Asset manage­ment: invest­ment pro­ducts in a world of Net­flix, Tik­Tok and others

How is the market evolving and what does this mean for asset managers?

The ongoing exceptionally high volatility on international capital markets is leading to increased uncertainty in the banks’ retail business, both among customers and investment advisors. Record inflation rates, combined with the global turnaround in interest rates, are reducing the ability to save and invest, heralding the return of the deposit business and driving demand for alternative investments. Both customers and advisors are alarmed and considering risks from geopolitics, technology and the aftermath of the COVID-19 pandemic as key drivers of their investment decisions.

These decisions are increasingly being made through non-traditional channels: after three years of pandemic, customers are used to conducting all business transactions digitally from home, including their investment transactions. They do their own research and invest accordingly: the relevance of traditional sales channels such as the bank branch is increasingly called into question.

Customers are seeking investment solutions that generate an absolute, risk-adjusted return despite turbulent market conditions. Classic buy- and hold-strategies no longer seem to fit to changing lifestyles and utilization patterns as well as the corresponding need for maximum flexibility.

All of these complex market conditions pose significant challenges for asset managers: which products should they offer to their customers and through which sales channels? The often-discussed commission ban hangs like a sword of Damocles over existing sales relationships between asset managers and banks. It is therefore essential to rethink the sales strategy in a holistic manner.

Which customer and age groups are worth targeting?

Stringent, consistent customer segmentation is the key to success for any asset manager – after all, products can only be designed and marketed successfully if individual needs and preferences are taken into account. On the one hand, customer segmentation considers the customer’s financial situation, which often also provides information about basic usage patterns in terms of sales channels, need for advice, standardization versus individualization, and price sensitivity. On the other hand, distinguishing between different age groups is essential for a target-group-oriented approach.

• It is difficult for asset managers to reach traditional private banking clients, as most of them have a strong relationship with their financial advisors, who in turn actively and continuously target this clientele given their high earnings potential. The customer group below this segment, however, offers enormous potential: these so-called affluent clients are characterized by a stable ability to save and invest, but are significantly less targeted than private banking clients, thus making them a key target group for product developers.
• In mass retail business, too, innovation, standardization and digitalization can score points despite a declining propensity to save and invest: easy-to-understand, simple robo-advisory products, packaged in attractive digital solutions, open up additional sales potential.
• Another topic that should not be forgotten in customer segmentation is the age pyramid: values, life cycles, as well as investment and financing interests are changing. Generations Y and Z, for example, have a growing demand for innovative financial products, are already building up their asset base, and are actively interested in what is happening in the global capital markets. They often pick their investment ideas from social media, actively follow the latest trends in crypto, alternatives and real estate, and therefore demand a modern product and service offering tailored to their needs.

In order to achieve short and long-term sales success as an asset manager, it is essential to focus on the right customer groups. Affluent clients will play an increasingly significant role in the upcoming years, mainly because of their ability to save and their resilience, especially in times of crisis. Young investors, on the other hand, need to be won over in the long term. Overall, it is therefore essential to address young affluents as a new target group and to provide them with an attractive service offering.

What is the optimal service offering for young affluents?

In order to attract and retain young affluents as customers, it is necessary to develop a tailored service offering. In addition to the different types of investors, the investment motives of young affluents and their expectations of products and services need to be taken into account.

Fundamentally, we distinguish between three different types of investors – the delegators, the advisory customers and the decision-makers:

• Delegators are characterized by the fact that they cannot or do not want to invest much time in financial decisions and therefore often invest in savings plans or have their money managed through mandates.
• Advisory customers, by contrast, continue to seek traditional banking advice, but make their final investment decisions independently.
• Decision-makers have a high affinity for the capital markets and forgo classic advisory services. They conduct their investment transactions exclusively through digital channels.

With the rise of financial companies like Trade Republic, the growing popularity of cryptocurrencies and the like, young investors are often accused of having no serious investment motives and of gambling. However, as several studies have shown, the opposite is true: young affluents invest their money primarily with the goal of maintaining and expanding their ability to consume and ensuring financial security for all life situations.

The interplay of investor type and investment motives results in individual expectations of products and services – but some key points in product design are always important:

• First, young affluents value simplicity and transparency – complicated product names and explanations, as well as opaque cost structures, are an absolute no-go.
• Second, specific topics such as sustainability, innovation and digitalization are important to this target group.
• Finally, the focus should be on customer needs – in the form of individually tailored investment proposals or customizable products in the vein of Netflix and Spotify.

All of the above are reflected in the market’s product offerings for young affluents. Best-in-class products give investors a sense of individualization through extensive preference queries and a broad range of thematic focuses and asset classes. Examples of thematic focuses are smart cities or water, while examples of a broad range of asset classes include alternative assets such as cryptocurrencies and real assets. Such a product and service offering is usually complemented by a brand identity that is clearly distinguishable from the traditional offering for the retail segment. This is achieved through an unostentatious and elegant brand presence, higher barriers to entry in terms of minimum investment amounts and fees, or even through beyond-banking offerings.

In summary, the optimal service offering for young affluents is essentially a product tailored to this target group. This should be characterized first and foremost by simplicity and transparency, e.g. through comprehensible product names and transparent all-in fees. The investment focus should be thematically relevant and offer investors the option to put together their own individual asset portfolio. Finally, the product offering should be supported by a high-quality and modern brand identity that is clearly distinguishable from retail offerings.

Which sales channels should be used to attract young affluents?

In addition to an appropriate product offering, it is important to provide young affluents with access to their preferred sales channels and to ensure maximum flexibility.

Not surprisingly, this target group primarily researches and learns about investment opportunities independently on digital channels. By contrast, it is difficult to reach young affluents through the brick-and-mortar channel – the hurdle of visiting a bank is too high, and good investment products are already easily accessible on the Internet. In addition to research, transactions are almost exclusively conducted online.

The fact that young affluents have a very strong tendency to buy online will lead to problems for asset managers with stationary sales channels in the long run and makes a holistic digitalization of sales inevitable – whether alone or in cooperation with branch-based sales partners.

Given the diversity of investor types, it would make sense to create or use a digital sales platform with a variety of user interfaces:

• For delegators, this could be slider-based platform in the look-and-feel of robo-advisors.
• For advisory customers, the most promising idea may be to provide a platform where they can easily get in touch with advisors and obtain information about products through a shared screen.
• For decision-makers, moving sales to trading platforms is a sensible option.