Trends Shaping the Wealth Management Industry  - First Quarter 2023
  • April
  • 2023

Trends Shaping the Wealth Management Industry - First Quarter 2023

The first quarter of 2023 saw some intriguing developments in wealth management. Let’s delve into the top trends.

The past year has witnessed slow growth and the ongoing battle against inflation causing widespread layoffs, lean payrolls and difficulty in filling skilled positions. 2023 has already seen its first casualty. California lender Silicon Valley Bank collapsed after tech investors and startups set off a bank run. This became the second-largest bank failure in US history, after Washington Mutual in 2008. 

The threat of a global economic slowdown looms and businesses look for ways to thrive through the downturn. Certainly, the interplay of the factors put together will ultimately shape the story of economic growth for 2023. In wealth management, the implementation of generative AI tools, a rise in interest in embedded wealth and the consumer duty requirements are reshuffling wealth managers’ approaches to business. 

However, it’s not all doom and gloom. The first quarter of 2023 saw some intriguing developments in wealth management. Let’s delve into the top trends making waves in the sector and how wealth managers can leverage them. 

- Tools like ChatGPT could transform wealth management and financial advisors’ work 

The buzz about AI has only gotten louder as various tools demonstrated the capability to shake up nearly any industry including wealth management/financial planning. We have already witnessed chatbots’ ability to improve work with respect to customer interactions such as scheduling inquiries and administrative questions. Now, GPT 4 – the latest iteration of OpenAI's language model – has created waves of anticipation throughout the banking and fintech industry.

AI tools can both reduce a financial advisor’s overheads and improve customer service as it’s no longer limited to answering just routine questions. Rather, these systems can help wealth management firms develop portfolios and research investment opportunities for their users. Take for instance, Morgan Stanley. The US-based juggernaut tested an OpenAI-powered chatbot with 300 advisors with plans to roll it out widely to all 16,000 advisors in the coming months. The move was to help the advisors make the most of the bank’s huge library of research and data resources. With the help of the tool, investment experts can parse through endless pages of in-depth analyst commentary, intellectual capital and market research in seconds; a process that could take hours, enabling advisors to focus more on client service. It doesn’t plan on stopping there. The wealth management firm is looking to use the AI tool to enhance insights from advisor notes and streamline follow-up client communications. 

Despite its rapid adoption, the chatbot is far from replacing humans. In an earlier note published in February, Morgan Stanely even raised concerns about ChatGPT’s struggle with accuracy. Admittedly, using ChatGPT comes with inevitable complications as the wealth management sector is highly regulated and involves handling individuals’ finances. A group of over 1,000 tech experts, including co-founders of Apple, Pinterest and Skype as well as Elon Musk, issued a warning that the industry is in a dangerous arms race to develop AI systems. The signatories said human-competitive intelligence could pose an existential risk to humanity, and demanded a six-month moratorium on further research until regulation is put in place.

Recently, the UK government published a whitepaper calling on regulators to come up with “tailored, context-specific approaches that suit the way AI is actually being used in their sectors.” In the wake of ChatGPT driving a wave of demand, regulators must issue practical guidance as well as resources like risk assessment templates, to set out how to implement these principles in various sectors, it said. Agreeably, it requires a rigorous AI governance framework in order to demonstrate adherence to established standards and auditable AI. 

- Embedded finance and investments are striving to reach new frontiers

Embedded finance has made almost every company a fintech company. Thanks to companies like PayPal and Klarna, a slew of non-financial institutions are integrating financial services into their platforms and offering creative forms of payment, credit, insurance and even investment into their customer journeys. 

A study by Juniper Research found that the revenue from embedded finance services will exceed $183 billion in 2027, rising staggeringly from under $65 billion in 2022. Furthermore, the research found that embedded investments where stock trading and investment products are integrated within other apps, will be the fastest-growing segment. It will increase by 421% in usage over the next 5 years, accounting for almost $11 billion in revenue globally by 2027. 

Outlining several use cases within the embedded wealth bracket, Kidbrooke® suggested in an earlier blog post that apart from integrating personal finance/ wealth management elements in shopping and subscription management services, embedding pension planning toolkits into firms’ intranet can help employees plan their retirement efficiently. Additionally, businesses can benefit by managing their balance sheets and improving their solvency. According to a report by additiv, embedded wealth management could increase the size of the wealth management market by up to circa $33 trillion in assets. 

