For US wealth management firms, the decade-long period of relatively easy growth fueled by favorable market conditions is likely over. The year 2022 brought a drumbeat of tough economic news, from slowing economic growth and high inflation to sagging equities and bond markets. The industry has held up relatively well thus far. Revenue growth and margins have proven resilient as rising interest rates more than offset sharp declines in client assets for most of the industry’s delivery models.
However, declaring victory would be premature. The macroeconomic uncertainty is not expected to subside in the near term, and indications are that the interest rate rises that propelled economic performance for many in the industry in 2022 are unlikely to continue at the same level.1 Worse, firms grew largely due to market performance rather than due to organic growth, so their cost bases have risen with the markets and have become less variable as firms became more complex and invested during a period of economic expansion.
As wealth managers set their priorities for the next 12 to 18 months, history offers one clear lesson: those that make bold moves and invest in growth early emerge as winners. According to our analysis of how companies across industries performed during and after the global financial crisis of 2008, those that moved early to build resilience positioned themselves for outperformance during the crisis and even more in the recovery that followed. For example, firms that invested in businesses and pursued transformative M&A solidified market-leading positions for the decade to come.2 This is an especially pertinent lesson for the wealth management industry—a growth industry that is experiencing a set of accelerating disruptions and facing long-standing demographic shifts that will redistribute wealth among subsegments.3
Therefore, wealth managers need to develop a set of bold growth priorities that will enable their firms to thrive through and beyond the current macroenvironment. Specifically, they need to take several near-term measures to strengthen resilience, including proactively helping clients navigate the challenging environment (and, in turn, building loyalty), as well as addressing sometimes long-neglected structural cost issues. From that baseline, they need to deploy financial and managerial capacity into decisive measures that can boost organic growth. These measures include doubling down on the most promising growth initiatives already under way, creating a strong lead generation system, building new businesses, and pursuing capability-driven or transformative M&A.
Years from now, the US wealth management industry will look back on the current period as a decisive one. Some firms will get through by hunkering down and staying cautious in the face of uncertainty. But true leaders will seize the opportunity to capitalize on the uncertainty by making bold strategic choices and positioning their organizations for long-term success.
2021: Culmination of an era of easy growth and (apparent) strength
In the decade since the global financial crisis, the US wealth management industry experienced one of the longest periods of market growth and economic stability in recent history. Between 2012 and 2021, global markets rose by an average annual rate of 14 percent.4 Over this period, firms relied heavily on these rising tides to provide their growth: capital markets performance was responsible for 70 percent of industry-wide asset growth.
The industry’s decade-long bull market—in terms of economic performance and increased reach—culminated in 2021, as markets and clients rebounded from the COVID-19-related disruptions of 2020. In 2021, client assets grew $7.9 trillion (19 percent) to reach an all-time high of $50 trillion (roughly doubling 2016 industry asset volume), with 13 percentage points of that growth driven by market performance and a record-high six percentage points ($2.5 trillion) from net flows (Exhibit 1). Industry profits grew by 24 percent to reach $58 billion (also an all-time high) with margins reaching 24 percent, which represents a 1.4-percentage-point increase year over year. In addition, a growing number of US households sought wealth management services: in 2020 and 2021, record numbers of new self-directed and advised accounts were opened.
Growth concentrated among top performers
The decade-long bull run appears impressive, but a closer look at the industry’s financial performance reveals a more nuanced picture. First, growth has not been distributed equally. In the five years leading up to 2021, most organic growth accrued to digital-direct wealth managers, which offer low-cost value propositions and digital-first client experiences. Digital-direct firms captured approximately 41 percent of total industry net flows for the period, growing their share of client assets from 21 percent to 27 percent.5 The other delivery model that achieved a disproportionate share of net flows was registered investment advisors (RIAs), which saw 22 percent of total net flows, above its 16 percent share of total client assets in 2021. The growth has been primarily driven by a sustained movement of advisors away from national full-service wealth managers. Regional and independent broker–dealers slightly outperformed the industry average (achieving 25 percent of total net flows, versus 24 percent of total client assets in 2021), also due to net-positive advisor recruiting away from national full-service wealth managers.
