The global wealth state is on the rise, with a trend of moving from lower income brackets to higher ones. Today, people are three times more likely to have a net worth of over $1m. Given this number, it is no surprise that the wealth management industry overall thrives and develops. Sergei Grechkin writes
For the wealth management industry, the UK presents a particular interest — 14% of the overall population is considered to be high-net-worth individuals (HNWIs). Given the increased funds, market giants are increasing the assets under management. Take, for example, HSBC, which plans to double the assets under management in its British wealth division to $131bn within the next five years.
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However, expansion and growth are always accompanied by a number of challenges. The wealth industry is no exception, and in this article, I will discuss the main impediments that slow down this expansion.
The duality of AI integration
AI has penetrated practically every sphere of our lives. This also applies to the wealth management industry, which has enormous potential, from enhancing client experiences to automating routine tasks. The wealth management firms understand this potential: 62% of them admit that it will significantly upgrade their operations.
Another report suggests that a hybrid advisory model, combining human expertise with AI, is set to become the norm. Investors are largely receptive to AI in their investment experience, with over 90% favouring its use for researching financial products and services and over 80% supporting its role in assisting advisors with portfolio management.
Despite a number of advantages, this shift still comes with considerable challenges. Integrating AI demands significant investments in technology and infrastructure, along with upskilling staff to adapt to new tools. But it’s not the end. Wealth management firms must be careful and consider issues related to data privacy, security, black box issues, and the ethical use of AI.
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By GlobalDataCompanies that effectively incorporate AI into their operations will likely be better equipped. However, they must balance embracing technological advancements with managing the potential risks involved. This requires all-rounded experts with a deep understanding of AI and ML. At the same time, these experts should have strong expertise in asset and risk management.
Regulatory hurdles and stricter oversight
As the wealth management industry expands, regulatory oversight continues to strengthen. New technologies, such as digital assets, only make this problem worse as the landscape becomes even more complex. To endure this changing landscape, wealth management firms must invest in robust risk management and compliance frameworks and stay ahead of regulatory changes. 74% of European wealth managers understand the problem of growing regulatory demands and increase investments in their compliance departments.
In an industry where reputation is critical, firms that can anticipate and respond to regulatory shifts will not only safeguard their operations but also enhance their competitive advantage. Failing to prioritise these issues could lead to significant financial losses, a decline in client confidence, and long-term damage to the firm’s credibility and eventually, market disadvantages.
Meeting Client Expectations Against Talent Shortages
In the era of services taking a major share in the economy, clients become highly demanding. Clients’ concerns lie not only in the return dimension but how the company can control and manage the risks. At the same time, they expect higher quality service with personalised and responsible offers. According to the KPMG report, 61% of executives expect to see a significant increase in the level of risk they will be responsible for in the next three to five years. The majority (90%) of businesses have increased their pace of risk transformation in order to manage threats.
68% of respondents believe that integration and interconnection of risk management systems, domains and processes significantly enhanced the effectiveness of risk-related decision-making.
Nevertheless, in order for expectations to match reality, this sector needs skilled staff. Unfortunately, the industry faces a major problem — a lack of talent. Global skills shortages hit a 16-year peak in 2022, with 75% of employers in the banking and finance sector struggling to find the workers they needed. This trend persists even today and marks the ongoing challenges of sourcing skilled professionals.
One of the ways to minimise this problem is supporting a favourable working environment. Research by Deloitte involving 300 senior investment management executives found that a flexible working environment positively influences employees’ perception of corporate culture. Also, establishing and clearly communicating a corporate purpose, particularly in relation to ESG and diversity policies, is linked to enhanced efficiency, increased revenue opportunities, and lower employee turnover.
Sergei Grechkin, is the FRM, Chief Risk Officer at Cayros Capital
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