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The writer is CEO and founder of Ellevest and former head of Bank of America’s global wealth and investment management division.
The tectonic plates of wealth management are shifting and massive changes are coming that have the potential to fundamentally reshape the industry.
The wealth management industry is, at first glance, healthy, generating predictable and much-vaunted profits. For Wall Street, these gains are very attractive compared to the more volatile and capital-intensive revenue streams from commercial and investment banking. And it’s why banks like Morgan Stanley, Goldman Sachs and UBS have been systematically restructuring their businesses to favor investments in these asset-based businesses.
But if we leave aside the stock and bond market appreciation of recent years, the organic growth story becomes blurred. According to McKinsey, capital markets performance was responsible for 70 percent of industry-wide asset growth between 2012 and 2021.
At the same time, few of the big groups have the massive training programs that have produced the “thunder herds” that fueled growth a few decades ago. Therefore, professionals in the sector are aging (50 percent are over 55, according to Cerulli Associates). I recently met with a large group with more financial advisors over 70 than under 30. And diversity remains a sticking point, as advisors remain pale and masculine.
But there are many changes on the horizon. In the United States, we may be at the beginning of an underlying shift in who owns wealth. This is being precipitated by the aging of the industry’s core customers (white, male baby boomers), with the oldest of them reaching age 80 or older. His passing will precipitate a huge transfer of wealth, in which tens of trillions of dollars will change hands.
While many experts focus on the impact this will have on millennials and Generation Z, most of this money will go to their mothers first, given women’s greater longevity: they live seven to 10 years longer than their husbands.
Absent some fairly significant changes in the strategy of wealth management groups (and a fairly significant change in the demographics of those who work in them), the hiss heard could be the air leaking out of the industry globe. And if that is combined with less robust markets, the industry could find that it is no longer posting the growth that seemed to be an immutable characteristic of the business.
This is because today, the default option for many widowed or divorced women is to leave their joint financial advisor. They often report feeling ignored in the relationship and therefore disconnected from the family financial advisor. Women who have not been involved in managing household money may feel overwhelmed and unprepared for the new responsibility.
According to research from Ellevest, only about half of women know where to go with a financial windfall, compared to 72 percent of men. Therefore, they often transfer the money to a bank. Safe, no doubt, but no longer based on the wealth she inherited.
When women are asked what they look for in a financial advisor, it may be different from what the industry has historically offered: less stock picking, less trading, less jargon, less golf. Less risk? Maybe, but it’s more nuanced than “women are more risk-averse than men”; It is rather a recognition that women are more “risk aware” than men and tend to want to understand the risks they run.
More financial education? Yes, certainly. But it’s not the silver bullet to attracting female customers. Instead, it’s about more financial planning, more purpose-driven investing, more helping with philanthropy, more investing in line with policies on environmental, social and governance issues (regardless of the changing political winds in the United States). And there needs to be more female financial advisors who can relate directly to their clients and understand their lived experiences.
The ripple effect of the wealth management industry doing this well goes far beyond the profitability of the industry. Women with wealth or who are accumulating it are more confident. They tend to be more philanthropic than men, they tend to vote for more moderate political candidates than men, they tend to invest more in their families than men, and they tend to invest more in their communities than men. They even tend to believe more in climate change and invest more to combat it. In other words, the “feminization of wealth” could drive significant social moderation.
Is the industry ready for this change? No. To be fair, it is difficult to identify tipping points, but the cost of missing them could be significant, for all of us.