Capgemini have just released their 2020 Global Wealth Report revealing the excessive and often well-hidden wealth management ‘fees’ to be a key disruptor.
But what does the increasing concern surrounding fees really mean for you? And how might this permanently shake up the traditional wealth ecosystem?
We unpack exactly where this discontent is coming from, what traditional wealth firms need to do, and the role of digital solutions from big tech and wealth tech.
Where it all began
Around the start of 2020, pre-coronavirus, Capgemini surveyed more than 2,500 individuals in the wealth management space. The results overwhelmingly showed that fees were a principal topic on wealthy investor’s minds . And more specifically, their frustration over the fees they were paying. We don’t blame them.
Two statistics that support this are:
- One in three individuals, with more than $1 million worth of investable assets, were uncomfortable with the fees they paid last year. This discomfort has undoubtedly risen in today’s volatile markets.
- One in five individuals plan to switch their primary wealth management firm in the next year. The top reason being high fees.
These results come as a shock to no-one. The fee structure in wealth management has been under growing pressure and scrutiny for quite some time. But why have more and more investors started to voice their discontent now?
Breaking down exactly why clients were uncomfortable with the fees they paid, we can see the core reasons are: a lack of transparency (47%), performance (41%) and value received, versus the fees they are charged (39%).
Transparency in Wealth Management
The wealth management industry is notorious for including obscure fees. Such as signing fees, exit fees, maintenance fees, performance fees and so on that may catch an investor off-guard. As fees are taken from returns, and not paid directly by the investor, investors do not realise how much they’re actually paying in fees.
Firms push the responsibility on the investor to do their own due diligence. To check their fees either through reading the small print or going through their long reports from wealth managers.
These excessive fees will quickly eat away at your returns on your hard-earned money. Resulting in a significantly smaller pot in 25+ years. This shouldn’t be the case, and many investors are arguing for full pricing transparency.
While a lot of this discontent has grown over the last few years, a lot of this sentiment has been accelerated by the coronavirus pandemic.
This is because the coronavirus generated extreme market volatility which shook up a lot of investors and their investments. It’s very common for investors to pay more attention to the fees they’re paying in times of market volatility. This is because high fees can quickly cut into meagre returns. So, if your returns are dropping, once the fees are taken out, you’ll be barely left with anything.
On the flip side, in great market rallies and long bull runs, investors tend to focus more on making great returns. So, if one wealth manager charges crazy fees, but has a reputation of outperforming the markets by a significant margin. An investor would probably still go for that manager as the fees don’t matter as much.
Wealth Management fees
Expectations surrounding fees have changed – it’s all about value for money now. Wealthy investors want to know what wealth managers bring to the table. What makes your service worth the fees, and am I getting the most out of my money?
Wealth management firms must be able to justify their fees. Or at least match rising expectations for clients with highly personalised or value added services.
Similarly, firms must revisit their cost structure to build a more resilient business model. This is because more investors are becoming savvy about the hidden fees. The growing discontent is proven to be a great enough force to compel someone to move wealth management firms altogether.
Ultimately, this is a matter of survival. Wealth management firms that do not listen to their client’s discontent will quickly find themselves losing out. Investors will find a different firm that offers higher value for money.
The role of big tech and wealth tech
When it comes to fees, big tech and wealth tech pose significant threats to traditional players in the industry. This simply boils down to the perception many HNWI have around technology focused companies.
- Nearly one fifth of HNWIs believe that big tech can deliver services better than incumbent firms. Naturally, the greatest area tech firms can blow out the competition is in value added services – essentially value for money.
- Customers have come to expect a hyper personalised experience based on their interactions with big tech firms. (Francesco Bracchi, deputy COO). That points to why HNWI are so willing to engage with big tech firms in the wealth management space. What wealth management company is going to outdo FAANG in hyper-personalisation? For more on the hyper-personalisation trend, you can read our other blog post.
Partnering with wealth tech firms
Wealth tech companies have the advantage of flexibility and agility. Many have already built their entire value proposition models around transparency, hyper-personalisation, and value added services that give investors a far better value for money.
On the other hand, traditional wealth management firms do not have the time or capital to develop these projects in house. This leaves firms with two options. They can either invest in AI technologies and analytics to build in-house capabilities while leveraging a collaborative ecosystem. Or they can partner with existing wealth tech companies to enhance their capabilities from the ground up.
Many experts are predicting the adoption of wealth tech solutions will become the new norm.
Most of the discontent from HNW investors highlighted is simply the latest signs of the pressure the traditional wealth management industry is under to reconsider their business propositions in line with today’s expectations. The coronavirus has served to exacerbate this. With market volatility causing many investors to look more closely at their fees. Ultimately, the clock is ticking for traditional firms, and if they don’t adapt then one of the big tech firms will certainly swoop in.
That’s exactly why we built ARQ. Trust and transparency are of key to us. We know how important it is to include every detail, as well as how deceiving it could be to leave information out. We show you exactly what your fees are, how much you’re paying and how well you’re performing.