Navigating the wealth management shift: Retail Investors are the new goldmine

Navigating the wealth management shift Retail Investors are the new goldmine

The transformation in the wealth management landscape is undeniable. To achieve consistent double-digit growth in this maturing industry, the focus must shift towards retail investors. These investors are a vast reservoir of opportunity, yet they present a set of challenges that many in the wealth management realm may find unfamiliar.

WealthTech company Velexa recently explored why investors need to focus on the retail customer and how they can do it. 

Retail investors are not a minor market force. They hold a staggering $140 to $150trn of global assets under management (AUM), which is roughly half the total, according to Bain & Company’s research. However, only a meagre 16% of these investors venture into alternative investments. This presents both a gap and an opportunity. Traditional firms, despite their vast experience, often find the distinct needs of the retail market a fresh terrain to navigate.

Several factors highlight the increasing allure of the retail investor. Due to rising interest rates, the conventional 60/40 investment model has witnessed a shakeup. Moreover, after the market upheavals of 2022, hedging became a trickier affair. With over 85% of firms that rake in more than $100m annually being privately owned, diversifying portfolios solely with public equity is now a challenge. As a solution, many managers are pivoting to alternative assets like private equity, real estate, and hedge funds to extract higher returns, especially in bearish markets.

Historically, these alternative assets were a no-go zone for the mass affluent segment who had less than $1m of liquid assets. However, a pivotal shift occurred in 2020. The Securities & Exchange Commission (SEC) took a progressive step by allowing those with the requisite “knowledge and expertise” to invest in such assets, even if their investable assets fell short of the $1m benchmark.

The primary lure for wealth management firms, however, isn’t just the mass affluent. The segment housing investors with assets between $1m and $30m, often termed the “broad middle”, is of prime interest. Presently, only 20% of this segment’s wealth is channeled into alternative investments. Without embracing this sector, achieving double-digit management fee growth, a crucial indicator for public market valuation, might remain elusive. Sole reliance on institutional investors won’t bridge this gap.

Major fund players recognise the undeniable potential of the broad middle. Giants like Blackstone, KKR, and Apollo have set ambitious sights on retail investors. Blackstone’s experience, however, underlined a core challenge with this demographic – the disparity in liquidity expectations. In a telling episode, even after the University of California infused Blackstone’s BREIT retail fund with a $4bn boost, hefty redemptions in 2022 demonstrated the gulf between retail and institutional investors’ perspectives.

As Bain & Company points out, one of the foremost hurdles in catering to retail investors is their liquidity needs. Unlike institutional investors, who are accustomed to long-term commitments, the retail segment craves quicker asset access during turbulent times. Addressing this dichotomy remains a significant challenge for large funds.

There are other areas of friction too: transitioning to a consumer-focused model, addressing the retail market’s demand for tailored solutions, efficient branding, nuanced marketing strategies to cater to various wealth tiers, and identifying new channels for distribution. Traditional approaches, like the one taken by private equity firms that previously focused on fostering tight-knit relationships with a limited set of institutional investors, won’t suffice in this evolving landscape.

The digital space offers vast avenues for retail investors, adding another layer to the challenge. Trust remains a concern, with a study by the CFA Institute revealing that only 60% of retail investors trust financial services, a stark contrast to the 86% of institutional investors. Beyond trust-building, firms need to champion digital education, ensuring they’re attuned to the preferences of newer generations like Gen-Z.

Adapting to this changing scenario might seem daunting, but this is where Velexa steps in. Established funds and wealth management firms, with their deep-rooted relationships, can harness Velexa’s investment-as-a-service platform. This platform provides a seamless way for these firms to cater to retail investors, boasting access to over 600,000 financial instruments across more than 50 markets. This plug-and-play solution means firms can channel their energy towards branding and messaging, instead of getting bogged down in developing investment tools from scratch.

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