In contrast, national full-service wealth managers and private banks punched below their weight. Between 2016 and 2021, they captured 9 percent and 4 percent of the industry’s net flows, respectively, and as a result, they controlled 20 percent and 13 percent of total client assets in 2021.
Within most delivery models, growth was distributed unevenly, with a subset of firms significantly outperforming their peers. The same holds true at the advisor level, with the best-performing advisors capturing a starkly disproportionate share of growth. The top quartile added 18 new households per year, 2.5 times more than the number for second quartile and 12 times that of the bottom quartile. Even within the top quartile, performance is highly concentrated at the top, with the top decile outperforming the next tier by a factor of 2.4 (28 and 12 new households per year, respectively).
Therefore, even though the industry overall demonstrated remarkable growth during the decade-long favorable market conditions, wealth managers and advisors alike tend to find themselves in very different positions, requiring different playbooks for the period ahead.
Flat operating leverage
The second detail from our closer look at the industry’s financial performance is that the industry’s unprecedented growth in client assets and revenue has brought a similar increase in costs. In 2021, total costs for the US wealth management industry reached a new high of $186 billion, with $25 billion of cost growth occurring in 2021 alone (Exhibit 2). Although the increased cost base in 2021 came with positive operating leverage—a 15 percent cost increase with 17 percent revenue growth—the story preceding this banner year was more mixed. Despite being aided by market tailwinds from 2016 to 2020, the industry grew with flat operating leverage, experiencing annual revenue and cost growth of 5 percent.
What is behind this? On one hand, clients have sought new digital value propositions, more digitally enabled engagement with their advisors, and more complex products, services, and solutions (including adjacencies like cash management, lending, and asset management). At the same time, advisors have sought better technology, support services, specialist support, and other home office support. As a result, wealth managers have responded by investing heavily in new propositions and capabilities, resulting in more complex—and perhaps rigid—operating models. In fact, over the last five years, rising frontline and technology-related costs contributed 82 percent and 9 percent of overall industry cost growth, respectively, and grew more than twice as fast as the industry’s organic growth rate (a compound annual growth rate of 9 percent, compared with 4 percent average net flows in 2016–21).
The growth in the size and complexity of the industry’s cost base represents a vulnerability for wealth managers. As assets have grown over the past decade, some management teams have not focused on expense discipline—a common oversight when there is little urgency. During that time, operating models have become more complex, and cost structures have ossified.
An expanding industry cost base is a natural—and perhaps inevitable—corollary to a steadily growing base of industry assets and revenues. But the volatility of the first three quarters of 2022 serves as a reminder that growth cannot be taken for granted. In a decade-long bull market, strong growth masked some underlying issues in the industry, and many firms have not capitalized on the opportunity to expand margins through more scalable infrastructure and new business models.
2022: Entering choppy waters with (temporary) wind in the sail for some
The current macroeconomic volatility will undoubtedly pose challenges, yet the wealth management industry has proven resilient thus far. Our analysis of performance of public wealth management firms in the first three quarters of 2022 suggests client assets sharply declined by 16 percent and net flows moderated from 2021 highs (Exhibit 3). But revenue growth for the industry was 4 percent and margins have improved by 0.4 percent, driven by sustained interest rate increases throughout 2022.
The different categories of wealth management providers had somewhat different experiences:
- Private banks experienced the smallest decrease in client assets among all delivery models (down 10 percent through the third quarter of 2022), due to their relatively low exposure to public equity markets. At the same time, significant exposure to cash management and lending businesses helped generate annualized revenue growth of 10 percent, with increases in both volumes and yields. Margins declined five percentage points as the largest private banks sustained higher structural expense and investments in the business, largely talent.
