The US wealth management industry will maintain its global dominance largely unchallenged in the medium term, the new Financial Services Observer published by Morningstar suggests.
Morningstar used Capgemini’s World Wealth Briefing report for 2013 which estimates the number of high net worth investors in the US to be just over 31% of the world’s high net worth population of 12 million.
The only notable exception to the US dominance in the industry will be China, which is expected to double its holdings of private wealth between2002 and 2017 to $28 trillion, becoming the second-wealthiest nation in the world, the report says.
Shifting to a new business model
Morningstar’s report examines the competitive shifts in the US wealth management industry as well as companies’ responses to industry changes following the financial crisis. The most relevant takeaways outlined in the report are the following:
– The HNW customer segment — with between $1 million and $20 million of investable assets — is increasingly competitive. US households in this category control more than half of US investable assets. Wealth controlled by HNW individuals in the United States is expected to rise at a compound annual rate of 7.3% through 2015.
– Wealth growth in the US and other developed markets will be largely determined by market returns rather than new wealth creation. Morningstar foresees a growing need for financial advice, as baby boomers retire and try to live on their savings. In the US, the Bureau of Labor Statistics expects the number of financial advisors to grow 32% between 2010 and 2020.
– Financial services companies are competing for advisors as well as clients. A majority of advisors have moved from wirehouses to independent advisor networks with a definitive shift away from transaction-based to fee-based revenue streams. According to the research, this is due, in part, to the regulatory environment having increasingly required significant investments in technology and compliance systems, and the market has become more segmented as wealth managers focus on the type of investor they can best serve.
– Despite some withdrawal from the US market, the report outlines that that changes in bank regulation are increasing competition in wealth management. An important reason for this is that now-higher regulatory capital requirements have increased the relative attractiveness of capital-light businesses like private banking. A variety of financial services firms, including Morgan Stanley, Bank of New York Mellon, and US Bancorp, have all announced plans to expand their wealth management practices in the coming years, for both capital and strategic reasons.
– Charles Schwab is a more successful wealth manager for the mass affluent customer segment — those with less than $1 million in investable assets — while Bank of America’s large size and scope of services could create a strong competitive advantage for serving both HNW and mass affluent clients.
– Raymond James is a financial services firm that is well positioned to compete in the HNW customer segment, because of the firm’s unique business model in employing advisors.