Asset And Wealth Management—Embracing AI And Consolidation To Win

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FORBES — The advice to asset managers has always been to focus on your strength—whether it be investing or distribution, for instance. Well, that is simply not enough anymore….

In today’s dynamic financial landscape, the asset and wealth management industries are undergoing a remarkable transformation. As technology advances, customer expectations evolve and fees further compress, with firms seeking new ways to adapt and thrive in the face of change.

AI combined with mergers and acquisitions are two predominate trends leading shifts in the asset and wealth management industries.

AI and technology advances driving change

As companies tool up for robo-advice and enhanced retail presence supported by smart use of AI, retail will have access to customized solutions once only reserved for ultra high net worth—a democratization of investment advice.

In their recent survey titled “Asset and Wealth Management Revolution 2023,” PWCPWC -0.6% discusses their research on HNW individuals in the US. Many are reconsidering their wealth management relationships as they seek customization and access to an increased variety of products and services—including private markets. Further, the opportunity for wealth management is immense—they expect $68 trillion of generational wealth transfer from baby boomers to millennials to take place by 2030, heightening the demand for the tech-enabled services favored by youngers.

PWC also predicts that assets managed by robo-advisers will reach $5.9 trillion by 2027, more than double the figure of $2.5 trillion in 2022 (see chart below). Evidencing the popularity of this trend, JP Morgan bought UK robo-adviser Nutmeg for $700 million in 2021.

PWC

 Robo-Advice PWC

Mergers and acquisitions trends

One emerging model for asset growth centers upon deeper vertical integration of the value chain—especially as asset and wealth management converge with the AI and other recent tech innovations. Goldman Sachs took a step in this direction last year when it announced it would internally unify its asset and wealth management areas back together under one business. Other companies have been turning to M&A to enable vertical integration, demonstrated by Schroders’ recent acquisition of Benchmark Capital.

Earlier this year in their report “M&A in Wealth and Asset Management: How Deals Will Shake Up the Industry,” Bain highlighted both scale and scope M&A trends to capture growth opportunities. While they expect to see a smaller share of “scale” deals valued at $1 billion or greater, they predict a significant increase in “scope” deals, especially those made to gain digital capabilities, expand offerings and ecosystems, and continue vertical integrations.

Between now and 2030, Bain expects continued scale activity for wealth management companies, heightened by technology. As the largest wealth managers outpace the market, scale benefits will become even more apparent since players will have to make significant investments in tech and data/analytics to provide differentiated client experiences. Bain reports that when a company shifts from a traditional to a digitally enabled wealth management model, returns to scale can be up to 35% higher (because of lower variable costs in a digitally enabled model). To complete that scale, companies can then turn to M&A for consolidation.

The PWC survey also highlights the trend around the consolidation of companies. Their global survey found that almost three-quarters of asset managers are considering acquiring or merging with a competitor, as business models come under increased pressure.

“The big managers are getting bigger,” said Olwyn Alexander, PwC’s global asset and wealth management leader. “There’s a lot of cost pressure in the industry now and margin pressure that’s forcing managers to look at their critical mass, and particularly with these pressures from the very big managers in the industry, whether they can withstand that as well as maintain margin.”

In conclusion, AI and consolidations are reshaping the asset and wealth management industries as firms seek cost efficiencies and strive for market competitiveness. We expect these trends to continue, driven by strategic objectives and evolving market dynamics.

Image by: Pexels

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