- Digital-direct wealth managers saw the steepest decline in assets (down 18 percent), driven by their significant exposure to public equity markets. Despite that, top- and bottom-line performance improved in 2022 due to higher interest rates on cash balances and increased volumes of cash as clients took a more conservative stance to investing. We estimate that revenues grew by 5 percent (on an annualized basis), with slight margin expansion to 47 percent (increasing one percentage point relative to 2021). Importantly, despite the worsening equity market conditions, the delivery model continued to generate relatively strong net flows of 4 percent in the first three quarters of 2022, albeit below this channel’s average of 6 percent over the last decade.
- National full-service wealth managers (also referred to as wirehouses) reported an average 17 percent decline in overall client assets. Despite that, the segment managed to maintain margins at 24 percent and achieved positive annualized revenue growth of 1 percent (aided by rising interest rates), though this was the lowest top-line growth among all delivery models analyzed. The segment experienced continuation of a long-standing trend of advisor departures, with more than 300 departures in aggregate during the first half of 2022. Firms are starting to reenergize their recruiting efforts, with some focusing on high-quality teams and experienced advisors, while others focus on new-advisor development. A subset of firms are starting to see the benefits; two of the four national full-service wealth managers reported growth in advisor head count during the third quarter.
- Regional and independent broker–dealers also saw sharp declines of client assets (down 16 percent). Despite that, revenue growth was a robust annualized 6 percent, resulting in a margin expansion from 15 percent in 2021 to 16 percent in the third quarter of 2022. This segment benefited from continued strength in attracting and retaining advisors and from improvements in advisor productivity, with one firm reporting third-quarter year-over-year productivity gains as high as 7 percent, driven by inflows and rising interest rates.
- RIAs are not shown in Exhibit 3, because we lack sufficient public data to draw definitive conclusions about how the RIA delivery model performed. However, RIA performance certainly experienced a negative impact from declining client assets and, in turn, fees, and RIAs had very little to no interest rate exposure to offset that impact. At the same time, the long-standing secular trend of advisor migration to the RIA model continues to persist despite macroeconomic uncertainty. In fact, private-equity-backed acquirers (except for debt-heavy acquirers) continue to be highly engaged in M&A, with 2022 being on track to hit record highs in terms of deal volume (though the focus has transitioned to somewhat smaller deals).6
This relative economic resilience of the industry across delivery models brings a sign of relief, albeit with a warning: wealth managers cannot be complacent, as interest-rate-fueled organic growth will subside soon. Instead, wealth managers should find ways to take full advantage of the secular trends that will underpin organic growth of the industry in the coming decade.7 As we describe in the next section, wealth managers that navigate the current challenging waters by investing with conviction in a focused set of high-potential growth priorities and operate with a growth-oriented mindset are likeliest to emerge stronger.
A lesson from history: Challenge creates opportunity
A look at the past downturn can help wealth managers understand how competitive positioning can change due to the macroeconomic environment—and how uncertainty creates opportunities to gain market share for the firm and advisor. In times of crisis, decisions have repercussions for years to come. Therefore, strategic decisions made prior to and during challenging times can set a company on the road to outsize growth over the longer term.
Based on our analysis of the 2008 crisis and the subsequent recovery,8 we identified the 20 percent of companies across industries with the greatest total shareholder returns during and after the 2008 crisis. This group of “resilient growers” outperformed in the months leading up to the crisis and during it, and they extended their lead in the years that followed (Exhibit 4).9
Drilling into the underlying factors that led to this strong performance, we see two broad sets of actions to bolster resilience. First, these companies created a safety buffer of flexibility, cleaning up their balance sheets and reducing their debt by $1 for every $1 of book capital, while others added more than $3 of debt. Second, they cut operating costs by 1 percent before the downturn, while others expanded costs by the same percentage.
Correlation is not causation; we don’t know for sure how much these high-performing companies owe to their resilience-building moves. But both accomplishments allowed companies in this group to adapt by investing into the downturn: they divested early in the cycle and then did about 10 percent more M&A than other companies. The crisis was clearly a moment for CEOs to prove their mettle.