Looking ahead, there is no doubt that more companies will see the benefits of embedding wealth solutions. The true benefit of embedded wealth can of course be realized with powerful APIs. For financial services firms, it will grow their addressable market while lowering customer acquisition costs, thus boosting profits. 

- The democratization of advice 

Let’s admit - wealth management services were historically addressed to wealthy customers. But times are changing, and following the overarching digitalisation trend, the industry is slowly democratizing, making it easier for people to access wealth services. The ongoing evolution of digital distribution channels, open banking and analytical capabilities have significantly lowered the costs of wealth management services, allowing firms to cater to previously underserved segments. 

However, despite digital retail wealth managers and execution platforms becoming ubiquitous in recent years, a considerable share of people are still not investing. A report from the World Economic Forum said that the shift in wealth management towards a responsible capital market ecosystem could happen centered on democratization and greater learning opportunities. 

Current solutions are either out of reach or too generic, whereas retail investors look for personalized advice. To fortify better standing in the industry, wealth management firms must elevate their product offerings by expanding their investment services repertoire and developing better digital capabilities. They must pivot towards a client-centric approach that places holistic wealth planning at the center of their activities. 

An easy way to resolve the demand for a more personalized experience is by adding interactive customer journeys. For instance, with Kidbrooke's advanced analytics, wealth managers can identify potential issues in the financial situations of thousands of customers within a matter of seconds and send them actionable and personalized notifications. Recently, UAE-based insurance company, Hayah Insurance, partnered with Kidbrooke® to enable its customers set up investments using mutual funds and ETFs, to meet one or more investment goals as defined by a customers’ relationship with risk, probabilistic simulations of future cash flows and a time horizon. The key purpose was to dramatically improve financial well-being for societies in the Middle East. 

The financial growth in the Middle East is fuelled by infrastructure needs to address the high proportion of financially excluded population. In a region where over 70% of people do not have access to bank accounts, fintech firms have bridged gaps by doubling down in the areas of digital wallets/money transfer, lending, payments and insurtech. The UAE’s vision to accelerate the digitalization of payments and drive financial inclusion prompted Egypt, Saudi Arabia and the UAE Central Banks to soon launch National Instant Payments Platforms (IPPs) with the aim to facilitate a real-time mechanism to transfer funds person-to-person, person-to-business, person-to-government and business-to-business. 

- Zeroing in on compliance 

Regulatory compliance is a pivotal area to consider when it comes to wealth management using technology in their offerings. 

The differences in regulations and tax regimes across the world can make international expansion ever more pressing for financial companies. Therefore, it is better to select a financial analytics provider with a long-term perspective and ensure it supports your goals.

A solution that meets the critical requirements has the potential to significantly diminish compliance expenses, facilitate quick and effortless internal adjustments at each stage of the journey and even streamline your international expansion endeavors. By implementing a well-tailored wealth management solution, you can navigate the intricate terrain of the financial landscape with confidence, enhancing the efficiency and effectiveness of your operations. 

Kidbrooke® actively works with compliance functions of financial institutions with the aim to reach swift turn-around times without compromising on rules and regulations. The process begins with establishing personal contacts with compliance professionals at the financial institution, building a relationship and understanding the project's scope in depth. Compliance procedures often involve auditing operations, documentation and risk management processes. Hence, Kidbrooke® incorporates best practices in terms of documentation of key processes and methodology to be used by our clients in the procedures. 

In conclusion, as wealth advice undergoes a transformational shift, the stakes for wealth management firms have never been higher. The ability to adapt to this evolving landscape is paramount to staying relevant, requiring firms to envision a future that creates value for all stakeholders. To achieve this, firms must conduct a thorough analysis of their new approach and its integration into the industry ecosystem.

To reach their objectives, firms must foster collaboration and execute with agility across borders and industry silos.

The wealth management industry's future will differ significantly from its past, necessitating bold and innovative approaches to financial advice. The time to act is now and the rewards for success are substantial.

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