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Demographic Shifts and Their Impact on Financial Advisory

Demographic shifts catalyze a profound transformation of the rapidly evolving financial advisory landscape. As global population dynamics undergo unprecedented changes, financial advisors must swiftly adapt to meet their client’s diverse needs and evolving expectations.

This blog delves into the key demographic trends in the coming year and their far-reaching impact on financial advisory services, exploring how these shifts reshape wealth management’s foundations.

The Silver Tsunami: Aging Population and the Great Wealth Transfer

One of the most significant demographic shifts is the aging population, often called the “Silver Tsunami.” As baby boomers transition into retirement, we witness a monumental wealth transfer. According to a groundbreaking study by Knight Frank, an astounding $90 trillion in assets will change hands between generations over the next two decades. This unprecedented wealth transfer presents both formidable challenges and exciting opportunities for financial advisors.

To navigate this seismic shift, advisors must provide meticulously tailored services encompassing:

Comprehensive retirement planning
Sophisticated estate planning strategies
Innovative philanthropy solutions

These services are crucial in helping clients manage their wealth effectively as they enter their golden years. Moreover, the aging population demands increasingly specialized advice on healthcare financing and long-term care planning, ensuring their financial needs are met throughout their extended retirement years.

A study by Cerulli Associates projects that by 2045, $84.4 trillion in wealth will be transferred across generations in the United States alone. This staggering figure underscores financial advisors’ critical role in guiding wealth transferors and inheritors through this complex process.

The Digital Natives: Millennials and Generation Z Reshape the Investment Landscape

Millennials and Generation Z are emerging as powerhouse investors, bringing revolutionary perspectives and expectations to the financial advisory industry. These tech-savvy generations place a premium on transparency, hyper-personalization, and socially responsible investing. A recent Forbes survey revealed that 72% of millennials and 85% of Gen Z allocate a significant portion of their portfolios to alternative investments.

Financial advisors must embrace cutting-edge digital tools and platforms to engage with these younger clients effectively. Offering personalized investment strategies that align with their deeply held values, such as ESG (Environmental, Social, and Governance) investing, is no longer optional it’s imperative for advisors seeking to build enduring relationships with this demographic.

According to an Accenture report, millennials and Gen Z will inherit over $30 trillion of wealth in North America alone by 2030. This immense transfer of wealth to digital natives will fundamentally reshape the financial advisory landscape, demanding a radical rethinking of traditional service models.

The Rise of Women Investors: A Paradigm Shift in Wealth Management

Women are rapidly becoming a formidable force in the investment world. They seek a holistic approach to wealth management that transcends traditional financial planning. Women investors prioritize comprehensive lifestyle management, legacy planning, and investments that resonate with their core values. According to a groundbreaking study by Fidelity, more than two-thirds of women are actively saving for retirement, and 60% are investing in the stock market. Financial advisors must recognize and adapt to the unique needs of women investors, providing tailored advice that addresses their specific goals and preferences. Building unshakeable trust and fostering robust client-advisor relationships are paramount in serving this burgeoning demographic effectively.

A report by McKinsey & Company predicts that women will control $30 trillion in financial assets by 2030, up from $10 trillion in 2015. This monumental shift in wealth control underscores the urgency for financial advisors to recalibrate their strategies to serve women better investors.

Empowering the Next Generation: Young Investors and Financial Literacy

Young investors, particularly millennials and Gen Z, demonstrate an insatiable appetite for personal finance and wealth accumulation. They are more likely to conduct extensive research and connect with businesses online, emphasizing transparency and seamless digital engagement. A comprehensive study by Deloitte found that 68% of investors, including a staggering 74% of Gen Y/Z, expect their investment providers to offer digital experiences on par with leading tech companies.

This presents a unique opportunity for financial advisors to educate and guide young investors, helping them make informed and strategic investment choices. By providing robust financial literacy resources and leveraging state-of-the-art digital tools, advisors can significantly enhance the client experience and foster long-term loyalty.

