Strategy
Mass-Affluent, Lower HNW Market – Are Wealth Managers, Banks Cracking The Code?
In this news analysis, the editor examines whether firms have figured out decisively how to cater to people with between $250,000 and just above $1 million of investable wealth – a sector arguably calling for more ways of thinking about "mass-customisation" and other capabilities.
Last year, when Capgemini issued its annual
health check on the state of the world’s high net worth wealth
market, it devoted a few pages to the “mass-affluent” sector:
those with investable wealth from $250,000 to $1
million.
Why does this sector matter? It is important because, as
Capgemini noted, “expanding the pool of potential wealth
management clients is now an imperative to help drive long-term
growth across the industry.”
And, in a report last October, Citi Ventures - the venture
capital arm of Citigroup - said that
even the lower reaches of the high net worth market
(“millionaires next door”) are underserved, given
that rising cost pressures are prompting banks to raise
their minimums. (See the
report here.)
THe voices of those discussing the topic are getting louder. For
example, management consultancy Synpulse explained in
an article here about how Asia’s mass-affluent client segment
deserves more love and attention from wealth management
businesses.
Mind the gap
If the financial market has a binary option of retail (highly
digital, affordable and plain vanilla) at one end, and private
banking (complex offerings, bespoke investments, concierge
services, lots of in-person RM contact, structuring advice, etc)
on the other, this means that a person on their way up the wealth
scale faces a sudden jump from one level to a different one.
There’s no “in-between." This is a jarring experience when
onboarding, different scrutiny and complete change in offerings
are involved.
Also, given that millions of people will not make it to the HNW
level – or even want to – they are missing out if all they can
get is retail. The same happens if an HNW individual becomes
poorer and is “relegated” back down to retail, instead of being
offered something else. Such options also reduce the frictions
and client attrition that can follow. (Arguably, the
“de-banking” saga at Coutts last year may have been
partly avoided had NatWest, Coutts’ parent, taken a different
approach to moving a certain prominent client to a different bank
platform.)
Citi Ventures said that there is a clear gap in the
market, ranging from lower-tier HNW individuals to the
mass-affluent space.
“Despite currently holding almost $55 trillion in wealth –
roughly double the wealth held by UHNWIs – lower-tier HNWIs are
being underserved in terms of the financial products they have
access to,” Citi Ventures said. “Often lumped together with the
mass affluent segment ($100,000 to $1 million in liquid assets),
these lower-tier millionaires tend to be offered stock- and
bond-based investment products and related margin loans because
the retail wealth managers who service them lack access to more
sophisticated products.”
Citi Ventures continued: “While the more enterprising
members of this group may cobble together access to certain
alternative investment products on their own or through platforms
like iCapital (a Citi Ventures portfolio company), this “hack”
does not quite match what the wealthier segments are able to
obtain.”
It appears that, while a number of banks and other firms – some
using modern technology – seek to serve the MA market, it is a
challenging field, requiring firms to master what, in
management-speak, is called “mass customisation.”
The opportunity
Gauging the mass-affluent market correctly is lucrative:
“With nearly $27 trillion in assets – almost 32 per cent of total
HNWI wealth – and a large and increasing population base, the
affluent segment dominates a sizeable chunk of the wealth
pyramid,” Capgemini said in its World Wealth Report last
year.
The consultancy even came up with the idea of
“wealth-as-a-service” (WaaS) to explain how the mass-affluent
market can be served.
“A growing financial services (FS) business model is
Banking-as-a-Service. FS firms leverage open application
programming interfaces (APIs) to embed regulated products within
the platform of an FS or non-FS third party. Likewise,
wealth-as-a-service can enable WM firms to package core
capabilities into modules and embed them with third-party
partners, such as retail banks or independent advisors,” it
said.
Mass-affluent growth outpaces
“Globally, the middle class is advancing in size and financial
clout and is driving the growth of the affluent wealth band,
Gareth Wilson, executive vice president, head of UK banking and
capital markets, Capgemini, told this news service.
In the US alone, $72.6 trillion in assets is likely to be
transferred to children and successors by 2045 as part of “the
great wealth transfer,” he noted. In the UK, this transfer
will possibly cover £5.5 trillion (more than $6.8 trillion) over
the next 30 years.
“Despite considerable revenue potential, wealth management firms
are yet to find their way in terms of how best to address this
affluent segment profitably,” Wilson continued.
But given the sheer scale of the financial sums, firms are
starting to rethink their segment strategies.
Wilson said UBS launched
wealth management services in October 2022 for affluent wealth
band clients in China via its WE.UBS digital platform, for
example. The quick-to-onboard, AI-intelligence-driven platform
offers local and global investment products, investor education,
and around-the-clock market activity tracking, he said.
