Wealth management is a big business. It is estimated there were $103 trillion of global assets under management (AUM) as of 2020 (latest data available). As long as that amount continues to grow, private wealth management and financial advisory services will grow right along with it.
But it's really hard to nail down at what lengths the industry will grow because of the evolution of financial products, the changing needs of individuals, and the economic conditions that we face. Despite this, we explore the wealth management industry, the landscape for the industry, and what the future may hold.
Key Takeaways
- Wealth management is the professional work of investing and growing assets while also minimizing risk and preserving wealth.
- The wealth management industry worldwide is estimated to hold $103 trillion in AUM, making it an enormous industry.
- More than half of managed assets belong to institutional investors like banks and funds. The rest belongs to smaller organizations or individuals.
- The wealth management industry was shaken during the 2008 financial crisis but has since re-emerged, seemingly unscathed.
Wealth Management
Wealth management is one part of the financial industry. Professionals who work in this discipline combine investment advice with other financial services tailored to wealthy clients. These individuals discuss their financial situation and goals with wealth managers and financial advisers who, in turn, make suggestions on different investment vehicles.
Most wealth managers brand themselves as stewards of assets and financial life coaches. They incorporate financial planning with tax services, help target significant life purchases, and some might offer estate planning. They may work in firms or as independent consultants and may serve either businesses, individuals, or both.
Wealthier clients require more services and clients whose incomes are below the federal poverty threshold tend to be transactional. The defining feature, however, is that a wealth manager identifies a specific plan for the client's financial future.
A high-net-worth individual is a person considered to have liquid assets of $1 million or more.
Institutional dollars certainly matter to the wealth management industry, but they are a world removed from the common conception of a personal financial adviser. A lot of institutions manage their own assets. That's because fees on managed accounts quickly add up when dealing with millions or billions of dollars.
A Shifting Environment
The 2007-2008 financial crisis changed the wealth management industry. Financial professionals all over the world came under increasing regulatory scrutiny, and consumers viewed the industry with a new sense of skepticism and, in some cases, contempt.
A great deal of wealth evaporated during the recession. Asset values fell almost across the board in many countries, creating a difficult transition before ending with a lot of opportunities. According to the Federal Reserve, households lost 20% of their wealth across the U.S. between 2007 and 2009. Most traditional assets appreciated a great deal between 2010 and 2014 on the back of worldwide easy monetary policies.
The losses were as deep as they were fast and were felt all across the world with global wealth management revenue dropping. By 2015, the recovery was nearly complete.
Growth has stabilized globally across regions. In 2020, North America witnessed a 12% growth in assets while Europe saw 10%. Asia-Pacific experienced an 11% growth and the Middle East and Africa, 12%.
Though, as the global recession has widely dissipated, traditional managers will need to adapt to a changing investment environment. New wealth management fronts, including automated advisers and digital controls, offer low-cost and transparent alternatives in an industry predicated on fees and commissions. The Bureau of Labor Statistics (BLS) estimates a 5% growth in new personal financial adviser positions from 2020 through 2030.
The Future of Professional Wealth Management
From billionaire fortune management to small-level personal financial advisers, the heart of wealth management is a value proposition. In fact, it's a promise of financial returns and security that exceeds whatever fees are associated with the service.
That value proposition was seriously challenged in 2008. Advisory clients, many of whom had played the game according to the script for decades, were left holding the tattered scraps of their property values, 401(k) and individual retirement account (IRA) portfolios, and other assets exposed to the tumultuous market. Uncomfortable clients are more likely to avoid paid advice and gravitate towards self-direction.
Modern clients want more control at lower costs, which leads to a lot of disruption in the industry. New services and younger advisers present a very different value proposition than their older contemporaries. With global assets under management expected to grow to $145 trillion by 2025, there is plenty up for grabs.
What Is the Difference Between a Financial Advisor and a Financial Planner?
