and grow their businesses. 

That being said, achieving this scalability is definitely easier said than done. Advisers face mounting challenges, including complex compliance requirements, increasing administrative burdens, and intricacies in business management. These pressures often detract from the core focus: building and nurturing client relationships. 

In response to these constraints, there is a notable trend towards outsourcing business functions such as technology and investment management, to specialised third-party providers. Research shows that this strategy not only alleviates pressure and promotes efficiency and scalability, but also allows advisors to focus on better serving their clients. 

“It’s a great time to be an adviser, there is a lot of opportunity. Capture the moment.” 

Trend 2: Industry Consolidation and Fee Pressure 

The adviser business consolidation trend is gaining momentum globally, and we are beginning to see a similar shift in the local market. Consolidation has the potential to unlock synergies between different businesses, enhancing capacity and operational efficiency. It is crucial to think about succession planning and consolidation and ensure that not only is your business more attractive to a potential successor or partner but ensure that you’ve laid the groundwork for a smoother transition when the time comes. 

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What can I do to make my business more attractive? 

• Client Demographics: Take a close look at the average age of your client base. While an older demographic might bring in larger portfolios, this appeal is often short-lived. It’s crucial to focus on strategies that gradually reduce the average age of your book over time to achieve sustainable growth. 

• Technology and Operational Infrastructure: This is the backbone of your business. Establishing repeatable processes is essential for efficiency. Additionally, consider key person risk: does your practice depend heavily on a single adviser, or have you built a model that can continue to serve clients effectively even when key individuals are unavailable? 

• Regulatory Adherence: Compliance isn’t just a box to check; it’s fundamental to your practice. A robust compliance framework not only safeguards your business but also enhances its value in the long run. 

Fee pressure is not a new challenge in our industry; it’s a topic that resonates globally. However, we’ve noticed that this pressure tends to impact asset management fees more significantly than advisory fees. Why is that?   

• Demand for Advice: The number of advisers is stagnating, while the demand for quality advice continues to rise, helping to maintain advisory fee structures. 

• Value Delivered: The comprehensive financial and lifestyle planning that advisers provide justifies their fees. Being able to clearly articulate this value proposition to clients is vital for minimising pressure on fees. 

That said, investors are increasingly savvy and aware of fees, so it’s important to keep this in mind as you shape your practice. 

“Remove yourself as the centerpiece of your practice, make sure it is repeatable and scalable.” 

Trend 3: Digitisation and Technology Pace of Change: 

Although the pandemic acted as a catalyst for digitisation across numerous industries, the Wealth Management industry has yet to fully embrace technology in the same way. This presents a significant opportunity for the industry to make substantial advancements in the technology space. Don’t shy away from technology; it can drive productivity and efficiency, help establish strong processes, and enhance the client experience. Use it to your advantage! 

How can I use technology and AI within my practice?           

• Client Service and Sales Ideas: Consider implementing website chatbots to enhance client engagement. For instance, Morgan Stanley uses AI to overlay client relationship management, creating top ten focus lists to help grow the advice practices they partner with in the U.S. This approach streamlines client interactions and drives sales efficiency. 

• Personalised Communication: While advisers around the world may not be fully utilising AI to develop comprehensive financial plans, many are leveraging AI engines to summarise these plans for clients. This allows for personalised messaging that resonates with individual clients, making your communication more impactful and tailored. 

• Analytics, Content, and Insights: AI can be an invaluable asset in editing content, generating key insights, and assisting with analytics. By harnessing these capabilities, you can effectively drive growth and enhance the overall performance of your business. 

“Look for the quick AI and tech wins as productivity enhancers. Leverage AI to save time and increase the capacity of your firm.” 

Trend 4: Succession and Wealth Transfer    

Succession and wealth transfer present some of the most complex challenges for advisers. As substantial amounts of wealth are set to change hands in the coming years, it’s crucial to consider how you’re engaging with the younger generation. Do you know your clients’ children or spouses? While these relationships may not yield immediate profits, they are essential for practice succession. 

Key considerations for advisers:         

• Diverse Service Models: Recognise that younger generations often have different investment philosophies. It’s important to establish service models that resonate with these clients, especially regarding alternatives, cryptocurrency, and ESG (Environmental, Social, and Governance) investing. Developing a clear framework for these topics can position you as a trusted adviser for the younger generation. 

• Communication Preferences: Different generations have varying expectations for communication. Striking the right balance between traditional and modern communication methods—whether in-person, online, or hybrid—will help maintain and strengthen these relationships over time. 

Develop relationships, regardless of the profitability (know them, or lose them) and assess whether your service model resonates with younger investors.” 

In conclusion   

In an evolving landscape, the Wealth Management industry faces both challenges and opportunities. As we navigate the complexities of practice scalability, industry consolidation, technological advancements, and the impending wealth transfer, it’s crucial for advisers to adapt, innovate and plan for the future to ensure that their practices are positioned for long-term success. The future is bright for those willing to embrace these trends and challenges.