Another point that feeds into how mass-affluent services can work
is technology.
Customer expectations are becoming increasingly digital, and are
rapidly increasing in line with the other aspects of their lives,
such as Uber, Wilson said. “Similarly, wealth management
customers want an intuitive, digital access to all elements of
their portfolio. Firms need to develop capabilities to deliver a
personalized, omni-channel experience that empowers investors and
enhances relationships,” Wilson said.
And this leads to the mass-customisation point.
“Administrative overload causes relationship managers’ advice and
service delivery to suffer. Less time spent by RMs on
customer-facing activities leads to an inability to personalise
advice and deliver value-added services. An improved digital
infrastructure and mature omni-channel platforms can boost the RM
efficacy,” he said.
Chores
Data reveals why mass-affluent is a hard area. Capgemini found
that in its survey of 800 relationship managers across 10
markets, RMs spend 67 per cent of their time engaged in
non-client-related activities.
This meansthat AI-driven workflows could boost
productivity.
“AI can deliver efficiency gains with automation of KYC and AML
processes, deliver insights for RMs to make investment decisions,
and enhance client experience by providing personalized content
and recommendations,” Wilson said.
And firms will be mindful of the cost margins – a force that
explains why private banks have hiked their
minimums, putting the squeeze on mass-affluent clients.
The typical cost-to-income ratio for wealth management firms
ranges between 65 per cent and 70 per cent, Capgemini said in its
report last year.
The view from North America
Rob Pettman, chief revenue officer at TIFIN, an AI innovation
platform, outlined the issues from a US perspective, focusing on
sectors such as registered investment advisors and banks.
The underlying issue concerns operational efficiency or, in
many cases, inefficiency. The question is how to deliver
customised bank/other services at scale, Pettman said.
Many US private banks, he said, operate off a trust platform, and
this way of working involves more complexity and is therefore
more expensive than, say, an RIA typically would be, he said.
With a trust platform, Pettman explained, one needs to have
fully-disclosed accounting – paying for each account and
transaction on the system; there are operational requirements,
which add steps that may be unnecessary for a non-trust
account.
“Furthermore, the technology is not as advanced, and the
integration with third parties is also not as well established as
it is within the RIA marketplace,” he said.
There is also more turnover with mass-affluent business models,
which creates challenges of its own, Pettman said.
“Mass-affluent banking/wealth business models typically have a
higher attrition rate for clients than, say, HNW banks or retail
banks. In comparing banks who serve the mass affluent investors
which results in a higher advisor to client ratio, the attrition
rate is higher than what you would find with an RIA or financial
advisor model where the ratio is lower.
“The banks will have higher net new investor capture rates vs the
other models, and so where other wealth firms may focus on
bringing in more investors as the problem to solve given the
attrition number is not as meaningful. Growth of a bank platform
can be solved on both sides of the spectrum – lowering attrition
and bringing in new investors,” he said.
Some firms are happy to operate in the mass-affluent space.
Canada’s Wellington-Altus,
which this firm
has interviewed about its business model, says 80 per
cent of its market is mass-affluent.
“We are very comfortable with that and we are able to offer high
quality to a larger market,” Shaun Hauser, founder and CEO of
Wellington-Altus, told this news service.
Switzerland
In Switzerland, there’s the example of Alpian, a digital bank and part
of the REYL Intesa Sanpaolo group. Alpian
was launched and incubated by Reyl in 2020. At
that time, target clients were those with investable assets
ranging from SFr100,000 ($109,294) to SFr1.0 million, a field
covering more than 2.6 million people in the Alpine state. In
2021, the former Alpian CEO explained that Alpian was focused on
the challenge that many Swiss/other clients had in making the
step from retail to private banking, because there was a lack of
something in between – the “mass-affluent” space.
Time with clients
TIFIN’s Pettman said that one difficulty for delivering advice at
scale is the fact that RMs can only deal with so many clients. In
the US, for example, the Securities
and Exchange Commission requires advisors to have a meeting
at least once a year with a client. They don’t necessarily have
to be in person, or last an hour, but that imposes a cap on the
RM/client ratio.
“Technology is going to play a major part” in fixing this sort of
issue, Wilson said.
But while there is work being done – the UBS example is
one – there remain problems, as Citigroup, as previously
mentioned, noted.
One Geneva-based private bank, for example, told this publication
that it had shut its doors to such clients, sadly, because they
weren’t profitable.Increasing regulations and rising technology
costs mean that the minimums of investable assets keep going up.
Even the $1 million minimum that Capgemini still uses (it has
used it for over 20 years) to define “high net worth” looks
seriously out of date, given the ravages of inflation.