Adapting to uncertainty: The impact of COVID-19 on wealth managers in Europe

The reaction to the COVID-19 crisis has been varied across different countries, segments, and individual firms.

This reflects the evolution of COVID-19 in each market and the differing shape of the wealth management and banking landscape at the local level. In general, the impact of the crisis has been more severe in Southern Europe where countries like Italy and Spain have had to deal earlier with a sudden surge of infections and the resulting lockdown measures. Central and Northern Europe have seen, on average, less disruption due to the combined effect of fewer violent outbreaks, milder lockdown measures, a more resilient economy, and a higher level of digital proficiency. The pandemic has accelerated pre-existing trends in wealth management: first, the digitisation of processes and client propositions; second, the shift to centralised portfolio and risk management; third, the increasing focus on ESG and growth investing; and finally, putting the accent on the role of wealth managers (WMs) in supporting their social and economic ecosystems.

Digital transformation in client propositions and adviser enablement
Wealth managers in Europe are prioritising digital transformation efforts. This is independent of the digital experiences of individual firms throughout the crisis, which have ranged from ‘near seamless’ to ‘challenged’. This transformation is driving an increased reliance on technology to support advisers and internal processes. It’s also driving the digitalisation of the interface with end-clients through digital or hybrid propositions. According to research conducted by BlackRock, 40% of wealth managers we spoke to are accelerating the implementation of digital transformation programmes due to COVID-19. Another 50% are maintaining existing digital projects but putting many other internal projects on hold.

The relevance of portfolio risk management and centralised investment propositions
In conditions of extreme market turmoil, sound portfolio and risk management systems have shown their worth. WM propositions based on centralised portfolio decisions – DPMs or home-office-led advisery propositions based on model portfolios – have shown greater resilience in both performance and flows. For this reason, they’ve also been praised as the preferred service model for the future by more than 70% of respondents in our client conversations.

Enhancing the focus on ESG and long-term growth trends in investments
With the COVID-19 crisis and related market downturn, 2020 could be the tipping point for sustainable investing. Many wealth managers saw ESG as a “nice to have” but have been waiting for the next crisis as the ultimate test of the concept. In the recent crisis sustainable investment strategies have proven to deliver higher and more stable returns. They have also attracted more resilient flows. As a result, 76% of WMs indicated that they have either continued to focus or increased their focus on sustainable investing in the recent crisis.

Earning the social license to operate: Wealth Managers supporting their local ecosystems
Most of the wealth managers we surveyed have increased their support of their local economy and ecosystems. Banking and insurance groups have increased their engagement with local authorities, trying to find ways to provide support and temporary relief to key stakeholders (their employees, their clients, and the local communities in which they operate). These initiatives are some of the steps financial institutions are taking as part of their corporate purpose and societal mission. Relief efforts include:
• Provision of new credit and loan management services to distressed households and businesses acting as a “transmission mechanism” to make sure eligible clients can get the most out of the new government programmes. In most countries, key banking figures have pledged the provision of significant amounts for new credit lines and set up programmes to defer principal and interest payments for mortgage and commercial loans. Some international private banks have used Lombard lending to offer their clients liquidity without the need to sell their investments during the market downturn.
• Monetary contribution to relief funds to deal with the COVID-19 health emergency. Banks and WMs have created their own relief fund programmes to sustain local healthcare emergency situations and support social relief efforts. There have been donations made to local communities, including charitable initiatives to support vulnerable groups and the educational needs of schools and students. For example, a Dutch bank donated 2,000 laptops to home-schooled children who didn’t have their own.

Getting ready for the ‘New Normal’: preliminary thoughts on wealth management in the recovery phase
As Europe prepares and implements a staged re-opening, WMs are thinking about how to get ready for the “new normal”. There are still a lot of dependencies, including the effect the expected recession will have on the size of wealth pools and the profitability of the industry, but WMs are getting ready to act in four ways:

• Rethinking how to deliver wealth management to clients and potentially evolve the business model through technology and centralisation. This includes the use of advanced portfolio risk management and advisory frameworks and tools, shifting to digital only and/or hybrid propositions, further branch closures, and a new balance of in-branch vs. remote delivery of advice.

• Focus on investment themes for resilience and recovery – This includes building better portfolios and delivering better investment outcomes at scale, targeting new drivers of long-term growth, and addressing near-term opportunities with high yield, credit, distressed debt, and private markets.

• Participation in reconstruction – Providing capital and liquidity to support the local economy and enhance the industry’s contribution to society.

• Getting ready for a likely wave of consolidation across the industry - Some WMs are looking for opportunities to partner and collaborate in a quest for scale and expert capabilities to drive profitability and growth. This could come in the form of an increase in mergers and acquisitions between WMs, as well as outsourcing along the value chain where firms agree to delegate non-core activities to the very best third-party providers.

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