US wealth management: Amid market turbulence, an industry converges

The approaching end of a decade-long run of growth fueled by market performance and net interest income, though somewhat expected, will be a rude awakening for US wealth managers. Over the past ten years, firms grew used to—in some cases, reliant upon—market-driven growth in assets. Assuming that this tailwind is waning, at least for a time, it will soon become apparent which firms remained operationally sharp during the good times and which overrelied on external forces.

The US wealth management industry experienced a significant contraction in 2022 (Exhibit 1). Client assets overseen by the industry declined by $6.2 trillion, erasing almost a year and a half of market appreciation. Market performance accounted for $7.6 trillion of the decline and was offset slightly by $1.4 trillion of net inflows (2.8 percent organic growth). This compares with 6.2 percent organic growth in 2021 ($2.6 trillion), which was bolstered by favorable economic conditions and federal stimulus money.

The saving graces were interest rate hikes, which enabled the industry to fare relatively well despite major headwinds. Over the course of 2022, the Federal Reserve increased the federal funds rate by a total of 425 basis points to the highest level since 2008. Wealth management revenues, profits, and profit margins continued on their growth trajectories, increasing 6 percent, 8 percent, and one percentage point, respectively in 2022, further validating the industry’s resilience and attractive fundamentals.

Performance in the first three quarters of 2023 has remained positive, albeit not as strong as in 2022. Interest rates increased by a further 100 basis points, and equity markets briefly achieved full recovery before sliding again—the S&P 500 was up 9 percent at the end of the third quarter, compared with 20 percent at the peak.

Four axes of convergence

Grappling with shifts in the macro environment is already a stiff challenge for US wealth managers, but another long-brewing trend is close to becoming a permanent feature of the industry landscape. The industry has long been organized along distinct lines in terms of delivery models and client segments. This structure has been gradually loosening, as wealth delivery models of all kinds expand beyond their old borders, shaking off traditional limitations on what services they offer clients and advisers and which clients and advisers they serve.

This trend itself is not “new news.” But thanks to the catalyzing impact of technology and the evolution of client and adviser needs, we are now on the cusp of this convergence solidifying into a new industry structure. Wealth management firms of all kinds have been converging across four axes.

The one-stop shop

More than ever, clients prefer one-stop-shop solutions for financial and other needs adjacent to wealth management. When we surveyed wealth clients in 2018, 29 percent said they prefer holistic advice across adjacent needs; in our 2023 survey, the figure jumped to 47 percent, a 60 percent increase (Exhibit 2). The biggest growth has been in lending and banking services: approximately 30 percent of clients with $1 million to $25 million in investable assets prefer to consolidate banking and wealth relationships, an increase of approximately 250 percent since 2018. Younger investors are even more interested in a one-stop shop: more than 73 percent of clients between the ages of 25 and 44 prefer to consolidate their wealth and banking relationships, up from 20 percent in 2018.

Wealth managers have been responding. Wirehouses started integrating banking and lending solutions years ago, offering central asset accounts to serve as the funding center for their clients’ investment, credit, lending, and debit needs. Several national and regional broker–dealers have followed suit, with some even acquiring banking charters. From the other direction, banks have been enhancing their wealth management offerings for their deposit clients, and banks, custodians, turnkey asset management platforms, and fintechs are innovating across banking solutions to provide white-label lending and cash management solutions for RIAs and broker–dealers. In addition, wealth managers are adding nonfinancial products and services such as trust administration, tax preparation, estate planning, and lifestyle management services to their platforms.

In another sign of convergence, traditional adviser-led wealth managers are offering digital-only options, while digital-direct firms are mirroring this approach and expanding their advisory services. The traditional firms are motivated by serving smaller clients profitably, attracting clients early in their wealth accumulation journey, and accommodating clients who simply like having a digital option alongside an adviser. For their part, digital-direct firms are building advisory offerings to monetize their existing relationships by providing higher value.

Come one, come all

The second axis of convergence in US wealth management is the rise of multisegment platforms, whether segmented by client or adviser, as wealth managers seek to tap into wider asset and revenue pools. The trend holds across almost all delivery models (Exhibit 3).

