The research focuses on the impacts of COVID-19 on the retail asset management market and high-net-worth individual wealth management market. Despite adverse market impacts, some trends pre-COVID are expected to continue after the global pandemic. One of the market growth drivers is high-net-worth individual investors who embrace new products and innovative business models built on digital technologies.
- Due to the COVID-19 global pandemic, the MSCI World Index (large- and mid-cap) plummeted by approximately 30% from its peak in less than a month. As shown in the chart below, the crisis is comparable to the 2000/01 tech bubble burst and 2008 global financial crisis; the latter two events resulted in an index decline of 44% in four years and 40% in six months, respectively.
- Despite concerns over the issue of suitability and liquidity, retail investors are expected to gain increased access to private market investment, such as private equity, real estate, private bond and infrastructure. Olive Wyman suggests allocating 5% of portfolio assets to venture capital DC schemes. This is driven by a broadened secondary market with improved liquidity, innovative investment vehicles, “challenge of lower-for-longer investment environment”, and better-handled liquidity restrictions.
- Under an uncertain economic environment, private market investment is a potential growth opportunity for some asset managers. If their target clients are retail investors, asset managers are expected to face the challenge of structuring new products or building a secondary retail market that is likely to experience urgent cash need. Successful asset managers should “quickly establish, scale and industrialize these new capabilities.”
- Effective from June 30, 2020, the US SEC has put in place a Regulation Best Interest (Reg BI), which aims to help retail investors better understand and compare services offered by various dealers and advisers in the asset management industry. Reg BI raises the standard of conduct for the asset management industry and protects individual investors.
- Similarly, on May 6, 2020, the European Securities and Market Authorities (ESMA) issued a statement that specifically warns retail investors about the risk of trading under the uncertain and unprecedented time of COVID-19. ESMA has also urged investment firms or asset managers to act in the best interest of clients and comply with the MiFID II conduct of business when providing investment advice and associated services.
- The UK is known to be the home of wealthy individuals and professional wealth management services. Although the market has weathered through several economic shocks in the past, the COVID-19 health crisis has caused a significant reduction of fee-based income in the advisory service sector where 45% of wealth managers’ income originates. Fortunately, transaction revenue improved during the same period due to new investment at the market trough, hence, the overall revenue decline in June 2020 was less than anticipated.
- During the pandemic, remote communications and digital asset management technologies have become a critical investment for wealth managers to engage retail clients and identify new revenue opportunities. For example, Goldman Sacks plans to offer digital wealth management platforms for individual investors who could not afford bespoke financial services. High-net-worth investors are expected to embrace new business models based on digital technologies, such as “digital communication channels, hybrid advisory models, and opening clients to an ecosystem of a broad set of partners.”
- As shown in the chart above, there is an increasing number of wealthy individuals in Asia. As a late mover in wealth management, retail banks in Asia are expected to leverage their existing depository relationships to drive the growth of trust-based and client-centric wealth management business. Simple and appealing solutions are expected to be effective in winning clients in markets where there is a limited number of established wealth management service providers.
- Due to income pressure, the cost-to-income ratio (CIR) in the UK wealth management sector has worsened from 63% in 2017 to an expected 83% in 2020. Among other factors, cost concerns are expected to propel mergers and acquisitions and secure more high-net-worth individual investors from the consolidation. For example, Standard Life Aberdeen acquired the advisory division of Grant Thornton and the Northern Ireland wealth division of BDO in 2019. To address the issue of heightened CIR, Oliver Wyman recommends some tactics used to reduce CIR in the future, as illustrated in the chart below:
- COVID-19 has disrupted the steady growth built up in the global wealth management industry over the past decade. High-net-worth individuals are key industry clients and expected to be a growth driver of the global asset management industry. As to the base case scenario, Olive Wyman expects the wealth management industry to decline by $3.1 trillion (4%) from 2019 and return to growth in 2021. Facing this impact, Olive Wyman recommends a series of measures to boost growth, namely client relationship management solutions using digital technologies, cost-cutting measures, acquisitive growth models, and differentiated products, such as “sustainable investing, private markets, protection products and digital assets.”
- With the expected recovery of asset prices, as illustrated in the chart above, the optimistic scenario predicts the global wealth of high-net-worth individuals to reach $80 trillion in 2020, a marginal growth of 0.9% from 2019. In the next five years, the growth between 2019 and 2024 is expected to be 5.6% and reach $104 trillion, according to research by Oliver Wyman and Morgan Stanley.
- COVID-19 is an accelerator of impact or ESG investment. For example, Vancity, a credit union that offers investment management services in Canada, has launched the Unity Term Deposit, a new investment product. This product allows retail investors to support businesses experiencing hardship and negative social consequences during COVID-19.
- Both private and institutional investors are expected to stabilize their investment portfolios that were impacted by COVID-19. Investors are advised to “quickly develop and implement cost-optimization strategies for protecting their franchises.”
The research reviewed a series of industry research reports and news releases, primarily by consulting firms, such as Oliver Wyman, BCG, Accenture, Deloitte, McKinsey, and news agencies, such as Financial Times and Forbes. It focuses on the retail/private asset management market and high-net-worth investors in the wealth management market. Some impacts caused by COVID-19 are expected to prevail after the global pandemic, which is treated as trends. Because there is limited information on COVID-19’s impact on asset prices, the research team provides some statistics on the changed value of the World Equity Index and the wealth of high-net-worth investors associated with COVID-19.