Mass-Affluent, Lower HNW Market – Are Wealth Managers, Banks Cracking The Code?

Tom Burroughes Group Editor 30 May 2024

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. 

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. 

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.

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