The Wealth Management Opportunity for Banks

Blog Posts
September 14, 2023

Broad Strokes

The long-discussed intergenerational wealth transfer is no longer a distant concept but an ongoing reality. By 2045, $80 trillion is expected to change hands as Baby Boomers - the youngest of whom turn 60 in 2024 - pass their wealth on to succeeding generations.

Whereas Boomers historically managed their wealth through a handful of wealth professionals and longstanding bank relationships, younger generations have proven more dynamic, handling their finances across a growing number of financial institutions and fintech platforms.

The evolving landscape presents challenges for banks, who must navigate deposit flight, net interest margin (NIM) compression, and declining trust while also preparing for a potential surge in wealth outflows. The way younger generations manage money – and the fact they’re about to get a whole lot more of it – raises critical questions about the future role of banks but also creates a once in a generation opportunity for those banks willing to capitalize on it.

The Bank Situation

Banks, fundamentally, are platforms with large balance sheets, relatively cheap cost of capital, core capabilities across deposits, money movement, and lending, and a vast base of KYC'd customers. These are valuable assets, but as the new environment puts pressure on the traditional banking model, many banks would benefit from exploring additional ways to monetize their strengths.

The upcoming wealth transfer represents an enormous opportunity for banks: trillions of dollars will be up for grabs and fees on AUM are sticky, recurring, and predictable; wealth relationships also bring lucrative cross sell opportunities. But despite being nominally “up for grabs”, most banks will have a hard time acquiring these customers if they try to go head-to-head with wirehouses and large RIAs once the wealth has already changed hands.

Rather than waiting to pitch wealth services in a frenzied market to overwhelmed inheritors, banks have an opportunity to develop new offerings and data strategies that deliver financial advisor/family office-style solutions to the emerging and mass affluent today. Done correctly, this will have three important benefits:

  1. Mitigate Deposit Flight: Enhance customer trust and build more resilient relationships
  2. Unlock Non-Interest Income: Offset declining profitability through new revenue streams
  3. Lay the Foundation: Position the bank as default advisor when customers inherit their wealth

Today’s Mass Market Wealth Landscape

The typical wealth advisor manages their high net worth (HNW) clients’ wealth across a range of solutions: ETFs, mutual funds, fixed income, direct equity, alternatives, estate planning, retirement, tax preparation, life insurance, and charitable giving. While the largest wirehouses have built some of these capabilities in-house, even the most comprehensive platforms rely on a variety of third parties and partners to deliver the single product that is wealth advisory.

By analogy, the mass market wealth stack can broadly be broken down into key capabilities: Banking, Consumer Lending, Brokerage, Retirement, Estate Planning, Tax, Personal Financial Management (PFM), Crypto, Alternatives, Loyalty/Rewards, and Giving. Like the HNW model, these services are provided by a patchwork of banks, fintechs, specialty finance, and insurance companies. What differs for the mass market is that there is no corresponding aggregator or front end that connects them.

The upshot is that mass market wealth offerings are siloed; data and capital move inefficiently between them – and only at the behest of the consumer. No one platform can claim to “manage” the consumer’s wealth fully, and the benefits of each are cheapened as a result.

Unlocking the Wealth Opportunity for Banks

If you are a bank, and your overarching short-term goal is to retain and grow deposits, and your overarching long-term goal is to unlock fee revenue from the upcoming wealth transfer, the strategy should be simple: reduce the number of other platforms your customers interface with regularly.

The goal is not to be the only application consumers use - in fact, consumers will likely still rely on many of the platforms they use today. Rather, banks should strive to be the interface that unifies the various solutions, enticing customers through targeted marketing and clear value propositions to consume those same products but through the bank.

For instance, the annual tax filing process often sends customers away from their banks to services like H&R Block or TurboTax. This not only disrupts the banking relationship but is also a missed opportunity for banks to deepen their understanding of customers’ needs. By embedding tax solutions like Column, April, or Muse Tax, banks get a new recurring, high-value touchpoint with their customers, complete information on their finances and a chance to prevent tax returns being deposited in other accounts their customers may hold. Customers also receive real value; because their bank already has most of their information, their return will be substantially filled out by the time they start the process, reducing a once-tedious obligation to a handful of clicks. Additionally, banks can introduce innovative offerings like early access to tax refunds and year-round tax monitoring, providing customers with cash when they need it and eliminating surprise expenses come April.

