AI and ESG trends transforming wealth management in 2023

AI and ESG trends transforming wealth management in 2023

Economic uncertainties have seen Western economies grapple with challenges such as high-interest rates, amidst geopolitical issues like the war in Ukraine. This ripple effect has significantly impacted the wealth management sector.

According to a recent BCG report, the global financial wealth experienced a reduction for the first time in 15 years in 2022, dwindling by 4% to $255tn. This decrease combined with escalating costs for wealth managers, stemming from larger teams, wage inflation, and increased tech investments, emphasises the need for a well-defined strategy moving forward.

So, how can wealth management companies navigate these turbulent times and achieve profitable growth? WealthTech pioneer Kidbrooke recently explored the key trends in wealth management during Q3. 

Several ongoing trends are reshaping the wealth management landscape. Key amongst these are the growing significance of environmental, social, and governance (ESG) factors, amplified regulatory scrutiny on consumer dealings, increased reliance on financial analytic tools, and a deeper integration of AI, machine learning, and automation.

Consumer Duty: Redefining Customer Care Standards

Consumer Duty, introduced on 31 July, establishes a more robust consumer protection framework within the financial services sector. This mandates banks, insurers, and wealth managers to present relevant, understandable information, ensure customised service that addresses client needs, and offer prompt customer support for issues. This proactive approach towards consumers is timely, given an FCA study that found fewer than half of UK adults trust the UK financial services. Approximately 7.4m individuals failed to reach their financial service providers in the year leading up to May 2022, with the most vulnerable citizens facing the most difficulties. Surprisingly, only 36% believed that the majority of financial firms treat them transparently and honestly.

Hence, businesses must exhibit the value derived from all facets of their operations, from sales to distribution. Although this might pose challenges, Consumer Duty is likely to motivate companies to leverage advanced financial analytics. This will enable them to design and monitor holistic, regulated client journeys.

AI Tools Paving the Way in Client Engagement

The impending ubiquity of artificial intelligence is something wealth managers cannot overlook. Notable players like Goldman Sachs and Morgan Stanley have already embraced generative AI tools for market intelligence. This reduces the workload on investment research analysts. Following the introduction of ChatGPT, a slew of similar tools, like Bloomberg GPT, have entered the market. These advancements are democratising previously specialised areas and encouraging collaboration across different business units, heralding better efficiency and knowledge sharing.

Machine learning tools are set to play a pivotal role in offering bespoke advice. By 2023, over 80% of new wealth management clients will demand tailored recommendations. Combining tools like ChatGPT with financial analytic platforms, like OutRank®, will not only improve forecasting but will elevate client engagement standards in the wealth management industry.

Sustainability in Investments: Essential for Wealth Managers

The escalating demand for sustainable investments, paired with stricter ESG regulations, has made it imperative for wealth management firms to reinforce their commitment to sustainable investments. Sustainable funds made up almost 20% of Europe’s total fund assets in 2022, as reported by Morningstar.

Regulations like the Sustainable Finance Disclosure Regulation (SFDR) now require GPs to disclose their sustainability metrics. A recent Bloomberg survey indicated that 92% of finance executives are set to amplify their investments in sustainable ventures, expecting an increase of at least 10%. Morgan Stanley has taken the lead, earmarking $700bn to achieve its ambitious target of $1tn in ESG financing by the end of the decade.

OutRank® offers a simulation-based method that allows financial advisors and wealth managers to project investment performances across varying future climate scenarios. This assists clients in visualising long-term financial goals, incorporating climate change considerations into their decision-making process.

Investing in the right digital tools can enhance relationship manager productivity, enrich client experience and loyalty, and cement financial literacy.

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