• Research

Wealth: Brave New World

Structural shifts in the $2.7 trillion super market are accelerating. Navigating this means businesses need to reshape the value chain to remain relevant.

Value chain dramatically shifting

The commercial viability of financial planning and dealer groups and the vertically integrated wealth model is unclear.

In the wake of the Royal Commission, compliance risks and regulatory scrutiny have increased, risk tolerance of financial planners has decreased, and community expectations have shifted.

Ultimately this drives the breakdown of specialist providers, with platforms evolving towards large at-scale execution, administration and tax reporting vehicles.

Wealth managers have no choice but to reposition their business or else risk declining margins.

Navigating this means reshaping the value chain and business model, which could take years. At the same time, the seeds of disruption are being sown:    

  • Shifts in regulation – the elevated role of the trustee, heightened scrutiny of clients’ ‘best interests’, risk that fee-for-service becomes an annual opt-in and commissions are banned.
  • New technology – changing infrastructure, digital scaled advice solutions.
  • Shifting adviser demands – adviser fee scrutiny, demand for transparency, push for greater platform product choice / open architecture, navigating ‘best interests’ via lowest cost options. These drivers are placing pressure on fees and driving planners to reconfigure operating models.
  • Customers waking up – the long dated nature of superannuation traditionally meant consumers were largely apathetic and disengaged. This is changing post the Royal Commission and more people are switching with industry funds major beneficiaries.

Dramatic reshaping of advice models

Increased risk and compliance is adding cost and complexity to the execution of advice, which is driving a distinct evolution of advice into three clear segments and operating models:    

  • High-end face-to-face advice.
  • Mid-tier mass affluent advice (call centres, new technology).
  • Self-directed advice tech platform solutions (mass market).

Morgan Stanley believes advice may evolve into a technology-based ecosystem for planners and customers to pursue goals. This includes leveraging digital tools, calculators and direct links to financial assets / liabilities with artificial intelligence and machine learning – either self-directed or in partnership with an adviser.

Adviser numbers could shrink between 20-30% as the market responds to the increased compliance burden and rising education standards. 

What does this mean for wealth managers?

As the business model evolves, where and how value is captured in the value chain will shift dramatically, particularly in the post Royal Commission environment and as the industry faces disruption.

The outlook for lower fees alongside the elevated compliance is likely to demand increasing scale, which would also allow wealth managers to leverage digital and data capabilities. Digital advice platforms and regulatory technology solutions are likely to become core infrastructure – providing oversight on fees and best interests.

To insulate margins, wealth managers need to disrupt their business models and rebuild customer-focused, advice-led, simplified businesses in order to navigate regulation, members' best interests and community expectations.    

 

For more on the structural shifts in the wealth industry or a copy of our research report, speak to your Morgan Stanley financial adviser or representative. Plus, more Ideas from Morgan Stanley’s thought leaders.