Mass affluent investors to increase exposure to structured products

Demand for complex financial products is increasing significantly, especially among mass affluent investors. Just over one-quarter of them (26%) will invest in structured products over the next two years.

This is one of the trends highlighted by ThoughtLab in a new research - Wealth and Asset Management 4.0: How Digital, Social, and Regulatory Shifts Will Transform the Industry.

According to the report, mass affluent investors no longer rely exclusively on exchange-traded funds (ETFs) and mutual funds and are starting to branch out and opt for alternatives such as structured products, and even art and other non-bankable assets, which were traditionally the domain of very high net worth (VHNW) investors.

The research, which looks at trends in investing, compared investor preferences across all wealth levels and found that there is little difference between VHNW investors and the mass affluent in their appetite for complex investments. Demand for alternatives (69%), tax-exempt investments (59%), structured products (26%), and art (16%) in the mass market almost matches the investment agenda of HNW investors.

The big shift

According to the report, the pandemic made risk mitigation a top goal for half of investors, while raising concerns about the future economic, regulatory, and tax landscape with more than four out of 10 investors more focused on active investing and holistic planning, and 20% of investors shifting their investments towards social causes.

Concerns about risks and performance caused 27% of investors to move accounts to other firms while 37% of investors relied more on advisors and 30% became more comfortable with video calls and digital tools.

Digital access became a higher priority for 40% of investors seeking to spend more time with their finances. Fees came under review, with about four out of 10 investors willing to pay fees for advice.

Megatrends in motion

Currently, three-quarters of investors use actively managed mutual funds, but in two years, this share will drop slightly, while investments in passive funds and individual securities will grow, according to the report.

‘As investors hunt for better returns, more than two-thirds plan to be using alternative investments such as hedge funds and private equity over the next two years,’ it said. ‘Investors across wealth levels are also looking to boost alpha through specialised products like IPOs, tax exempt investment, commodities and derivatives, REITs, and structured products.

Retirement products such as pension funds, life products and annuities offering longer-term, tax-sheltered returns are moving up the priority list because of the ageing population. From an asset exposure standpoint, the direction of cryptocurrencies is still uncertain - while a small percentage of investors see them as the future of money, most investors are not convinced due to regulatory, market, and cyber risks.

Other megatrends identified by the study include ‘investing with purpose’; ‘higher standards’; ‘transparent/lower fees’; and ‘switching providers’.

Disclosure and suitability are increasing challenges for wealth managers in this more complex environment as firms must ensure that documentation and processes are well managed, accurate and auditable when offering products to the ‘risk-protected, mass affluent market’.

All relevant regulatory Know Your Customer profiles and risk-appropriateness documents and client confirmations must be filled and filed correctly right from the start during the onboarding stage, and then periodically reviewed, according to the report.

‘This presents a considerable burden to the wealth manager, who must take trouble to avoid not-in-good-order documents that require applications to be resubmitted to the investor due to errors and omissions. These are key causes of client dissatisfaction and of possible compliance issues further down the line,’ stated the report.

In addition to this tendency to diversify investment products and services, investors are starting to diversify wealth management providers as well.

One in three investors changed wealth managers in the last year, while almost half of investors globally are planning to add additional wealth management relationships in the next two years.

This significant new flow of capital is expected to trigger increased competition between wealth management firms which will be required to offer ‘a seamless digital experience’ to acquire and keep new clients.

Drivers of change

Shift to digital - 40% of investors saying that digital access has become a greater priority with 75% of wealth executives expecting digital interaction to be the norm in two years and 89% of investors saying their preferred channel will be mobile apps.

Investing with purpose - 34% of investors will seek ESG investing advice over the next two years. More than four out of 10 providers believe that clients expect them to be knowledgeable on social impact investing and to offer ESG products and services.

Democratisation - 67% of investors will want to invest in alternatives and 49% in IPOs. Also in two years, 58% of investors will want personalised financial planning and 53% will want day-to-day financial management services.

Higher standards - 49% of investors say that acting in their best interests is the most effective way for advisors to build relationships with them. The same percentage of investors have become more concerned about regulatory and tax changes.

Transparent/lower fees - Only 37% of investors are happy with their provider’s fees and just 36% are happy with their fee structures. Even fewer, 35%, understand how their advisors are compensated.

Switching providers - Over the last year one-third of investors moved over 20% of their funds to providers that offered what they want. Over the next two years, 44% plan to do so.

Click in the link to read the full report: Wealth and Asset Management 4.0: How Digital, Social, and Regulatory Shifts Will Transform the Industry by ThoughtLab.

The ThoughtLab report is based on a global survey of 2,325 investors across age and wealth levels, together with a cross-regional survey of 500 wealth and asset management firms, including investment advisory groups, private banks and trust companies, broker-dealers, robo-advisors, family offices, and retail, institutional, and alternative asset management firms. The study was concluded in November 2021.

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