Morningstar Magazine - June/July 2017 - 58

72%

Spotlight: The Future of Investing
APAC

Europe

EXHIBIT 1

Fee compression is not the only impediment to
wealth managers' margins. Regulatory compliance
costs incurred in the wake of the financial
crisis are the main cause of declining margins of
European wealth managers. And these costs are
expected to remain high. According to a survey by
the consultancy EY, European wealth managers
are much more pessimistic about profit-margin
trends than are their U.S. counterparts. While 46%
of U.S. wealth managers expect improving
margins, only 11% expect the same in Europe; 40%
see margins set to decline (compared with 18%
of U.S. respondents).4
Trust: Elusive, but Crucial, for Wealth Managers
While trust is a crucial element in the client-advisor
relationship, it is also an elusive one. The
fallout of the financial crisis, in which investors
suffered losses and watched big banks
saved only by state-sponsored bailouts, should
not be underestimated.

"Brand value, arguably the most important asset
of incumbent wealth managers, has been
damaged by a series of related shocks," says Giles
Keating, former head of global research
at Credit Suisse and current president of the
Werthstein Institute, an affiliate of the Germanbased robo-advisor Werthstein.
Clients' loyalties to incumbent wealth managers
are no longer rock solid. According to EY,
the main drivers of the trust for European wealth
management clients are transparency in portfolio
performance and fees. Firms' reputations and
their advisors' objectivity also figure prominently
as elements of trust, says EY.
On those counts, the track record of wealth
managers has been, at best, mixed. Add
in the growing appeal of robo-advisors, and
indications are that eroding trust might
be a threat to wealth managers. These nimble
newcomers have capitalized on the advancements of technology and promise a new
customer experience through innovative, easyto-use applications.

Earn Your Fee Investors say they prefer performance-based fees over other types.
Current

Ideal

% of Respondents
40

30.1
23.8

21.9

20.5

18.0

Morningstar June/July 2017

17.4

16.1

20
12.7

11.9

10
0

Percentage
of Assets

Modular Fee
for Service

Based on
Performance

Fixed Yearly
Fees

Combination

Source: Capgemini.

Consider demographics, too. A substantial amount
of wealth will transfer to younger generations.
Millennials are more tech-savvy than today's rich.
Asset retention across generations is no longer a
given for wealth managers. According to a survey
by PwC, asset attrition rates may reach more than
50% in intergenerational transfers of wealth.5
New players are licking their chops to challenge
the incumbents by offering elements of
wealth management services. These players are
not limited to robo-advisors but also include
brokerage firms and asset managers. We should
note that while robo-advisors have been the
talk of the town, the assets they manage are still
modest. The largest of the new players, the U.S.
platform Betterment, manages about $7.5
billion. The largest non-U.S. robo-advisor is British
Nutmeg, which has AUM of $800 million.
The largest robo-advisor in the German-language
countries is Scalable Capital, which manages
only $100 million.
The challenge to incumbent wealth managers by
the new financial-technology firms is dwarfed
by that posed by actors entering the market that
have thrived in other parts of the financial
industry, such as asset managers and brokers.
Schwab Intelligent Portfolios manages more than

4 http://www.ey.com/gl/en/industries/financial-services/asset-management/ey-global-wealth-management-survey-2016
5 Spellacy, Michael, & Patel, Arjun. 2016. "2016 Wealth Management Trends: A Revolution Both Loud and Quiet." PwC. White Paper.

28.1

$10 billion. Vanguard, having entered the market
only in 2015, now runs the largest robo-advisor
in the world. The assets administered by
Vanguard Personal Advisor Services have increased
from $17 billion in May 2015 to nearly $50 billion
as of February. Other asset managers have
also dabbled with robo-advisors. In 2016, Invesco
acquired Jemstep, which will function as
an open-architecture, white-label platform for
third-party distributers. A year before, BlackRock
purchased FutureAdvisor, which also offers its
services to banks. In 2016, FutureAdvisor reached
a distribution agreement with Spanish bank
Banco Bilbao Vizcaya Argentaria BBVA.
Desperately Seeking the Tech Edge
The third challenge to wealth managers concerns
the rapid advances of technologies such as
robotics automation. We've already discussed the
effects these technologies are having on
client-facing aspects of the industry. But tech
advances also involve changes in the back- and
middle-office structures. While the latter
aspect is a powerful inducement for cooperation
between newcomers and incumbents, the former
will be a tough challenge for incumbents.

Although the market share of European pure-play
robo-advisors is negligible today, competition

http://www.ey.com/gl/en/industries/financial-services/asset-management/ey-global-wealth-management-survey-2016

Table of Contents for the Digital Edition of Morningstar Magazine - June/July 2017