Wealth management is big business. The Boston Consulting Group estimated there was $74.3 trillion of global assets under management (AUM) for the year 2018. As long as that amount continues to grow, private wealth management and financial advisory services will grow right along with it.

Key Takeaways

  • Wealth management is the professional work of investing and growing assets while also minimizing risk and preserving wealth.
  • The wealth management industry worldwide is estimated to hold nearly $75 trillion AUM, making it an enormous industry.
  • More than half of managed assets belong to institutional investors like banks and funds. The rest belongs to smaller organization or individuals.
  • The wealth management industry was shaken during the 2008 financial crisis, but has since re-emerged, seemingly unscathed.

Defining Wealth Management

The Boston Consulting Group's report disclosed that $45 trillion, around 60%, of global managed assets, belong to institutional investors. A lot of institutions manage their own assets; fees on managed accounts quickly add up when dealing with millions or billions of dollars.

Institutional dollars certainly matter to the wealth management industry, but they are a world removed from the common conception of a personal financial advisor. Wealth management is an enormous field; it's difficult to nail down what kinds of services count as wealth management.

Wealth managers are different from brokers, who simply coordinate buyers and sellers and execute trades in the market. Most wealth managers brand themselves as stewards of assets and financial life coaches. They incorporate financial planning with tax services, help target significant life purchases, and some might offer estate planning. They may work in firms or as independent consultants. They may target businesses or individuals.

Wealthier clients require more services and poorer clients tend to be transactional. The defining feature, however, is that a wealth manager identifies a specific plan for the client's financial future.

A Shifting Environment

The 2007-2008 financial crisis changed the wealth management industry. Financial professionals all over the world came under increasing regulatory scrutiny, and consumers viewed the industry with a new sense of skepticism and, in some cases, contempt.

Moreover, a lot of wealth evaporated in the recession. Assets fell almost across the board in many countries, creating a difficult transition before ending with a lot of opportunities. Most traditional assets appreciated a great deal between 2010 and 2014 on the back of worldwide easy monetary policies.

The losses were as deep as they were fast. Between 2007 and the end of 2008, North American AUM plummeted 36%. The losses were at 25% in Europe, 25% in Asia and 14% in the Middle East. Global wealth management revenue dropped by more than one-third. By 2015, the recovery had been nearly completed.

Not every region recovered the same, however. European firms were particularly hard hit, and wealth managers in Europe are still seeing revenue at levels 20% below those of 2008. Switzerland, the United Kingdom, and the United States remained the largest wealth management hubs, while Hong Kong and Singapore were the fastest rising markets for new client assets.

This shift corresponds with a move away from the traditional advisor relationship. New wealth management fronts, including automated advisors and digital controls, offer low-cost and transparent alternatives in an industry predicated on fees and commissions. However, the Bureau of Labor Statistics estimates a 27% growth in new personal financial advisor positions through 2022 – much faster than the average for all jobs.

The Future of Professional Wealth Management

From billionaire fortune management to small-level personal financial advisors, the heart of wealth management is a value proposition: it's a promise of financial returns and security that exceeds whatever fees are associated with the service.

That value proposition was seriously challenged in 2008. Advisory clients, many of whom had played the game according to script for decades, were left holding the tattered scraps of their property values, 401(k) and IRA portfolios, and other assets exposed to the tumultuous market. Uncomfortable clients are more likely to avoid paid advice and gravitate towards self-direction.

Modern clients want more control at lower costs, which leads to a lot of disruption in the industry. New services and younger advisors present a very different value proposition than their older contemporaries. With nearly $75 trillion up for grabs, the market isn't lacking for new entrants and fresh ideas.