Wealth Management Trends in 2023

Heightened geopolitical tensions, the war in Ukraine, inflation, and a looming global recession will cause additional pressure on wealth management firms as lower assets under management (AUM) growth strains profitability.

FREMONT, CA: Where will the focus of wealth managers be in 2023? The industry is approaching a turning point. Increased geopolitical tensions, the crisis in Ukraine, inflation, and an impending global recession will exert extra pressure on wealth management firms, as decreased assets under management (AUM) growth impedes profitability. Concurrently, competitive pressures are growing, and client demand for new goods and services, such as private markets, tailored advice, and seamless omnichannel experiences, continues to evolve swiftly. Wealth managers have two options: realign their business models and expedite fundamental reform initiatives or risk falling behind. Here are topics that wealth managers anticipate prioritizing:

Return of deposits, but deposit beta rises looming

High-interest rate tailwinds will continue to boost wealth managers' net interest income as dormant deposit pools become productive. Yet, due to recent rate hikes—and similarly to what transpired during the last US rate cycle beginning in 2004—wealth managers anticipate a delayed recovery in deposit beta, the proportion of margin upside passed on to consumers via pricing. Given the increased competition in the wealth management market and the increased emphasis on upper high net worth (HNW) and quasi-institutional ultra-high net worth (UHNW) clients who anticipate a greater passthrough of rate increases, wealth managers expect deposit betas to rise above even the peak levels of previous rate-hike cycles. This will limit the benefits of future rate increases for wealth managers. For wealth managers to succeed, enhancing deposit-management capabilities, particularly the sophistication of pricing and modeling, is essential.

The time has come to implement price and discount management

The significant discounting of list prices has been a worldwide plague for asset managers for decades. In extreme circumstances, forty to fifty percent of a wealth manager's client relationships stay unprofitable due to misaligned pricing and cost-to-serve. Larger and more profitable customer connections frequently cross-subsidize others, with aggregate profitability obscuring the issue. In the face of high inflation and a deteriorating economic outlook, pricing management is critical for wealth managers to preserve overall competitiveness and profitability. While aligning fees with market norms is the initial stage, examining discounting levels and procedures is crucial for obtaining sustainable revenue increases. Effective wealth managers will execute initiatives to identify clients with excessive and out-of-date discounts, conduct discount evaluations, redefine discount governance and processes, and deploy reporting and impact analysis tools. The sustainable income increases can be collected in less than a year, will alleviate pressure on the bottom line, and assist finance growth investments.

Cost transformation moves to the forefront of the discussion

Strong AUM growth and strategic initiatives to boost productivity have enabled large asset managers to sustain cost-income levels of approximately 70 percent throughout the past decade. A decline in AUM growth will intensify profitability pressures. Wealth managers must act swiftly with a methodical approach tailored to their cost management journey stage. It will be essential to balance fast successes and structural transformation to generate momentum and a sustainable change in costs. Wealth managers anticipate the greatest efficiency gains in the front office and the heavier technology and operations departments, with levers ranging from advisor productivity appraisals to support-function activity redesign to comprehensive business footprint reviews.