Artificial intelligence (AI) is poised to create a significant upheaval in the wealth management sector, already embroiled in fierce competition for fees and client inflows. As investors embrace AI-powered robo-advisors, the industry is witnessing a surge in mergers and acquisitions (M&A) activity. A recent PwC survey warns that one in six asset and wealth management companies may face acquisition or shutdown within the next five years due to the disruptive impact of AI.
The tech carnage and AI’s looming impact
Paul Meeks, a seasoned portfolio manager at Independent Solutions Wealth Management, predicts that the rise of AI will result in significant “tech carnage” within the wealth management industry. As the industry becomes more technologically advanced, smaller firms may be compelled to consolidate to stay competitive. Meeks emphasizes that investments in game-changing technology are vital for survival, as failure to adopt such advancements may lead to the replacement of existing firms.
Robo-Advisors unleash game-changing technology
Robo-advisors, powered by sophisticated AI models, are revolutionizing the wealth management landscape. Companies like Vanguard, Schwab, Fidelity, Betterment, and Acorns are already offering and investing in robo-advisory services. These AI-driven platforms empower investors with wealth-building actions for the present and retirement planning for the future.
Meeks argues that the wealth management industry will witness a concentration of power, with the strong becoming even stronger. The key differentiator will be the ability to execute a vision driven by technology. Industry giants like Schwab and other major players are expected to hold an edge due to their vast resources and technology-oriented strategies. However, the question remains whether these industry giants can effectively deliver on their promises.
Forecasting the rise of robo-advisors
PwC predicts exponential growth for robo-advisors, projecting that they will manage a staggering $6 trillion in assets by 2027. As investors increasingly embrace digital investment advice, money management firms are under pressure to bolster their technological capabilities to navigate the industry’s AI-driven future.
M&A deals on the rise, navigating the storm
With the growing significance of AI, M&A deals in the wealth management sector are surging. Last year witnessed 341 M&A deals, marking an 11% increase from 2021 and the highest number of deals in a decade, as reported by investment bank and consulting firm Echelon Partners. Notable transactions include Royal Bank of Canada’s acquisition of Brewin Dolphin, HUB International’s takeover of WealthPlan Advisors, and Alera Group Wealth Services’ buyout of Johnson Brunetti.
The trend of consolidation has continued this year, with headline acquisitions like JPMorgan’s takeover of First Republic Bank, First Citizens Bank’s rescue deal for Silicon Valley Bank, and UBS’s emergency takeover of Credit Suisse. These crisis-driven deals have consolidated wealth management operations in anticipation of an AI-fueled future.
Reshaping the industry: Stephen Dover’s Barbell approach
Stephen Dover, head of the Franklin Templeton Institute, envisions a “barbell approach” for reshaping wealth management. Large players will continue to scale and thrive, while smaller specialized groups will need to adopt creative and idiosyncratic strategies to succeed in the transformed landscape.
The wealth management industry is on the cusp of a major transformation driven by AI-powered robo-advisors. Market players must adapt and embrace technology to thrive in this new era or risk being overtaken by competitors. Just as passive investing through ETFs disrupted actively managed funds in the past, AI-driven technology is now poised to reshape the industry. The stage is set for the survival of the fittest, and those who fail to adopt AI may face consolidation or extinction.