A survey by the CFA Institute revealed that 65% of millennials believe financial education is a critical life skill, yet only 35% feel confident in their financial knowledge. This gap presents a golden opportunity for financial advisors to position themselves as indispensable educators and mentors to this demographic.

The Philanthropy Revolution: Integrating Purpose-Driven Advisory Services

Philanthropy is rapidly becoming integral to wealth management, particularly for younger generations. Gen Y/Z clients increasingly expect their financial advisors to offer services far beyond traditional financial advice, including guidance on effective giving strategies and facilitating connections with impactful charitable organizations.

Wealth management firms can attract and retain clients by seamlessly integrating philanthropic advisory services into their offerings, prioritizing social impact and sustainability. A study by Fidelity Charitable found that 77% of affluent millennials consider their charitable giving an essential part of their identity.

Conclusion: Embracing the Future of Financial Advisory

The demographic shifts reshaping the financial advisory landscape present unprecedented challenges and extraordinary opportunities for advisors. By deeply understanding and swiftly adapting to the unique needs of different client segments, financial advisors can provide more personalized, effective, and impactful services.

Embracing cutting-edge digital tools, offering meticulously tailored advice, and integrating comprehensive philanthropic services are no longer optional strategies – they are essential for thriving in this rapidly evolving industry. As the demographic landscape continues its dramatic transformation, financial advisors who stay ahead of these seismic trends will be uniquely positioned to succeed and redefine the very nature of wealth management for generations to come.

The future of financial advisory belongs to those who can navigate these demographic shifts with agility, insight, and unwavering commitment to client success. Are you ready to take charge of this new era of wealth management?

Citations and Further Reading

Co-authored by Venkatesh Padmanabhachari, Avinash Dave, and Sagar Rathore

Maveric’s thought leadership series – E.D.G.E (Experiences Delivered by Global Experts) – handpicks the game-changing technology ideas and pressing functional questions Banks and financial institutions must solve today.

These features – reports, whitepapers, podcasts, flyers, blogs, and infographics – are for Banking leaders and Technology evangelists to apply profound trends, the latest opinions, and transformational analyses to boost the performance of their organizations.

About Maveric Systems

Established in 2000, Maveric Systems is a niche, domain-led, BankTech specialist, transforming digital ecosystems across retail, corporate, wealth management, cards & payments and lending domains. Our 2600+ specialists use proven solutions and frameworks to address formidable CXO challenges across Customer Experience, Assurance, Regulatory Compliance, Process Excellence and New age AMS.

Our competencies across Data, Digital, Cloud, DevOps, AI and automation helps global and regional banking leaders as well as Fintechs solve next-gen business challenges through emerging technology. Our global presence spans across 3 continents with regional delivery capabilities in Amsterdam, Bengaluru, Chennai, Dallas, Dubai, Kingdom of Saudi Arabia, London, New Jersey, Pune, Riyadh, Singapore, Sweden, Dubai and Warsaw.

Our inherent banking domain expertise, a customer-intimacy-led delivery model, and differentiated talent with layered competency – deep domain and tech leadership, supported by a culture of ownership, energy, and commitment to customer success, make us the technology partner of choice for our customers.

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The Rise of Alternative Assets in Financial Advisory: A Paradigm Shift

The financial advisory landscape is witnessing a remarkable shift, with alternative assets projected to surge to $23.21 trillion in global assets under management by 2026, up from $13.32 trillion at the end of 2021. This dramatic growth underscores a pivotal change in how investors view their portfolios and advisors’ strategies. As traditional investments face increasing scrutiny and volatility, alternative assets are gaining traction as essential tools for diversification, inflation hedging, and meeting the demands of a tech-savvy investor base.

This blog examines the rise of alternative assets in the next 12 months and their transformative impact on financial advisory practices.

The Alternative Asset Revolution

Alternative assets encompass vast and diverse investment opportunities beyond stocks, bonds, and cash. This burgeoning sector includes private equity, hedge funds, real estate, commodities, infrastructure, and the rapidly expanding universe of digital assets such as cryptocurrencies and tokenized assets.

