June 14, 2024

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The writer is chief executive and founder of Ellevest and former head of Bank of America’s global wealth and investment management division

Tectonic plates are shifting for wealth management, with massive changes on the way that have the potential to fundamentally reshape the industry.

The wealth management industry is, on its face, a healthy one, delivering much-vaunted and predictable earnings. For Wall Street, these earnings are very attractive compared with the more volatile and capital-intensive income streams from trading and investment banking. And it is the reason that banks such as Morgan Stanley, Goldman Sachs and UBS have been systematically remaking their businesses to favour investments in these assets-based businesses.

But strip away the stock and bond market appreciation of the past years and the organic growth story blurs. Capital markets performance was responsible for 70 per cent of industry-wide asset growth between 2012 and 2021, according to McKinsey.

At the same time, few of the big groups have the massive training programmes that have churned out the growth-driving “thundering herds” of a few decades ago. Thus the industry’s professionals are ageing (50 per cent are above the age of 55, according to Cerulli Associates). I recently met with one large group with more financial advisers over the age of 70 than under the age of 30. And diversity remains a sticking point, with advisers remaining pale and male.

But much change is on the horizon. In the US, we may be at the beginning of an underlying shift in who owns wealth. This is being precipitated by the ageing of industry’s core clients — white, male baby boomers — with the oldest of them hitting 80 years old or more. Their passing away will precipitate a great wealth transfer, in which tens of trillions of dollars will change hands.

While many pundits focus on the impact this will have on millennials and Generation Z, most of this money will first go into the hands of their mothers given women’s greater longevity — they live seven to 10 years longer than their husbands.

Absent pretty significant shifts in strategy by wealth management groups — and a pretty significant change in the demographics of those who work in them — the hissing sound you hear could be the air seeping out of the industry balloon. And if that is combined with less robust markets, the industry could find itself no longer posting the growth that seemed to be an immutable feature of the business.

That is because today, the default for many women who are widowed or divorced is to leave their joint financial adviser. They often report feeling overlooked in the relationship and thus disconnected from the family financial adviser. For women who have not been involved in managing the household money, they can feel overwhelmed and unprepared by the new responsibility.

According to Ellevest research, only about half of women know where to go with a financial windfall compared with 72 per cent of men. They thus often move the money into a bank. Safe, certainly, but no longer building on the wealth she inherited.

When women are asked what they look for in a financial adviser, it can be different from what the industry has historically offered: less stockpicking, less trading, less jargon, less golfing. Less risk? Perhaps, but it is more nuanced than “women are more risk averse than men”; it is more of a recognition that women are more “risk aware” than men and tend to want to understand the risks they are taking.

More financial education? Yes, certainly. But it is not the silver bullet to engaging female clients. Instead, it is more financial planning, more goal-based investing, more help with philanthropy, more investing in line with policies on environmental, social and governance issues (regardless of the shifting political winds in the US). And there needs to be more women financial advisers who can relate directly to their clients and can understand their lived experiences.

The ripple effect of the wealth management industry getting this right goes well beyond industry profitability. Women with wealth or building it are more confident. They tend to be more philanthropic than men, tend to vote for more moderate political candidates than men, tend to invest more in their families than men and tend to invest more in their communities than men. They even tend to believe more in climate change and to invest more to combat it. In other words, the “feminisation of wealth” could drive a meaningful societal moderation.

Is the industry ready for this shift? No. To be fair, inflection points are challenging to identify, but the cost of missing it could be significant — for all of us.

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