Despite the heightened economic uncertainties caused by the pandemic, the wealth management industry has surpassed the centi-trillion mark, reaching $ 103 trillion in assets under management by the end of 2020, an 11 percent year-over-year increase, according to the Boston Consulting Group’s annual report Group on the industry is expected to be released on Thursday.
Of the total, institutional investments made up 59 percent at $ 61 trillion, while retail portfolios made up 41 percent of global assets, or $ 42 trillion. North America was seen as the main growth driver, holding the lion’s share of assets at $ 49 trillion.
As the end of the pandemic approaches and remote working models become a “permanent fixture,” BCG urged asset managers to look for growth opportunities in the private markets as well as the data and analytics that will be critical to everything from customer loyalty and sales through to tailor-made investment products.
“The next big wave”
Investments in private markets rose 12 percent annually to $ 8 trillion in September, according to the report. BCG highlighted this asset class as an important opportunity for retail-focused wealth managers – a cohort that contributed 4.4 percent of net inflows across all asset classes last year. This included tailor-made offerings, “especially when it comes to ESG products, thematic ETFs, direct indexing and separately managed accounts on a large scale,” the report says. “We believe the next big wave is likely to come from retail investors who have largely remained on the sidelines as private markets expand.”
The democratization of alternatives moved closer last year after the US Department of Labor released a letter to support private equity investments in defined contribution plans where individuals can choose their own funds. This caused large institutions to make these assets more accessible, according to BCG.
BCG said managers marketing to retail investors must make education a top priority. “Retail investors and their advisors need to understand that, in addition to their potential for higher returns, private market investments have a longer lockout period and higher risk profile than public market investments,” the report said.
“The difficulty lies in how to build it into the products in such a way that the returns for retail investors are really improved and how to explain the risks and benefits of the asset class, which is very different from the products being sold.” To these investors so far, “said Lubasha Heredia, partner at BCG who co-authored the report.
As the retail base grew, BCG also expected to expand manufacturing and distribution capabilities in the area through three methods: private fund managers who compete directly with traditional asset managers; Asset managers who accept mergers and acquisitions or employ teams to build the skills; and managers who work with medium-sized players to pool their expertise.
Opportunities in ESG
The report also highlighted that due to their longer holding periods and control stakes, private market participants are in a prime position to drive sustainable change. According to BCG, these managers could make a difference by mandating diversity on the board and aligning investments with sustainability metrics. “Our research has shown that buyers are increasingly willing to pay a premium for assets that have undergone a sustainability transformation,” the report said.
One major caveat, however, is the sheer lack of ESG metrics for privately held companies compared to their publicly traded counterparts. Market leaders in this space will seek to fill the gap by collecting data directly and working with competitors to accelerate the development of ESG standards, BCG said.
“The most important part of [this report] is that it’s a story of growth and a story of opportunity, ”Heredia said. “It’s impressive that after the terrible year we’ve all had, there is such a positive mindset and how to benefit from it [the] Growth to move forward. “