The pressing need for wealth managers to cater to retail investors


In a recent post by WealthTech firm Velexa, the company outlined why wealth managers need to focus more on retail investors. 

The WealthTech industry is on the cusp of a significant shift. If they aim to sustain the double-digit growth trajectory, wealth management companies must realign their focus to target retail investors. The retail sector, while abundant in opportunity, offers a plethora of challenges that many in the wealth management space might find difficult to navigate.

Retail investors are no small fry. They possess a staggering $140 to $150 trillion of the world’s assets under management (AUM), accounting for about 50% of the total, as highlighted by Bain & Company. However, a meagre 16% of these retail investors venture into alternative investments.

Many conventional firms often overlook this massive potential, viewing the retail investor’s needs as unknown waters.

The global financial climate has undergone noticeable shifts. Elevated interest rates have disrupted the classic 60/40 investment paradigm. The financial tremors of 2022, coupled with the surge in interest rates, have made equity hedging a complex affair. To add to the conundrum, over 85% of firms raking in more than $100m annually remain privately owned, thereby making a purely public equity-based portfolio diversification a challenging endeavour.

In the pursuit of amplified returns, especially in bear markets, managers have historically sought refuge in alternative asset classes like private equity, real estate, and hedge funds. Historically, these investment avenues remained beyond the grasp of the mass affluent investors, particularly those with less than $1m to invest. This landscape underwent a transformation in 2020 when the Securities & Exchange Commission (SEC), the USA’s financial watchdog, liberalised regulations. This decision enabled those with the requisite “knowledge and expertise” to dabble in alternative assets, irrespective of their net worth.

Interestingly, the true gold mine for wealth managers isn’t the mass affluent. It’s the $1m to $30m segment, often dubbed the “broad middle.” A mere 20% of wealth in this category has been directed towards alternative investments. This trend persisted even before the SEC’s regulatory shift. If wealth management entities fail to attract this segment, they risk missing out on their ambitious double-digit management fee growth aspirations, a pivotal metric that plays a crucial role in determining their public market valuation.

Major funds like Blackstone, KKR, and Apollo have recognised the value of this segment and have set lofty targets. Yet, Blackstone’s experiences in 2022 stand as a testament to the fact that retail investors operate on different wavelengths compared to institutional ones, particularly when it comes to liquidity expectations.

Tapping into the retail market is no cakewalk. As Bain & Company aptly point out, liquidity remains one of the foremost challenges when courting retail investors. Unlike their institutional counterparts, retail investors seek swift access to their assets, especially during turbulent times. This mindset clashes with the traditional fund structures oriented towards long-term gains.

The WealthTech arena requires an evolutionary approach, embracing digital pathways and enhancing branding efforts. Moreover, with a mere 60% of retail investors placing their trust in the financial services industry (as per the CFA Institute), the need for digital education solutions and transparent communication becomes paramount.

Yet, amidst these challenges, established funds and wealth managers wield an edge – their longstanding relationships with major stakeholders and institutional investors. These relationships can be harnessed to market products extensively. Enter Velexa, which offers a streamlined solution.

Their “plug and play” system enables firms to roll out a diverse product range for retail investors seamlessly. Whether it’s through the Investing API or a full-blown customer-centric platform, Velexa’s offerings promise to be a game-changer.

Read the full post here.

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