More broadly, the resilient growers in our analysis were equipped to take such measures because they had the right organizational capabilities in place: (1) rigorous scenario planning to anticipate the storm and stress testing to gauge their ability to withstand disruptions; (2) a corporate nerve center that enables dynamic assessment, monitoring, and agile decision making; and (3) a comprehensive approach entailing levers across financial, operational, and technological realms to become more resilient and address known vulnerabilities while maintaining a growth mindset.
Although our quantitative evidence does not include financial services firms, due to the nature of the crisis, we also saw these dynamics play out in the wealth industry. Banks were under severe strain, and affiliated wealth management businesses suffered consequences. Diminishing confidence in bank institutions cast doubt on the strength of associated wealth businesses. One of the largest US bank-owned brokerages was reportedly losing 40 advisors per week in a crisis of confidence for the parent organization, leading the bank to sell its wealth management business.
Against that backdrop, three of today’s market leaders laid the groundwork for their strategic positioning today through bold decisions made during that period of disruption: Morgan Stanley through its acquisition of Smith Barney, Bank of America through its acquisition of Merrill Lynch, and Wells Fargo though its acquisition of Wachovia. In retrospect, the advantages of these deals are clear, but during the market upheaval of the crisis, they required management teams to adapt quickly, set a clear strategic vision for resilient growth after the market turmoil subsided, and execute on an ambitious plan.
Similar dynamics played out at the advisor level. In the 12 months following the 2008 global financial crisis, a tier of top performers opened almost twice as many new accounts as advisors in a control group. Furthermore, the average size of the accounts opened by the outperformers was 37 percent greater. In challenging markets, advisors who are prepared to fully engage anxious clients can reap great rewards. Others who lie low stand to lose ground.
Today, advisors may have an even greater opportunity to stand out, given that most have never experienced an environment of high inflation and a period of potentially more moderated capital markets growth. Most clients built their financial plans under very different macroeconomic assumptions, and they are looking for help. Advisors who lean in and help clients navigate this uncertain and complex environment will emerge as net winners.
Looking ahead: Resetting for resilient growth
As history shows, uncertain environments present opportunities. Although the industry has held up well so far, it cannot rely on further interest rate increases for sustainable growth. Therefore, to weather the current uncertainty, wealth managers should consider taking several near-term, no-regret actions to create resiliency. That puts wealth managers at the baseline, where they can pivot to making a set of growth-oriented, strategic choices.
Create resiliency with no-regret moves
In our experience, several near-term moves are associated with the creation of resiliency (Exhibit 5):
- Proactively deepen client relationships. Our research suggests that proactive and frequent communication with clients leads to a higher degree of satisfaction. As communication frequency increases from once or twice per year to monthly, we see customer satisfaction scores increase by 52 percent.10 This is especially relevant in the current macroeconomic climate, which has created anxiety for clients, many of whom have built financial plans based on obsolete macroeconomic assumptions. Wealth managers that are proactive now and help their clients navigate the current environment have a chance to win their loyalty. Centralized digital communications enabled by analytics can be invaluable for advisor-led and direct models by providing tailored messages and enabling targeted outreach (for example, identifying and reaching out to clients who are at the highest risk of moving assets away, have not been in touch with their advisor or relationship manager recently, or do not have a fresh financial plan).
- Address structural cost issues. Disciplined cost management is a critical part of resilience planning and a means of generating the capital and flexibility required to take advantage of dislocations in a rapidly changing environment. Near-term cost controls are important but can only go so far. Wealth managers should be willing to commit to a bolder approach on structural costs—one that involves a fundamental reengineering of their operating models, often enabled by technology. This can enable them to unlock a far deeper pool of resources while also building scale advantages that will make them more competitive in a recovery. For example, firms should seek ways to cleansheet most labor-intensive processes (for example, money and asset movement, account opening, and client onboarding) through digitization, automation, process redesign, and policy refresh as applicable to drive down structural costs. Of course, action on costs requires investment and commitment, but in the medium to longer term, it will free resources for reinvestment in growth.
