What next for Australian Wealth?

If you have read anything I have written before, you will know that I am a wealth management technology evangelist.

I sincerely believe that technology can conquer all…reduce operating costs, increase margins, drive growth and boost profit, but perhaps more importantly, that it can serve as a much needed leveler –  that technology can deliver better outcomes, provide engaging customer experiences and that ultimately, it can help to provide a wealth management industry that can cater to all – that can improve financial literacy and provide much needed holistic advice to all consumers regardless of their net worth, their goals, their ambitions, their age, race or geography.

Nowhere is this needed more right now than in Australia and, sadly, nowhere does the challenge that lies ahead seem more daunting.

It is estimated that in Australia, one in three people possess no more than a basic level of financial literacy.

During the COVID 19 crisis, some $35 Billion AUD was released in early access from Superannuation funds to help people meet their basic household expenses.

A report by ‘Real Struggle’ in 2024 highlighted that 69% of Australian households are currently dealing with financial stress and a government opposition report published in January this year suggests that Australian per capita living standards will not return to pre-2022 levels until at least 2030.

The home page of the ANZ website contains a link to a section focused on cost-of-living support and Commonwealth Bank’s site includes a homepage link that asks visitors if they are ‘experiencing financial difficulty.’

Whilst it is admirable to see the largest retail banks offering support for the most vulnerable members of society, post-Haynes report trust levels remain low and, according to a 2023 report by Oliver Wyman, a large subset of consumers still find that undertaking even basic activities such as building an emergency fund or meeting a specific financial milestone either ‘challenging’ or ‘very challenging and possibly infeasible to achieve.’

The current market size for wealth AUM in Australia, excluding assets invested in Super funds is estimated to be some $1.2 Trillion, a figure that is projected to increase by over $400 billion within the next 5 years.

The sub-segment of consumers referred to by Oliver Wyman included the ‘unengaged’, the ‘ambivalent’ and ‘inquisitive beginners’ – none of whom are deemed to be adequately served by the wealth industry today and yet account for approximately 62% of the total addressable market.

For the most part, a small number of wealth management providers are fighting for market share in the HNW and UHNW segment, predominately focused on more sophisticated products and services that are likely unsuitable for mass market consumers seeking advice on lower risk and less complex investments, savings, loans, insurance and term deposit accounts.

The reasons are all too familiar. There remains a net decline in new advisers joining the industry. Industry trust levels remain low, meaning many consumers may not actively seek the advice they need – or more concerning, may turn to other sources such as social media channels.

Marketing messages, currently targeting only HNW or UHNW customers, may not ‘speak’ to mass affluent or retail customers, leading to apprehension when seeking to engage with a wealth management adviser.

Even the more simplified options, Superannuation investment for example, remains overly complex leading many to seek alternative options, for example, property investment.

Those investors that do utilize superannuation funds may fail to actively monitor or consider contribution levels, performance and charges. Prohibitive regulation keeps the cost of providing advice too high to encourage any real focus on what are perceived to be lower value customer segments and of course the introduction of robo-advisory and the increased use of both AI and machine learning has yet to deliver on an early promise of reducing costs to the point of enabling total inclusion.

I still believe that technology can solve many of these challenges, although not in isolation. Financial literacy needs to be tackled, and this responsibility should    not be borne only by the industry.

A 2020 survey of 17,000 people by The Household, Income & Labor Dynamics in Australia showed a sharp decline in the financial literacy of younger Australians – particularly those under the age of 24.

Whilst the Australian curriculum does include consumer and financial literacy in math, humanities and social science subjects, the extent to which this is being delivered is considered ad-hoc.

Banks and wealth managers need to recognize that the needs of these consumers may present very differently to more sophisticated clients. Wealth managers may need to shoulder a higher duty of care and, where possible, adopt a longer-term ‘lifecycle’ approach when undertaking planning – helping to educate, increase disciple, and structure long-term plans that may not be as immediately lucrative.

For wealth managers that are unable to offer a full suite of solutions across cash products, investments, insurance and loans, a collaboration across different groups, although unlikely to be desired, may be firmly in the best interest of the customer.

The regulators of course have a key role to play, not only in encouraging and making this collaboration possible but in creating a less rigid framework that will help to reduce the cost of advice and permit advisors and wealth managers to re-enter the space without fear.

Technology does of course have a significant role to play.

Digital onboarding tools, AI assistants and machine learning can help to automate processes by reducing the total cost of providing advice.

The advent of open API frameworks has enabled collaboration making truly holistic advice a possibility – hindered only by the current regulatory environment.

Gamification and digital engagement tools can help with improving financial literacy, understanding both spending and budgeting and enabling consumers to take greater control of their overall expenditure.

Goal setting tools encourage structured and disciplined investment and savings, and robo-advisory solutions enable a more tailored, more efficient investment management service at a significantly reduced cost.

Organizations themselves need to rethink their overall service proposition. Whilst many of the tools are already available, they need to be deployed as part of a carefully considered and well-defined overall strategy.

Whilst many Australian wealth management organizations have signaled a strong intend to ramp up their usage of AI in the next 3-5 years, almost 50% currently have no formal policies in place to eliminate bias or fairness, even less have policies in place to disclose the use of AI to their customers.

As I stated at outset, the size of the challenge in Australia is very daunting, but so is the potential prize.

There are two lenses through which we can view this. From the perspective of society in general, it’s imperative that all individuals can gain access to financial education and to receive high quality holistic advice on savings, insurance and investment – hopefully enabling better planning and reducing future dependency on the state.

We must also remember that we are currently in the midst of a global generational wealth transfer. In order to attract and retain the beneficiaries of inherited wealth, firms need to consider how they currently engage with a new type of customer.