Consider a few examples:

• RIAs, historically focused on the core millionaire segment, are now expanding into the ultra-high-net-worth segment as most productive wirehouse advisers are starting to break away and start their RIAs as better technology and investment content become more easily accessible. From 2016 to 2022, $10 million–plus relationships grew 13 percent annually in the RIA channel, versus 8 percent for wirehouses and private banks.
• Digital-direct firms are also moving upmarket, with double-digit growth similar to that of RIAs in $10 million–plus relationships between 2016 and 2022, according to our estimates.
• Bank-owned wealth management firms (including wirehouses) are heading down market, rolling out digital-only models to capture a large installed retail banking client base in lower-wealth segments.
• Regional and independent broker–dealers are also competing to attract high-net-worth teams and move upmarket. Between 2016 and 2022, these firms grew their assets with $1 million–plus relationships by 9 percent annually, in line with the industry as a whole.

Meanwhile, individual advisers want the freedom to choose the affiliation that best serves their needs, and many are opting for independent models. Whether they choose a custodian, broker–dealer platform, or employer, advisers need some degree of support from a trusted financial institution. Some enjoy the benefits and support that come with the employee model; some value the greater autonomy of the 1099 independent model but do not want to deal with middle- and back-office complexity; others seek the independence of the RIA model, where they can build their own business. While there is growing adviser preference for independence, a significant portion of advisers prefer W2 employee affiliation with greater support and lower risk.

Wealth management firms are increasingly catering to all of these affiliation preferences. Independent broker–dealers are acquiring RIAs with W2 advisers while enabling 1099 advisers to affiliate with their broker–dealer or corporate RIA. Some of the largest independent and regional broker–dealers are expanding their platform services to include RIA custody to retain the assets of fully independent firms. Additionally, some wirehouses already have affiliated independent channels. Some of the largest and fastest-growing wealth managers have multiple affiliation models to appeal to a broad range of adviser preferences.

Novel approaches to client acquisition

The fastest-growing wealth management firms are taking a fresh look at client acquisition. The traditional approaches—adviser recruitment and M&A, adviser-led, client referrals, centers of influence—are still part of the mix, but many firms are turning to centralized lead generation to boost organic growth, especially among the younger clients. Acquiring client assets in the traditional manner can be expensive. For example, adviser recruitment or M&A is estimated to carry a cost of acquisition between 250 to 300 basis points. New, and more affordable, strategies are emerging in five distinct areas:

1. Retirement and workplace. Wirehouses, independent broker–dealers, and RIAs have made significant investments in the retirement segment by building new businesses or acquiring existing ones. Acquisitions have centered on employee stock option administration solutions, third-party administrators, and retirement plan advisory practices. In that third category, there were 74 acquisitions in 2022, compared with eight in 2017. From the other side, some recordkeepers are bolstering their retail offerings through acquisition and innovation, such as collective investment trusts and in-plan managed accounts, to build wealth management relationships with clients outside of retirement plans. These firms are leveraging their privileged access to prospects through the workplace to gain trust and capture both in- and out-of-plan assets for acquisitions costs as low as ten to 20 basis points.
2. Affiliated self-directed businesses. Digital-direct firms and wealth managers with sizable self-directed business are setting up centralized lead generation capabilities to transition self-directed clients into higher-value advisory relationships. The most successful firms have developed systems across people, processes, and tools to drive acquisition costs down to as low as 20 basis points.
3. Retail banking clients. Bank-owned wealth managers, which have historically relied on in-branch referrals, are increasingly deploying sophisticated marketing techniques and analytics to increase top-of-funnel conversion. They are also actively blurring the lines between traditional banker and financial adviser roles and are introducing collaboration models to maximize client experience. Successful bank-owned wealth managers are acquiring clients from retail banking relationships for between 20 and 70 basis points.
4. Tax, insurance, and ancillary services providers. To better serve clients and gain privileged access to new prospects, independent broker–dealers and RIAs are acquiring firms that provide adjacent services. Recent acquisition examples include tax practices, insurance broker general agencies, trust administration service providers, and business management/CFO services companies. Although centers of influence with tax and insurance providers have been a common practice for many years, these acquisitions are too early in their development to estimate their client acquisition costs.
5. Direct-to-consumer marketing. Many wealth managers are viewing direct-to-consumer marketing as a way to boost client acquisition, often starting with third-party affiliate marketing services. For example, fast-growing RIAs are looking to diversify away from the expensive custodian referrals by building proprietary direct marketing engines. When firms focus on a narrow target segment with the right offer, the right marketing hook, and the right seller at the right time, acquisition costs can be as low as 70 to 80 basis points.

