Traditional private banks and wealth managers often struggle in adapting their offerings to appeal to younger generations of clients. As a result, they are at risk of losing those clients to competitors that have more compelling proposals (e.g. in terms of social responsibility, client centricity or flexibility) and they might be missing valuable opportunities to create new revenue streams.
Generation Z – those born in the final years of the last century and early 2000s – are coming of age. Estimates of what they and other generations close to them will inherit over the next years range from $15 trillion to $68 trillion, and some are expected to also become wealth creators at a younger age.
Yet very few private banks have adapted their offerings to suit their younger clients – for example, by hiring advisers that speak their language and understand their different motivations and beliefs. Nor have many private banks so far embraced the newer technology services – such as digital channels, blockchain and cryptocurrencies – and investment themes that this generation might be interested in.
According to the Accenture – Orbium Wealth Management C-Level Survey, banks acknowledge how societal and behavioral megatrends (such as sustainability, multigenerational societies, emerging technologies or shifts in values, beliefs and trust) are affecting their industry. But the survey also shows that many are struggling to respond accordingly.
Why banks should be more oriented to Gen Z
The challenge to engage Gen Z starts with a bank’s typical traditional financial adviser workforce. He – yes, still often he – is likely to be 50-plus with an illustrious career forged in very different times with very different market dynamics. He might fail to be flexible enough to relate to Gen Z, whose attitudes and behaviors vary greatly from those of their parents and grandparents – his traditional clients.
According to the Pew Research Center, Gen Z is digitally native – having grown up in the world of smartphones – more ethnically and racially diverse and probably better educated than any generation before. This generation is also more likely to act on strongly held moral and ethical values. Another survey found that Gen Z members in the UK, for example, are up to seven times more inclined than Boomers to pay a 20% premium for an ethically produced item.
As such, the younger generations are looking for responsible wealth managers to provide opportunities for ethical investing – and if they don’t find it where their parents and grandparents bank, they might go elsewhere.
Our recent Wealth Management C-Level Survey also found that when wealth handled by private banks is inherited, on average 32% of it leaves that bank to be managed elsewhere. Banks need to respond quickly to stem this outflow as younger generations progressively take control of their inherited wealth.
Embracing ESG and adopting new technologies to increase flexibility and speed
In short, in order to engage with Generation Z and those around them, banks need to adopt more responsible strategies that can meet changed demands and avoid new potential risks such as greenwashing. Some have already begun that journey. Swiss private bank Lombard Odier, for example, has invested significantly in environmental, social and corporate governance (ESG). It is working with Oxford University on a research project into sustainable finance and has developed its own models to help clients keep their portfolios aligned with their ethical values.
But pressure is mounting on the industry to do more. Younger members of the Rockefeller banking family recently founded BankFWD to put pressure on banks to be more responsible and align their strategies with the goals of the Paris Agreement on global warming.
Another area where private banks might also be losing ground is in adopting new technologies such as digital, cloud, AI and machine learning which could help provide opportunities to significantly increase their flexibility by better scaling delivery of products, data analytics and advice at speed.
To be fair, for private banks, this is in part due to their very nature. Heavily regulated and thus having to be risk-conscious, they are often restricted in the services they can provide. But firms should still investigate what is possible. For example, many of the players in the industry were cautious to the potential of cryptocurrencies, and might have underestimated younger investors’ appetite for them – with some suggesting early incarnations of Bitcoin were a “scam”. But times have changed since then, and, for example, last year J.P. Morgan Chase created its own cryptocurrency: the JPM Coin. Times have changed indeed.
The rise of cryptocurrencies is not only due to their performance, but also that their underlying model might be perceived by Gen Z to be more independent, transparent and trustworthy (in comparison to established products). Our survey findings thus reinforce the fact that the societal and behavioral megatrends which we laid out before could progressively reshape client and investor behavior and demands going forward.
Truly digital wealth management has also had a slow start. Many wealth managers believed their highly personalized services couldn’t be delivered digitally, particularly for the very wealthy. But guess what? It turns out that high-net-worth individuals like the convenience of digital services. And the current pandemic, which has severely restricted travel and in-person business meetings, has proved the worth of remote digital advice and trading many times over. Citi in Asia, for example, saw its digital brokerage volumes jump 78% year-on-year in the first quarter of 2020, just as the pandemic was taking hold in the region.
Fast change is needed to become a responsible, client centric and flexible wealth manager to capture next generation wealth
The message is rather clear. Wealth managers that wait too long to see how change pans out risk losing their current clients and their current clients’ offspring, along with the opportunity to develop new revenue streams and the chance to cut costs and raise their return on assets.
Their new younger clients still might be an enigma to them in parts, but technology is here to help. Analyzing data on those clients’ spending and investing can help banks better understand what makes them tick, find out what they care about and create the respective new products needed across both new and traditional asset classes. As an example, last year Spanish banking group BBVA launched what it calls its AI Factory to work on shortening time-to-market for new products and personalization.
Meeting the needs of the younger generation means real change for private banks. It means recruiting differently, adopting new technology and developing new products and solutions, such as ESG investing. Banks that are making an effort now are likely to see additional growth.
Set to inherit significant sums, the younger generations will likely be key to the long-term future of wealth managers. It’s time they were given the attention and investment they deserve before they start looking elsewhere.