CONTRIBUTORS
Sandy Kaul
Head of Innovation
Franklin Templeton
Robert Crossley
Head of Industry Advisory Services
Franklin Templeton
Alegria Apikelis
Senior Analyst
Franklin Templeton
Janice Deringer
Senior Analyst
Franklin Templeton
Samuel Huddart
Senior Analyst
Franklin Templeton
This is the eighth article in the Future of Investing series, drawing insights from our annual industry-wide survey, The Future of Investing.1 The Overview summarizing the top 10 key findings can be found here along with a series of articles, each exploring a key finding in more depth.
Preview
Demographic timebomb is challenging the “one-size-fits-all” platform and approach to advisory
The economics of and approach to delivering wealth advice are changing across the world, and while the specifics may differ by country, there is a common direction of travel. The industry is becoming more competitive, more consumer-centric and more reliant upon tech-facilitated solutions. It is also becoming more regulated. Advisors are being held to higher standards of responsibility, and regulation is changing how they are remunerated, to align incentives, improve outcomes and increase consumer protections.
Four requirements are influencing the creation of platforms to service wealthy and mass- affluent clients:
- Become more client-centric: The ongoing shift from product- to client-centricity requires bankers/advisors to build deeper and wider profiles of their clients. This is to better understand their clients’ total wealth picture; to better consider and integrate not just their clients’ risk tolerance, but their values, goals and preferences when constructing their investment portfolios; and to better track the provision of advice to satisfy the regulatory standard of acting in the client’s best interests. More emphasis is being placed on understanding a client’s life journey, comparing and contrasting them within and across relevant cohorts and modeling peer behavior and preferences when advising them.
- Enhance existing wealth offerings: Investment products are evolving. In the United States, new investment approaches, such as direct indexing and the expanding use of separately managed accounts (SMAs) and model portfolios, offer opportunities to increase the relevance of a portfolio to the individual investor and to optimize their holdings and tax position. In the United Kingdom and Europe, the growth of multi-asset class solutions and the expanded use of exchange-traded funds (ETFs) are challenging the traditional focus on income products and creating demands for better and broader diversification. Several survey participants saw potential for the region to follow the United States’ lead and introduce more tailored, customized portfolios and flexible investment structures and vehicles. In Asia, the bias toward home markets is eroding and the desire for discretionary managed portfolios that offer global exposures across both equities and bonds is creating a new opportunity that could increase the region’s willingness to pay for advisory services and narrow the gap between Asian wealth offerings and those provided in the West.
- Offer new alternative investments: New investment products and wider asset-class exposures are being considered across all major regions. Alternative funds are being placed into more liquid wrappers to provide mass affluent and high-net-worth investors with a vehicle for exposure to private equity, credit and real assets. Interest in trading cryptocurrencies and altcoins is growing, especially as more regions put into place regulatory frameworks that provide consumer protections. Capital that is invested in both cryptocurrencies and private investments may sit outside the banker’s or advisor’s view in many platforms, undermining or constraining their ability to provide advice to maximize the benefit to the client's overall position. The ability to create consolidated reporting for the investor is difficult, if not impossible, as the result of assets that sit outside the advisor’s view.
- Improve the digital and omnichannel experience: Engagement channels are shifting. More investors are looking for digital consumer experiences, and their expectations are high as they are accustomed to the ease of use and streamlined processes of payment and financial apps. Demand for mobile offerings is especially strong, but customers will still expect equal ease of use and access to information and services whether visiting a website, collaborating via video, speaking on the phone or visiting a physical office.
All these requirements may be understood, but in many instances, they are yet to be addressed in the build-out of wealth-focused platforms. Overshadowing each of these challenges is also the complex question of how to best deploy and integrate new generative artificial intelligence (AI) tools. Survey participants saw many opportunities to use AI to capture low-hanging efficiency gains but were much less clear on how to create business “alpha” using the new capabilities.
Simply building more robust versions of current platforms for the future will not suffice. Firms must also manage their talent pool and navigate the changing role and demands of the banker or advisor. The demographics of today’s advisory workforce align too closely with the baby boomer generation, which risks many firms losing access to client capital when the generational turnover of wealth occurs. A 2021 Cerulli survey found that more than 70% of heirs are likely to change or fire financial advisors after inheriting their parents’ wealth.2 As the role of the advisor evolves to meet the needs of the next generation, new or different skills will be needed.
For more information or to request a presentation on the 2024/25 Future of Investing findings, please contact your Franklin Templeton representative or reach us directly at [email protected]
ENDNOTES
- On an annual basis, Franklin Templeton’s Industry Advisory Services team conducts off-the-record, unscripted interviews of leaders across the financial services industry. This year, we were fortunate enough to hear from 85 leading thinkers controlling over US$50.1 trillion of assets under management across the financial services industry about their views on the future of investing between March and September of 2024. Input came from a broad cross-section of the industry—asset owners, private banks, wealth managers, consultants, investment managers, crypto firms, academics, industry leaders and fintech firms. Conversations took place formally as part of free-ranging, qualitative, off-the-record, survey interviews, and informally during one-on-one sessions where the implications and plans for each organization are discussed and explored. Each of these inputs added to an emerging picture of an industry that is changing rapidly and across multiple dimensions. Interviews were conducted globally with about two-thirds of discussions held with leaders of firms based in the United States, and the other third spread between Europe and Asia.
- Source: Deaton, Holly. “How Advisors Should Prepare for the Clients Inheriting $72.6 Trillion.” RIA Intel. January 25, 2022.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Companies in the technology sector have historically been volatile due to the rapid pace of product change and development within the sector. Artificial Intelligence is subject to various risks, including, potentially rapid product obsolescence, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations.
Blockchain and cryptocurrency investments are subject to various risks, including inability to develop digital asset applications or to capitalize on those applications, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations. Speculative trading in bitcoins and other forms of cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risk; an investor can lose the entire amount of their investment. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies.
Digital assets are subject to risks relating to immature and rapidly developing technology, security vulnerabilities of this technology (such as theft, loss, or destruction of cryptographic keys), conflicting intellectual property claims, credit risk of digital asset exchanges, regulatory uncertainty, high volatility in their value/price, unclear acceptance by users and global marketplaces, and manipulation or fraud. Portfolio managers, service providers to the portfolios and other market participants increasingly depend on complex information technology and communications systems to conduct business functions. These systems are subject to a number of different threats or risks that could adversely affect the portfolio and their investors, despite the efforts of the portfolio managers and service providers to adopt technologies, processes and practices intended to mitigate these risks and protect the security of their computer systems, software, networks and other technology assets, as well as the confidentiality, integrity and availability of information belonging to the portfolios and their investors.
ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.The manager may consider environmental, social and governance (ESG) criteria in the research or investment process; however, ESG considerations may not be a determinative factor in security selection. In addition, the manager may not assess every investment for ESG criteria, and not every ESG factor may be identified or evaluated.