The allure of alternative assets lies in their potential for:

Superior returns: Alternative investments have historically outperformed traditional assets, with private equity delivering an average annual return of 14.2% over the past 20 years, compared to 9.9% for the S&P 500.
Enhanced diversification: By incorporating non-correlated assets, portfolios can achieve greater resilience against market volatility.
Inflation protection: Real assets like real estate and commodities often appreciate during inflationary periods, safeguarding purchasing power.

Catalysts Fueling the Shift

Several powerful forces are propelling the rise of alternative assets in financial advisory:

The Millennial and Gen Z Effect: Younger investors are revolutionizing the investment landscape with their appetite for innovation and higher yields. 94% of millennials are interested in sustainable investing, while 87% believe corporate success should be measured by more than just financial performance.
The Digital Asset Tsunami: Blockchain technology and asset tokenization have unleashed a wave of innovation, democratizing access to previously illiquid assets. The global tokenization market is projected to reach $5.6 trillion by 2026, growing at a CAGR of 19.5%
The Diversification Imperative: Traditional 60/40 portfolios are no longer sufficient to navigate today’s complex market dynamics. Alternative assets offer a lifeline, with studies showing that allocating just 20% to alternatives can potentially enhance returns by 2% annually while reducing volatility.
The Inflation Hedge Imperative: With inflation rates soaring to multi-decade highs, investors are flocking to tangible assets as a safeguard. Gold, often considered the ultimate inflation hedge, has surged over 500% in the past two decades.

The Evolving Role of Financial Advisors

Financial advisors are at the forefront of this revolution, adapting their strategies to harness the power of alternative assets:

Mastering Digital Asset Complexities: Advisors are rapidly upskilling to navigate the intricate world of blockchain and cryptocurrencies. A recent survey found that 94% of financial advisors received questions about crypto from clients in 2021, up from 81% in 2020.
Elevating Client Education: Transparent communication is paramount in demystifying alternative assets. Advisors leverage cutting-edge tools and platforms to provide real-time insights and foster informed decision-making.
Crafting Bespoke Investment Strategies: The era of one-size-fits-all portfolios is over. Advisors harness advanced analytics and AI-powered tools to create hyper-personalized investment strategies tailored to each client’s unique risk profile and goals.

The Future is Alternative

As we stand on the cusp of a new era in financial advisory, integrating alternative assets is not just a trend – it’s a necessity. By embracing this paradigm shift, financial advisors can unlock unprecedented opportunities for their clients and position themselves at the vanguard of the industry’s evolution.

The future belongs to those who can harness the power of alternative assets to deliver superior returns, enhance diversification, and meet the evolving needs of a new generation of investors. Are you ready to lead the charge?

Citations and Further Reading

Co-authored by Venkatesh Padmanabhachari, Avinash Dave, and Sagar Rathore

About Maveric Systems

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Creating Future-Ready digital wealth management platforms

The wealth management landscape is experiencing a profound shift as digital solutions reimagine how advisors serve their clients and investors manage their wealth. Digital wealth management platforms are at the forefront of this revolution, empowering financial institutions to provide personalized, data-driven advice at scale – all while enhancing client experiences. However, these platforms must evolve to meet rising expectations and embrace next-generation technologies to thrive in the future.

Why Future-Readiness Matters

In traditional wealth management, high-net-worth individuals (HNWIs) can access tailored advice and portfolio management. However, this model is often inaccessible to broader demographics. Digital platforms democratize wealth management, opening access to services historically reserved for an exclusive clientele. The future belongs to platforms that can balance this accessibility with the sophistication and personalization that clients demand.

Maveric Systems understands the nuanced challenges of wealth management, providing a robust foundation for implementing digital solutions. Their 3Cs Advantages of Contextualization, Competence, and Commitment ensure that digital wealth management platforms are designed with a deep understanding of industry dynamics, supported by technical expertise, and aligned with long-term strategic objectives.

Critical Elements of Future-Ready Platforms

Let’s explore what makes a digital wealth management platform truly future proof:

1) Hyper-Personalization:

AI-powered analytics can delve into a client’s financial profile, risk tolerance, and goals to create customized portfolios that are optimized and aligned with individual needs.