Technology takes center stage

About two decades ago, in response to rising client and adviser expectations, wealth managers began investing significant resources in technology, and the trend is accelerating. In fact, spending on technology has outpaced revenue and cost growth of the industry over the last five years (9 percent versus 8 percent versus 7 percent, respectively, from 2016 to 2021), with a big jump in 2022 (19 percent year-over-year growth, versus 6 percent and 5 percent, respectively). Tech upgrades have spanned adviser desktops and tools, client portals, data feeds and integrations, cloud infrastructure, core tech modernization, and cybersecurity, among others. Today, assembling a tech stack across in-house and vendor solutions is a core competency for wealth managers. In addition, fintech and WealthTech have become key enablers.

The emergence of generative AI (gen AI) is likely to bring technology even further to the forefront of the wealth management model. While we do not see gen AI displacing the role of the adviser in the near future, it provides a once-in-a-generation opportunity for wealth managers to improve client experience and increase the productivity of advisers and other client-facing staff. In the latter category, gen AI is already being deployed to generate and synthesize meeting notes, draft financial plans and client briefs, support compliance reporting, and serve as a virtual assistant. According to McKinsey estimates, gen AI could help the average wealth adviser reorient 20 to 30 percent of their time toward growth-related tasks.

Agenda for a new industry landscape

Thriving in the emerging new landscape of wealth management will require a focus on strategic positioning, operating model design across the value chain, and development of a well-tuned “execution engine” to create forward momentum. US wealth managers can position themselves for success by focusing on the following six areas:

1. Expanded offerings. Expanding the scope of advice and product offerings will be crucial; firms that do not keep up with client needs and their desire to bank and invest in one place risk losing share. Wealth managers will need to decide where to lean in for their clients and acquire new capabilities, whether organically or via partnerships.
2. Institutionalized lead generation system. Centralized lead generation capabilities are a proven competitive advantage. While developing and scaling such a system requires investment, the benefits are compelling: the acquisition of a $1 million relationship can unlock $50,000 to $70,000 in advisory fees over a decade, suggesting that wealth managers should be willing to spend as much as $15,000 to $20,000 on client acquisition.
3. Adviser talent strategy. An adviser talent attraction strategy is vital, given projections that the number of advisers will remain roughly flat and the growing percentage of assets managed by advisers nearing retirement. Near-term approaches include improving adviser productivity and enhancing the value proposition—for example, with succession solutions, technology, compensation, paths to growth, or increased flexibility. At the same time, an innovative long-term approach to adviser development, compensation, and service models can attract new profiles of advisers.
4. Adviser productivity leveraging gen AI. Embedding gen AI capabilities into workflows can move the needle on productivity of advisers and other client-facing and supporting roles. Success calls for investments in technology coupled with a focus on risk, compliance, and importantly, change management across the organization. We expect to see outperformance by the firms that make the right big bets.
5. Resource reallocation. Firms should take a granular look at spend across the organization and realign it in support of their new priorities. This approach puts resources behind the highest-conviction growth priorities and cuts back on complexity. It often involves a realignment of incentives and KPIs to tailor them to various businesses operating at different speeds.
6. Target operating model. Redesigning the operating model is an opportunity to embed scalability and hardwire sources of competitive advantage. This includes creating a flexible cost base that can adapt quickly to changing market conditions, as well as creating a culture that can be a force multiplier.

As the wealth management ecosystem undergoes a once-in-a-generation convergence, wealth managers of all sizes have an opportunity to reposition their franchises for a healthier future while broadening the ways in which they help clients and advisers meet their financial needs in an environment of greater uncertainty.