How about retirement planning? Almost all bank customers have some form of retirement plan, such as a 401k or IRA, which is often managed outside of the bank. Assisting with the management and optimization of these plans through rollovers gives banks an opportunity to deepen customer relationships and position themselves for future wealth management. Companies like Capitalize help customers find held-away retirement accounts and streamline the rollover process, allowing banks to effortlessly aggregate retirement assets their customers already possess and eliminating the need for customers to maintain a retirement account at a different institution.

Estate planning is another logical solution for banks to offer. Historically considered a concern for wealthy individuals with complex inheritance decisions, new providers like Trust & Will, Wealth, and Just in Case offer digital-first estate planning solutions that scale to serve a broader market. Most people make or update estate plans when they purchase a house or have a child; mortgage is thus an obvious point-of-sale for these services, and, if banks embed tax preparation, they’ll be in the know when a customer adds a new dependent and can update the plan accordingly. Downstream opportunities like trust banking, probate lending, and estate administration make this not only a relationship-enhancing product but a highly lucrative one as well.

Banks can extend the same strategy to brokerage, trading, robo-advisory, charitable giving, and so on down the line: partnering, embedding, white labeling, and building their way to an integrated offering. The ubiquity of APIs and the emergence of embedded wealth enablers like Front, Atomic and MoneyKit make this easier than ever. The core strengths discussed above make banks the ideal platform to aggregate these solutions and an attractive low-CAC distribution channel for the partners that build them.

Wrapping these features into a beautiful, cohesive digital-first interface makes the offering scalable and accessible to a generation that has come to expect excellent digital experiences. Weaving an intelligent data layer underneath the solution will give institutions strong footing upon which to cross-sell their bread and butter: mortgage, auto, SMB, HYSA and whichever other products in which a given bank specializes. Customers will be delighted by a suite of solutions that build upon each other to reduce complexity while enhancing functionality.

Perhaps most importantly, in addition to unlocking potential fee streams and useful data on the customer, this approach has the subtle benefit of conditioning the consumer to manage their wealth with the bank. By the time a consumer is managing their bank accounts, loans, tax preparation, estate planning, personal investing, charitable giving and retirement savings behind a single pane of glass, it becomes logical – and will feel natural - to manage their inherited wealth in the same place.

Capitalizing on the Wealth Opportunity

In the short term, banks should measure success in terms of decreased deposit flight and increased fee revenue. Over the long term, banks’ core objective should be to graduate their existing customers into full-fledged wealth advisory clients. As consumers leverage more offerings on-platform, institutions must arm their advisors with tools to make the most of the opportunity. LLMs can play a major role in organizing the new data and help banks deliver their services to the right folks at the right times, but an intentional, overarching data strategy that integrates insights from new products will also be essential.

Beyond data, banks will need to modernize their wealth offering to appeal to younger generations. We’ll discuss these in detail in our next post, but table stakes capabilities will include digital experiences enhanced with personalized advice, access to alternative and sustainable investments, a sense of community and brand that resonates, value alignment, and educational content, to name a few.

Technology and partnerships can help expand wealth offerings into successively lower minimum thresholds. New technology stacks underpinning the advisory models from companies like Atlas, Farther, and Savvy can enhance the efficiency and reach of a bank’s existing advisors and expands the addressable markets of platforms willing to white-label their software to the banking channel.

Over time this could look like a Gen AI-powered chatbot for the mass market, a hybrid robo advisory model for $100K+, a limited amount of advisor time for $500K+, and a full advisory offering for $3M+. There might be ten different approaches for ten different banks, but the important thing is to build wealth-based advisory relationships with customers as early as possible.

In Summary

In a period of rapid change, banks are uniquely poised to offer wealth solutions that increase loyalty, create new revenue streams, and allow them to capture substantial portions of a once-in-a-generation wealth transfer. Here at Canapi, we are firm believers that banks ought to be a driving force of wealth and prosperity for Americans at all wealth levels.

In the coming weeks, we will release additional posts that further outline our thoughts on the exciting opportunities that exist for banks and fintechs and the specific steps institutions can take to unlock them. If you are building in this space or spend as much time thinking about it as we do, please do not hesitate to reach out!

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