2) Holistic Financial View:

Platforms must integrate with a broad range of financial accounts, providing a consolidated view of an investor’s assets, liabilities, and overall financial health.

3) Gamification:

Engaging features like simulations, leaderboards, and educational content can boost financial literacy and make managing wealth an enjoyable experience.

Hybrid Models:

Blended “robo-advisory” models that combine algorithms with human advisor expertise will deliver an optimal mix of efficiency and personalized touch.

Seamless User Experience:

Intuitive interfaces and cross-device compatibility are essential to attract clients seeking accessible, user-friendly wealth management.

The Role of Emerging Technologies

Looking ahead, these technologies are poised to reshape the digital wealth management landscape:

Blockchain:

The potential applications include streamlined asset transfer, automated record-keeping, and secure fractional ownership of high-value assets.

Virtual/Augmented Reality:

These technologies can create immersive, interactive environments for client consultations, portfolio visualizations, and financial education.

Strategic Ways Forward

Here’s how wealth management firms can build future-focused digital platforms:

Focus on the Client Journey:

Map out the ideal customer experience, ensuring that every touchpoint delivers ease of use and meaningful value.

Prioritize Data Security and Transparency:

Handling sensitive financial information demands robust security protocols, ethical data usage, and clear communication to build trust.

Embrace an Agile Mindset: Be prepared to iterate and adapt platforms in response to changing technologies, investor preferences, and market conditions.

Find the Right Partner:

Work with a partner like Maveric Systems, which can deliver the specialized expertise needed to build and maintain a cutting-edge platform that instills client confidence.

Conclusion

The future of wealth management is undoubtedly digital. Platforms that successfully balance personalization, flexibility, and the seamless integration of new technologies will empower investors and advisors. By carefully considering these trends, wealth management firms can harness the power of digital solutions to attract new clients, improve satisfaction, and position themselves as leaders in a competitive and technology-driven landscape.

About Maveric Systems

Established in 2000, Maveric Systems is a niche, domain-led, BankTech specialist, transforming retail, corporate, and wealth management digital ecosystems. Our 2600+ specialists use proven solutions and frameworks to address formidable CXO challenges across regulatory compliance, customer experience, wealth management and CloudDevSecOps.

Our services and competencies across data, digital, core banking and quality engineering helps global and regional banking leaders as well as Fintechs solve next-gen business challenges through emerging technology. Our global presence spans across 3 continents with regional delivery capabilities in Amsterdam, Bengaluru, Chennai, Dallas, Dubai, London, New Jersey, Pune, Riyadh, Singapore and Warsaw. Our inherent banking domain expertise, a customer-intimacy-led delivery model, and differentiated talent with layered competency – deep domain and tech leadership, supported by a culture of ownership, energy, and commitment to customer success, make us the technology partner of choice for our customers.

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ESG & Alternative Assets – Impact on Wealth Management Investment Strategy

Changing Business Environment

The shift in economic policies in the US, UK & the European Union in the post pandemic period, involving high interest rates and tightening liquidity had its impact in the Wealth Management (WM) business too. After more than a decade of sustained growth, global volume of Assets Under Management (AUM) declined for the first time in 2022 by 10%. The declining equity & bond values, and corresponding decline in portfolio values, significantly contributed to this. At the same time, new business flows also declined with the Net Flow Rate of AUM falling to 1.6% in 2022 from 4.4% in the previous year.

Average Client Business Volumes (CBV – average assets & liabilities under management) have also been on a declining trend, registering a drop of 11.7% in 2022, vis-a-vis growth of 12.5% & 6.4% in 2020 & 2021.

Added to this, the US investors have been showing an increasing preference to passive investments – Exchange Traded Funds (ETFs) & other mutual funds – during the last decade. In 2022, when active investments showed a net outflow of US $ 1 trillion, passive investments showed a net increase of US $ 0.5 trillion

To counter these pressures of declining growth, profitability & performance, one of the options available to WM firms is to look at opportunities for diversifying into new offerings with better margins. This also needs to be considered in the backdrop of the evolving customer preference for newer classes of assets viz. ESG compliant assets & alternative assets.