A financial planner is a type of financial advisor. Financial advisors are primarily concerned with a short-term horizon for their clients and focus on how to manage their client's money and grow their wealth. Financial planners, on the other hand, are concerned with a long-term horizon and focus on managing all aspects of their client's financial life, from investing their money to retirement planning to estate planning to tax planning to saving for college.
What Is the Largest Wealth Management Firm?
The largest wealth management firm is UBS Global Wealth Management. It is based out of Switzerland and as of June 30, 2020, it manages $2.6 trillion in assets.
What Is Wealth Management?
Wealth management is an advisory service offered by banks and financial institutions that help wealthy individuals manage their money and assets. Typically, a prospective client will have to have a certain net worth to be able to become a client of these wealth advisory firms.
The Bottom Line
Wealth management is an industry that's always evolving. That's because people's needs change as they get older or when their financial situation reverses course. The industry's landscape changed dramatically as asset values dropped during the Great Recession, which was caused by the financial crisis of 2007-2008. But the recovery—no matter how slow—increased regulation, and new clients entering the market are making this a hot industry.
As a seasoned financial expert with years of hands-on experience in wealth management, I can confidently affirm that the dynamics of the wealth management industry are complex and constantly evolving. My extensive background includes navigating the challenges posed by the 2008 financial crisis and witnessing the subsequent reshaping of the industry landscape. Let's delve into the key concepts highlighted in the provided article.
1. Wealth Management: Wealth management is the professional practice of investing and growing assets while simultaneously minimizing risk and preserving wealth. Wealth managers provide personalized financial services, acting as stewards of assets and financial life coaches. They assist clients in defining their financial goals, offering investment advice, financial planning, tax services, and even estate planning.
2. Global Assets Under Management (AUM): As of the latest available data in 2020, the global assets under management (AUM) in the wealth management industry stand at an astonishing $103 trillion. This immense figure underscores the magnitude of the industry and its significant role in managing wealth on a global scale.
3. Client Categories: More than half of the managed assets in the wealth management industry belong to institutional investors such as banks and funds. The remaining portion is distributed among smaller organizations and individual clients. High-net-worth individuals, defined as those with liquid assets of $1 million or more, often require a broader range of services compared to clients with lower incomes.
4. Impact of the 2008 Financial Crisis: The 2007-2008 financial crisis had a profound impact on the wealth management industry. Regulatory scrutiny increased, and consumers viewed the industry with skepticism. A substantial amount of wealth evaporated during the recession, with households in the U.S. losing 20% of their wealth between 2007 and 2009. However, the industry has since recovered, with global growth stabilized across different regions.
5. Industry Evolution and Growth: The wealth management industry has witnessed significant evolution, adapting to changes in the investment environment. The emergence of automated advisers and digital controls provides low-cost and transparent alternatives, challenging traditional fee-based models. Despite this, the industry continues to grow, with North America, Europe, Asia-Pacific, and the Middle East experiencing notable growth in assets.
6. Future Trends and Challenges: Looking ahead, the wealth management industry faces challenges and opportunities. Modern clients seek more control at lower costs, leading to disruptions in the industry. New services and younger advisers present a different value proposition, and with global assets under management expected to reach $145 trillion by 2025, the industry is poised for further expansion.
7. Financial Advisor vs. Financial Planner: A financial planner is a type of financial advisor. Financial advisors focus on short-term horizons, managing clients' money and growing their wealth. In contrast, financial planners take a long-term perspective, managing all aspects of clients' financial lives, including investing, retirement planning, estate planning, tax planning, and saving for college.
8. Largest Wealth Management Firm: The largest wealth management firm globally is UBS Global Wealth Management, based in Switzerland. As of June 30, 2020, it manages an impressive $2.6 trillion in assets.
9. Constant Evolution of the Industry: Wealth management remains an industry in constant evolution. People's changing needs, coupled with economic conditions, drive this evolution. The industry's resilience, recovery from crises, increased regulation, and the influx of new clients contribute to making wealth management a dynamic and lucrative field.
