September 7, 2023

Why Wealth Managers Must Focus On Retail Investors (And How)

The wealth management sector needs to expand to retail if it hopes to maintain double-digit growth in a maturing industry.

The wealth management sector needs to expand to retail if it hopes to maintain double-digit growth in a maturing industry. The retail sector represents an enormous well of potential but comes with challenges that the wealth management sector is typically unprepared to deal with.

Retail investors hold between $140 and $150 trillion of the world’s assets under management (AUM), or about 50%, reports Bain & Company. But only 16% of those investors hold alternative investments.

Despite the attractiveness of this cohort, the market needs of retail investors are unfamiliar territory to traditional firms.

The growing attractiveness of retail investors

High-interest rates have tilted the traditional 60/40 investment model. Rising interest rates have made hedging more challenging due to the decline in equity prices following 2022’s market rout. Additionally, over 85% of the companies generating over $100 million annually are privately held. This makes portfolio diversification challenging when it’s composed only of public equity.

Managers typically turn to private equity, real estate, hedge funds, and other alternative asset classes to achieve higher returns, especially during down markets.

These asset classes have been previously closed to mass affluent investors with less than $1 million of investable assets. This changed in 2020 when the Securities & Exchange Commission (SEC), USA’s investment and securities watchdog, relaxed this regulation and allowed investors with sufficient “knowledge and expertise” to invest in alternative assets, even if they had less than $1 million in investable assets.

Still, the most attractive retail investment sector isn’t the mass affluent but the $1-million to $30-million range generally known as the “broad middle.” Only about 20% of the wealth in this broad middle category is currently allocated to alternative investments, despite these investors being qualified for them even before the SEC’s relaxation.

Without attracting this broad middle sector, wealth management firms are unlikely to reach their double-digit management fee growth targets, a vital metric to maintain a high public market valuation. Institutional investors are unlikely to furnish the required capital alone to achieve this growth.

The largest funds understand the vital need to target this broad middle. Blackstone, KKR, and Apollo have all ambitious retail investor targets.

But Blackstone learned firsthand that retail investors think differently than institutional investors when its retail funds were hit by significant redemptions in 2022.

Although the University of California gave Blackstone’s BREIT (Blackstone Real Estate Income Trust) retail fund a $4-billion vote of confidence, the quantity of redemptions Blackstone experienced highlights a key challenge when dealing with retail investors: Liquidity expectations.

Challenges of targeting the retail market

According to Bain & Company, liquidity is among the top challenges funds and wealth managers face when targeting retail investors. Institutional investors are accustomed to locking up funds for several years and patiently waiting for returns. Conversely, the retail market gets uncomfortable with the same structure and wants quick access to assets when the waters grow rough.

This inherent conflict reduces fund managers’ ability to structure funds for long-term gain. Large funds have made various attempts to address this challenge, with varying degrees of success.

The other challenges lie in the realm of typically unfamiliar territory for traditional wealth managers:

  • The need to adopt a B2C model.
  • Retail’s demand for customer-centric solutions.
  • Branding.
  • Segmented marketing to reach mass-affluent as well as higher tiers.
  • Discovering new distribution channels.

For example, private equity’s focus in the past has been to build solid relationships with a small number of institutional investors. This focus has led to insufficient distribution channels to reach individual investors.

Immense digital pathways now exist for retail investors, adding to the challenge of capturing this cohort’s attention.

Funds must also work on branding. A study by the CFA Institute found that only 60% of retail investors trust the financial services industry, compared with 86% of institutional investors. This is a branding issue.

Retail investors might also require more education, and funds need to implement tools to provide this digitally. It wouldn’t be possible to hand-hold thousands of investors through all their investments. Retail investors also don’t want to be hand-held, especially in the growing Gen-Z cohort that increasingly obtains its advice from online channels. So, digital education solutions are essential.

Building in all these tools and features is overwhelming, but funds need to be nimble in the changing market, or risk being overtaken by upcoming aggressive players.

In matters of building a professional investment tool, Velexa can help wealth management firms get a foot in the door, freeing them up to focus on the other aspects of their strategy.

How Velexa’s investment-as-a-service platform can help in the changing landscape

Despite the work needed to build the necessary digital services and channels to serve the retail market, established funds and wealth management firms have at least one significant advantage over startups: Decades’ worth of powerful relationships with incumbents and large institutional investors, built on mutual trust.

Funds and wealth management firms can leverage these relationships to market their product broadly. As for building it: Velexa provides a “plug and play” solution for firms at every level to immediately start offering retail investors a white-labelled, comprehensive, and differentiated range of products. The Velexa solution can be implemented incrementally through the Investing API or as a full-scale customer-centric service.

The Velexa platform offers simple access to over 600,000 financial instruments across more than 50 markets. The platform supports a variety of assets and offers flexibility with a 24/7 operational model. Velexa also has customer privacy and tested security protocols built into.
With a robust product in place, firms can focus on branding and messaging instead of spending months or years building an investment solution while newer players take the lead.

To learn more about implementing Velexa as part of your investment offering, contact us for a demo.