Diversification Into New Asset Classes

What are the opportunities & challenges involved in including ESG & Alternate Assets into a firm’s portfolio of offerings?

1) ESG Compliant Investment:

Environment, Social & Governance (ESG) compliant investing has become a key priority, given increasing social awareness & responsibility. There is also the potential future risk of regulatory non-compliance impact in investing in ESG non-compliant businesses. Some focus areas for ESG investing have been Climate Control, Air & Water Pollution Control, Data Protection & Privacy, and Deforestation.

Significant advances in energy transition to clean energy sources have also opened up new avenues for profitable investment, like Electric Vehicles business, and commodities like lithium, copper, nickel, uranium, etc., used in batteries, and businesses associated with these commodities. Thus, purely from a financial perspective too, ESG investing promises to be a good option with the expected widespread adoption of these technologies.

Research reports indicate that a good majority of the institutional investors are planning to increase their investments in ESG assets and global ESG investing is set to exceed US $ 53 trillion by 2025. About 2/3rds of the HNW investors are reported to consider the ESG score before taking investment decisions, indicating the strong growth potential of ESG investing.

WM firms face the challenge of acquiring capabilities for advising & managing ESG investment portfolios. They require specialized platforms for launching ESG related products & offerings and keeping track of ESG investments. They also need to acquire capabilities for ESG investment opportunities related data collection, analysis, identifying investment opportunities, risk measurement & tracking in terms of ESG performance, and regulatory & client reporting.

2) Alternative Assets:

Alternative assets like Private Equity, Private Credit, Private Real Estate, and Digital assets like Cryptocurrencies, NFTs, and Tokenized Passion assets (Art, Wine, Nature) etc. – are emerging as a preferred investment option. Investors seeking diversification in the UHNI segment and at Family Offices, are looking to increase their allocations in these Alternative Assets. Alternative assets carry additional investment risks & require expertise in understanding the product & the market. But they provide significantly higher returns for investors with deep pockets & a higher risk appetite. They also provide opportunities for increasing income & margins for the WMs. Market study reports indicate that Alternative assets, at US $ 20 trillion, accounted for more than one fifth of the total global AUM in 2022 but contributed half of the total global revenues.

Among alternative assets, Private Equity offerings have been popular in recent times because of the repricing and valuation corrections experienced due to tightening liquidity conditions. Wealth Managers have been cautious in advising clients in digital assets, especially cryptocurrencies, because of the huge fluctuations in value, and uncertain regulatory environment. However, interest in relatively safer digital assets like tokenized real-world assets (RWAs) is showing an uptrend.

Alternative assets are inherently more complex in many dimensions – liquidity, regulation, pricing etc. WM firms need to acquire both the talent in terms of trained advisors who can effectively manage the risks involved, & the technology in terms of trading & custody ecosystems to manage this asset class. Boutique firms specializing in Alternative Assets also pose serious competition to WMs in the conventional asset space, in acquiring market share.

Acquiring ESG & Alternate Assets Investing Capabilities

While diversification into these new asset classes through organic growth is an option, considering the specialized talent and technology platforms required to advise on & manage these asset classes, and time to market, WMs are looking at Mergers & Acquisitions (M&A) as a serious alternative. Both in the US & Europe there is increasing interest in acquiring additional capabilities, customers & markets through M&A. M&A activities had shown significant growth in 2021 & 2022. In terms of actual deals, the number of deals in the US wealth management sector for the 12 months ending May 15, 2023, is higher than the more than 300 deals concluded in 2021.

Some recent examples of M&A with focus on acquiring ESG and Alternative Assets investment capabilities are:

Acquiring ESG & Alternative Assets investment capabilities presents an opportunity to WM firms to grow their business & also avenues for increasing fee income.

Co-authored by Eswaran Swaminathan, and Venkatesh Padmanabhachari

Maveric’s thought leadership series – E.D.G.E (Experiences Delivered by Global Experts) – handpicks the game-changing technology ideas and pressing functional questions financial institutions must solve today.

