Finding Opportunity in Interesting Times: Wealth Management in 2022 and Beyond

In 1966 Robert F Kennedy gave a Day of Affirmation address in front of students and faculty of the University of Capetown in Capetown, South Africa. In it, he stated that:

“Like it or not, we live in interesting times. They are times of danger and uncertainty; but they are also the most creative of any time in the history of mankind.”

This quote is strikingly familiar. Kennedy could easily have been describing the world we find ourselves in, here, heading into the Spring of 2022.

In my recent blog, Navigating the Industry's Headwinds in 2022 and Beyond, I spoke about how asset management firms are facing pandemic-strengthened existing headwinds, exposing the flaws within many investment firms’ operating models.

The same is true for the wealth management industry. Many of the themes I highlighted as driving the asset management industry are also pushing wealth managers. Client demands for alternative investment products and an ever-increasing focus on ESG are both high-impact trends for wealth management firms. Likewise, the M&A activity we see in asset management as firms push for scale and growth opportunities is mirrored for wealth managers as consolidation within the industry continues unabated.

While these trends are important, they aren’t occurring in a vacuum. I find that any discussion of the types of trends that have been fundamental in shaping the industry landscape for the past several years has to acknowledge that we — firms, clients, advisors, vendors, and everyone in between — are living in a time of unprecedented change. Two themes, in particular, are worthy of attention: macro-economic uncertainty and foundational social change. Taken together, these themes are at the root of many of the trends we see in the industry and understanding them is paramount to understanding how to survive—and thrive—in these interesting times.

Macro-economic Uncertainty

Macroeconomic uncertainty reaches far into our industry — via clients nervous about investments or looking for new ways to mitigate risk, firms looking for ways to ensure continued growth in a high inflation environment, and even advisors looking for new and better ways to help guide clients through the current landscape.

Many of the trends we see in the industry currently related to new and different investment products can be linked to a broader backdrop of macro-economic uncertainty coupled with technological innovation. Thanks in part to an extended period of low-to-negative interest rates, income-seeking investors have been pushed toward non-traditional asset classes such as private debt in their search for yield and private equity for uncorrelated market exposure.

This has led to more demand for alternative investment products as advisors look for ways to meet client goals. However, thanks to new technology that allows firms to provide “alternatives at scale”, investment products that were once limited to the ultra-wealthy are starting to make their way downstream. For example, in 2021, an explosion in demand for private debt and real estate strategies occurred as advisors confronted the new reality of high inflation and continued low interest rates. These types of investments were traditionally reserved for the UHNW client, but regulatory reforms and innovative new fund structures (interval funds) have broadened the potential investor base for these asset classes. Additionally, advisors are confronted with client demands for cryptocurrency exposure in the portfolios, which has led to the creation of more crypto-related funds and products.

All of these new investing products offer opportunities for firms. With some, scalability means that firms may be able to push down market and find new pools of prospective end-investors. With others, the ability to offer “best thinking at scale” will allow firms to further differentiate themselves from their competitors on something other than fees. Of course, there are risks, too. But at Cutter we see opportunity in the current macro-economic landscape for firms who are willing to think outside the box.

Foundational Social Change

In addition to economic uncertainty, the very fabric of modern societies is being reshaped. The pandemic may have revealed the fault lines in our social foundations more clearly, but these fault lines are in no way new. By 2020, people were already questioning the legitimacy of existing social norms, shining a light on structural inequality and pushing for large-scale change in the way societies are organized.

The focus on ESG during 2020 and 2021 is only one manifestation of this broader social upheaval. But ESG isn’t necessarily anything new—especially not when it comes to wealthy clients. These clients have demanded access to impact investing and socially responsible investing for years. What’s changed, however, is the willingness of end investors to demand accountability and to comfortably play the role of activists. One recent survey found that almost 60% of polled investors believed that they had a responsibility to help solve social issues with their investments.

This willingness to push for change through investing is even more pronounced with younger investors. A 2018 study of millennial investors found that 89% expected their financial advisor to research ESG performance before recommending an investment opportunity and just under 60% had pulled money out of a company due to the impact that company had on people’s health and well-being. Keeping in mind that around 68 trillion USD is expected to transfer to the next generation within the next decade or so, this propensity to link investing behavior and social responsibility means that the current push for social change won’t be going away any time soon.

It’s easy to ignore foundational social change as not applicable or, worse, mistake social fault lines for political fault lines and dismiss potential ramifications in an attempt to sidestep partisan debates. However, wealth management, along with the financial industry as a whole, will continue to feel the ramifications of current social changes for years to come. We expect this to manifest in a continued deepening of demand for ESG products and with an increased willingness of clients to act as activists. At Cutter, we believe that firms who understand the importance of socially aware products and services, and who are serious about changing their value proposition to better align it with these products and services, will, again, find opportunity in this era of foundational social change.

Although the wealth management industry today continues to be an industry characterized by rapid change, we also see clear opportunity for firms who can respond flexibly and creatively to this change. As the industry continues to transform, we at Cutter remain committed to helping wealth managers adapt their operating models and find opportunity in the interesting times we live in.

For more on trends impacting wealth managers and asset managers now and into the future, read our recent whitepapers: Trends in Wealth Management: 2022 and Beyond and Trends in Asset Management: 2022 and Beyond.