- Maintain pricing discipline (for advisor-led models with discounting practices). During times of volatility, and especially downturns, “sympathy pricing” often happens in advisor-led models where advisors have the discretion to discount. During the global financial crisis, many advisors reduced their fees to bolster their growth and competitiveness amid challenging conditions. The impulse is understandable, but fee reductions did not lead to better outcomes. Research at the time suggested that advisors not only fell short of the incremental growth they hoped for but also locked themselves into lower fee arrangements for years to come.11
Invest for growth
The three near-term, no-regret moves represent a baseline; they are necessary but not sufficient. To thrive and outperform in the coming recovery, wealth managers also need to make strategic growth-oriented choices. Doing so requires investing in a focused set of high-potential growth priorities during periods of economic uncertainty.
The exact priorities will vary depending on a firm’s business model and starting position, but we anticipate firms focusing on the following areas:
- Double down on highest-potential growth initiatives and cull the rest. Wealth managers that strengthened their competitive positions in previous downturns typically continued to invest throughout the cycle, including at market troughs. The current environment requires a zero-based approach that focuses resources on the most promising growth investments and reins in those that are not working. For example, a wealth management organization might accelerate the upskilling and upscaling of advisors (including establishment of the necessary support infrastructure), enabling them to serve the wealthier households while the company creates scalable centralized offerings to provide high-quality service to lower-wealth households.
- Create an institutionalized lead generation system. Centralized and effective lead generation is a proven competitive advantage, yet few wealth managers have mastered it. With improvements in data infrastructure and a proliferation of advanced analytics technology and talent, more wealth managers can benefit from this capability and accelerate organic growth by attracting new clients or deepening relationships with existing clients, including wealth clients in lower-value offerings (eg, self-directed) or clients of adjacent business units (eg, retail banking). This is especially pertinent in times of volatility, which are typically followed by accelerated money in motion.12
The benefits of a robust lead generation system are many. Accelerating organic growth can make the firm more attractive in the eyes of highly sought-after advisors. It also can make the client relationship with the firm stickier, lower compensation as a percentage of revenue, and create new avenues for strategic M&A. While putting in place such a system requires investment, the costs should be examined in the context of benefits they unlock. For example, the acquisition of a $1 million relationship can unlock $50,000 to $70,000 in advisory fees over a decade, suggesting that wealth managers should be willing to spend as high as $15,000 to $20,000 on client acquisition.
- Build new businesses close to the core or in adjacencies. In contrast to their historical overreliance on market appreciation and advisor recruiting for growth, wealth managers need more sustainable sources of growth. These can take many forms, such as developing new, often digitally enabled business models to serve existing or new client segments, providing value-add services to a fast-growing RIA segment, or tapping into adjacent revenue streams, such as banking, asset management, retirement, or payments. The exact focus will be specific to each firm, but success factors are universal. They include taking a fully client-backed view on the solutions, constantly iterating with clients, funding the venture appropriately and patiently, linking the new venture to the core business to draw on existing strengths without compromising agility and pace, and hiring talent at the right caliber to bring in new thinking and skills.
- Pursue M&A. We expect three major M&A themes to shape dealmaking among wealth managers in the next 12 to 18 months. One theme is a focus on platform synergies, mostly in the vibrant RIA market but also among the largest wealth managers. The second theme is transactions that enable firms to enter adjacent revenue pools, such as asset management, banking, retirement, or payments. Third, wealth managers will likely pursue transactions to acquire capabilities that will be key for growth. Many such deals—for example, start-ups focused on digital advice or planning, digital assets, retail alternatives, and wealth technology—now come at more attractive valuations than a year ago.
The current environment is challenging for wealth managers, but a long-term view shows how firms have performed in the face of similar challenges in the past. Our research suggests that the best wealth managers do things differently. One essential distinction: they focus on beating the odds by making bold moves early. Leading wealth managers are building resilience now, with intense financial planning followed by decisive plans of action. They are on track to weather the storm and to deliver sustainable, inclusive growth in the years to come. Fortune favors the brave, even now.