About Maveric Systems

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Leveraging Technology For Wealth Management Operational Efficiency

Profitability Pressures

The average global operating profit margin of Wealth Managers fell by 11.6% between 2020 & 2022. Wealth Management (WM) firms have been feeling the pressure of rising cost of operations, with personnel cost estimated to be a major factor. The pre-tax profit margins of WM firms declined by a little more than 12% between 2020 & 2022. This is in addition to revenue pressures due to contraction in Assets Under Management (AUM) due to macro-economic factors, fee income being impacted by increasing shift to passive investments, especially in the US geography, & competition from fintechs.

A technology transformation initiative with strategic objectives focused on leveraging technology to simplify operations, increase efficiency & reduce costs would be needed to address this.

Process Automation

With the goal of operational cost reduction and profitability improvement, tools for focused point-automation could contribute to larger operational transformation. Some examples of point-automation opportunities are:

1) Robotic Process Automation (RPA):

RPA has emerged as a key option for automation of voluminous manual processes like customer onboarding.

Customer onboarding has been a time-consuming and highly manual process in the Banking industry in general, given the large number of documents to be handled and KYC requirements to be complied with. This has gained focus in the wealth management business too, with businesses expanding to cover the affluent segment customers, increasing the number of customers. OCR is the main technology used for data capture from the physical forms and feeding into the systems. This had a handicap of being able to process only structured data and low success rate in processing handwritten data. Customer onboarding typically involves forms hand filled by the customer & investment manager’s front office staff. This also involves handling a lot of unstructured data in terms of different formats, different kinds of documents depending on the client segment, region, etc.

Improvements in OCR cameras and AI capabilities in terms of Natural Language Processing (NLP) & Machine Learning (ML) have now made it possible to automate customer onboarding to a large extent. Business rules can be defined to handle exceptions in terms of missing documents, information etc. This also comes in handy for audit & due diligence requirements during mergers, etc.

Another use case for RPA based automation is the extraction of data from physical financial statements, market reports etc. for financial analysis, which again has the potential to reduce manual effort & nimprove productivity.

2) Open API Architecture:

Investment managers often have access to a lot of ‘client permissible’ financial data from client systems, like portfolio performance & holding details with other investment managers, gains or losses from other investments or other sources of income, etc . to fine tune investment strategies, tax loss harvesting, etc. WM firms also integrate with external stakeholder systems like embedded service providers.

Adoption of an Open API based architecture helps automate these interfaces and automated processing of data & feeding to transaction systems.

Cognitive Technologies For Improving Productivity:

Predictive AI brings tremendous capability for deep personalization in identifying individual client preferences and tailoring the offerings.

Generative AI is increasingly being used for automating the administrative functions of financial planning – customer communication, market and investment analysis, etc. – for the advisor, helping free up time for improving quality of advice. A notable example of recent initiatives in this space is Tifin.AI, launched jointly by fintech Tifin & J P Morgan. The venture is an innovation platform that will enable fintechs to develop AI powered WM solutions for portfolio insights to advisors, enabling alternative investments, and employee benefits wealth management, based on Tifin.AI’s conversational AI framework.

Some examples AI enabled automation are:

1) Advisor Marketing & Communication:

Solutions based on generative AI software like Chat GPT help advisors deliver effective & highly personalized communications to their clients & prospects, relating to their portfolio and / or financial education. Some examples are:

2) Investment Assistance:

AI powered tools for market analysis & forecasting. Some of the solutions that have emerged in recent times in this space are:

3) AI Powered Robo Advisors:

Robo Advisors traditionally use algorithms to arrive at investment decisions based on a set of parameters like financial goals, risk tolerance etc., to select the right asset. AI enabled Robo Advisors use Machine Learning (ML) to create the best fit for the customer and automate use of customer financial data for tax loss harvesting, an enabler for offering Personal Indexing at scale.

With continuing evolution of digital & cognitive technologies, organisations need to continuously look out for opportunities to leverage them for improving operational efficiency.

Co-authored by Eswaran Swaminathan, and Venkatesh Padmanabhachari

About Maveric Systems

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