Wealth managers continue to promote the US as centre of innovation, tech and land of opportunity for alternative investments.
While much is said about which hubs in Europe and Asia are benefiting from wealth migration and fostering talent, the US stands tall as leader in asset and wealth management innovation.
North America, particularly the US, remains the top region for high net worth individual (HNWI) wealth and population. According to Capgemini’s World Wealth Report 2024, the US HNWI segment experienced 7.4 per cent wealth expansion and 7.3 per cent growth of numbers of wealthy individuals in 2023.
Last year, US equity markets registered strong returns, a trend that continues today. An avalanche of US government-led spending initiatives to increase onshore manufacturing contributed to capital growth, from the Chips Act to the Inflation Reduction Act. A tech-led rally bolstered S&P index returns.
Wealth managers are undoubtedly taking stock of this growth, but how are they adapting to changing client demands?
“The composition of wealth is changing, and the coming generational wealth transfer presents numerous opportunities,” says Steven Fradkin, president of wealth management at Chicago-based giant Northern Trust. “As that next generation rises, it brings not only tech-savvy individuals but also different perspectives on how financial resources should be used.”
Northern Trust says it is continuing to roll out digital tools without losing the human element. “For example, we are leveraging an enterprise solution with GenAI that gives our advisers interactive access to The Northern Trust Institute, a research centre that powers delivery of persona-based advice, shaped by thousands of client interactions,” he says.
“This approach, including outcomes from clients and feedback from advisers, feeds into a proprietary algorithm that is continually fine-tuned. As more data points are added, the advice becomes more targeted and precise.”
“We view new technology through the lens of how to better serve and advise our clients, which leads to growth given the importance of client retention and referrals,” says Eric Sontag, president of New York-based Wealthspire Advisors, which has $27.4bn in assets under management (AuM).
“As it relates to generative AI, many of the applications that we’re exploring and implementing are behind the scenes, so the improvements are ones that clients will feel but not see,” he adds.
Early tech adopters
The industry’s primary custodians are investing heavily in generative AI to help improve processing turnaround times and question response times, says Mr Sontag. According to KPMG, 41 per cent of executives plan to double their investments in GenAI.
Wealthspire has been an “early adopter” of Microsoft Office’s Copilot, which is designed to improve daily productivity. “Daily activities such as notetaking, summarising meetings, drafting basic emails, and searching for information across multiple applications can all be done far more efficiently, freeing up material time for our advisers to spend with their clients and prospects,” says Mr Sontag
Client portals are also evolving fast. “Historically, they have focused predominantly on performance management, document vaults, and cash flow analysis,” he says. Looking ahead, however, the focus will be more “action-driven”, relating to signing of documents and initiating requests.
The view at Wealthspire is that consolidation and expansion of services will remain a significant industry trend. Three years ago, a registered investment adviser (RIA) managing $10bn in assets was expected to acquire smaller firms for growth. “But looking ahead, there is the question of when it will become more common for firms of that size or even larger to be acquired by the ‘mega-RIAs’,” says Mr Sontag.
As the industry has “evolved and become more competitive”, firms are adding services rather than reducing fees. Recently, Wealthspire launched a trust company, a service designed for their multi-generational clients.
According to research conducted by Cerulli, the top-five US wealth management firms control 57 per cent of broker/dealer AuM and 32 per cent of broker/dealer advisers, while the top-25 broker/dealer firms and their affiliates control 92 per cent of AuM and 79 per cent of advisers.
The research predicts a sizeable consolidation opportunity in the affluent investor segment. According to the survey, 57 per cent of advised households would prefer to consolidate financial assets with a single institution; however, just 32 per cent use the same provider for cash management and investment services.
Alternatives on tap
Growth in wealth has also led private banks to tap into alternative assets. Top players say it is “absolutely crucial” for wealthy families to diversify into private equity, private credit, real estate and infrastructure. “We’re seeing opportunities in infrastructure, especially with changes in demographics, the focus on renewable energy, and need for energy,” says Daniel Scansaroli, head of portfolio strategy at UBS, based in New York.
Digital evolution and the billions being pumped into renewable energy are driving demand for infrastructure, he believes. “The third component of this is the fact that we in the US are grossly behind in terms of updating our infrastructure,” he says.
Clearly many wealth managers keep one eye on the influence of US endowments and pension schemes, which have been the major drivers of alternative investments.
“I think their investment history provides insights into what ‘smart investors’ think the mix of asset classes should be for a long-term portfolio,” says Michael Moriarty, chief investment officer at Wealthspire Advisors. “And that’s good information for the wealth channel, but our considerations are different.”
Most agree that “notable differences” exist in demand drivers between institutions and the wealth segment. Firstly, most institutions have an “infinite investment horizon”. Secondly, most wealth managers are influenced by “significant” decline of public companies in recent decades, which has restricted their investment activities in public markets. According to the US Bureau of Economic Analysis, the number of listed companies in the US peaked at 8,090 in 1996, but as of the first quarter in 2023, it had fallen to 4,572, a drop of 43 per cent.
“The 60/40 portfolio just hasn’t held up in some of the more difficult markets, and people are looking for other ways to diversify,” says Mark Steffen, global alternative investment strategist, at Wells Fargo Investment Institute. “It’s not necessarily that our clients are looking to become more institutional; it’s really that the alternative space is becoming more accessible to the average high net-worth investor.”
A proliferation of “evergreen” structures across different alternative asset classes are “tailor-made” for the wealth channel, adds Mr Steffen.
Greener portfolios
Environmental, social and governance (ESG) considerations have become increasingly important for institutional investors, yet they’ve also sparked controversy over performance and “greenwashing”. Private banks are aiming to navigate this complex landscape.
Three-quarters of clients with investible assets between $25-$50m say ESG is important to their investment decision making according to Northern Trust. The research found that exposure to distinct, well-established risk factors such as size, value and profitability can explain most ESG strategy returns.
US private banks seek to provide a clearer view of exposures through dedicated ESG data platforms, allowing them to see how their portfolio compares to the broader investment universe. They can also “gain insight into how investments are aligned with values” and how this may affect their portfolio’s risk factors, according to Mr Fradkin at Northern Trust.
Among US wealth managers, innovative developments around ESG, private markets and technology which will continue to differentiate the best from the rest.