Wealth management is a big business. In fact, the Boston Consulting Group estimated there were $89 trillion of global assets under management (AUM) in 2019. As long as that amount continues to grow, private wealth management and financial advisory services will grow right along with it.
But it's really hard to nail down at what lengths the industry will grow because of the evolution of financial products, the changing needs of individuals, and the economic conditions that we face. Despite this, we explore the wealth management industry, the landscape for the industry, and what the future may hold.
- 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 $89 trillion in 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 organizations or individuals.
- The wealth management industry was shaken during the 2008 financial crisis, but has since re-emerged, seemingly unscathed.
What Is Wealth Management?
Wealth management is one part of the financial industry. Professionals who work in this discipline combine investment advice with other financial services tailored to wealthy clients. These individuals discuss their financial situation and goals with wealth managers and financial advisers who, in turn, make suggestions on different investment vehicles.
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 and may serve either businesses, individuals, or both.
Wealthier clients require more services and clients whose incomes are below the federal poverty threshold tend to be transactional. The defining feature, however, is that a wealth manager identifies a specific plan for the client's financial future.
Wealth management is different from private banking, which provides financial management services to high-net-worth individuals.
Institutional dollars certainly matter to the wealth management industry, but they are a world removed from the common conception of a personal financial adviser. A lot of institutions manage their own assets. That's because fees on managed accounts quickly add up when dealing with millions or billions of dollars. According to the Boston Consulting Group's report, $52 trillion, around 58% of global managed assets, belong to institutional investors.
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.
A great deal of wealth evaporated during the recession. Asset values fell almost across the board in many countries, creating a difficult transition before ending with a lot of opportunities. According to the Federal Reserve, households lost 20% of their wealth across the U.S. between 2007 and 2009. 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 and were felt all across the world with global wealth management revenue dropping. By 2015, the recovery was nearly complete.
Not every region recovered the same, however. European firms were particularly hard to 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. Hong Kong and Singapore were the fastest rising markets for new client assets.
This shift corresponds with a move away from the traditional adviser relationship. New wealth management fronts, including automated advisers and digital controls, offer low-cost and transparent alternatives in an industry predicated on fees and commissions. The Bureau of Labor Statistics (BLS) estimates a 4% growth in new personal financial adviser positions from 2019 through 2029.
The Future of Professional Wealth Management
From billionaire fortune management to small-level personal financial advisers, the heart of wealth management is a value proposition. In fact, 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 the script for decades, were left holding the tattered scraps of their property values, 401(k) and individual retirement account (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 advisers present a very different value proposition than their older contemporaries. With about $89 trillion up for grabs, the market isn't lacking for new entrants and fresh ideas.
The Bottom Line
Wealth management is an industry that's always evolving. That's because people's needs change as they get older or when their financial situation reverses course. The industry's landscape changed dramatically as asset values dropped during the Great Recession, which was caused by the financial crisis of 2007-2008. But the recovery—no matter how slow—increased regulation, and new clients entering the market are making this a hot industry.