The world of wealth management—whether for RIAs, IBDs or wirehouses—changes constantly to keep up with market forces, Washington policy, technological innovation and client demand. Every year brings its own challenges, but 2013 is likely to be an exceptionally dynamic year for change.
Whether the change comes internally due to industry growth or externally due to economic and other pressures, wealth managers in 2013 are watching events closely to understand how they might affect their high-net-worth clients, say analysts for the Aite Group in their "Top 10 Trends in Wealth Management, 2013" report published this month.
"Regulations, business and servicing models, and operating models are all still adjusting to the post-crisis business environment, and the main goal for many firms is to finally be able to kick their wealth management business into gear and once more accelerate growth in this line of business," the analysts write.
Aite concludes that "a heavy dose of change" will dominate the sixth year following the start of the financial crisis. Although Aite believes that wealth management profitability will continue a flat growth trajectory in 2013, it also predicts that firms will seek to grow either by providing differentiating and revenue-enhancing services to clients or by reducing the cost of serving clients.
1) Operating and Growth Strategies: Acquisitions vs. Partnerships
In 2012, several of the largest U.S. wealth management firms completed acquisition deals, says Aite analyst Sophie Schmitt. For example: Raymond James completed its acquisition of Morgan Keegan, Morgan Stanley finalized a purchase agreement with Citigroup to acquire the 49% of Smith Barney it does not already own, and Cetera Financial completed its acquisition of Genworth Financial Investment Services.
This year, the largest wealth management firms will continue to pursue growth strategies that involve acquiring or building internally, Schmitt predicts, while small and midsize wealth management firms will choose to expand or update their wealth management capabilities through partnerships with their service providers.
"Clearing firms such as National Financial and Pershing, and third-party broker-dealers such as Cetera Financial Institutions, LPL Financial Institution Services and Raymond James' Financial Institutions Division, will continue to see strong business growth in 2013," she writes.
2) Investment Advice Regs Drive Business Model Changes
The most significant change to the global financial advice industry will take place this year not in the United States but in the United Kingdom and Australia, Schmitt predicts.
As of Jan. 1 in the U.K. and July in Australia, all licensed advisors must move to a fee-for-service model. "Commissions and inducements from product providers will be banned, and advisors can only charge clients an ongoing fee if they provide an ongoing service," writes Schmitt, who adds that wealth management firms in those countries will concentrate technology and services spending on tools to automate and track service.
In the United States, the proposed uniform fiduciary standard for all financial advisors has a better chance of becoming law now that President Barack Obama has won re-election and pro-investor politicians such as Sen. Elizabeth Warren have been nominated to key financial services regulatory roles, Schmitt believes.
"We expect the Securities and Exchange Commission to draft a proposed fiduciary standard rule by the end of 2013," she writes. "This effort will accompany (though not necessarily mimic) a Department of Labor proposal to extend the scope of ERISA's fiduciary standard to all financial advisors when they give advice on 401(k) plans to their own clients or to employees through worksite visits. Implementation of both the SEC standard and the DOL enhanced standard is likely to take place in 2014 or 2015."
3) RIAs Reach for Greater Efficiency
"The registered investment advisor market has been one of the big success stories in the U.S. wealth management industry since the start of the 2008 financial crisis," write Aite analysts Bill Butterfield and Alois Pirker in the report. "RIAs have been able to take between 0.5% and 1% of market share annually from other wealth management industry segments over the last five years."
However, RIAs' small size means challenging operational efficiencies, Butterfield and Pirker say. "Two-thirds of independent RIAs estimated the level of technology integration across their business applications to be 50% or less," they write.
On a positive note, Butterfield and Pirker predict that RIAs' technology and operations disadvantages could soon be a thing of the past due to web-based technologies and software-as-a-service practices.
"A diverse set of firmsranging from custodians like Fidelity Investments, Charles Schwab and Pershing to broker-dealer firms like LPL, Raymond James and National Financial Partners (NFP) to technology players like Advent Software and Morningstarhave all been investing in technology platforms targeted at RIAs," they write.
4) More Intergenerational Wealth Management and Advisor Succession Planning
Advisor succession planning will be a top issue for the foreseeable future, say Pirker and Schmitt.
"Advisors are likely aware that many of their wealthy clients scrambled in the last few months of 2012 to transition a significant amount of their wealth to heirs to take advantage of the generous estate tax exemption that was expected to disappear in 2013," Pirker and Schmitt write. "This transition may trigger the wake-up call that financial advisors need to focus on their own succession planning."
Aite expects that advisors in 2013 will get more serious about finding their ideal successor and connecting them to their clients' children—"the key to their practice's longevity." A 2012 Aite survey of advisors found that 40% of practice owners surveyed wish to transition their practice to another party within 10 years, yet of advisors who are within two years of transitioning their practice to a successor, more than 40% lack a succession plan.
"Advisors who fail to plan for this transition run the risk of seeing a substantial portion of their clients leave the practice following the transition," warn Pirker and Schmitt. To avoid such a fate, advisors should start planning early for a transition, the analysts say, noting that mergers-and-acquisitions consultants suggest starting to plan for an internal succession at least 10 years before the transition.
5) International Firms Reassess Global Operations
8) Cloud-Based Trading
