Wealth management: why some insurance companies are opting out of a lucrative opportunity

The insurance industry is undergoing significant change, driven by several external and internal factors that are reshaping its core and redefining the relationships between firms and their clients.

At the same time, we are witnessing a shift in consumer preferences. No longer satisfied with generic offerings, today's clients want products that address their unique circumstances as well as personalized plans informed by their financial goals and tolerance for risk. Research suggests that clients are increasingly looking to consolidate their financial accounts with one provider, moving away from a product-centric model to a more holistic approach to financial well-being. This shift underscores the value of a financial advisor who provides both proactive and protective guidance that caters to the diverse needs of modern consumers.

According to recent McKinsey & Co. research, 62% of people under age 55 prefer such an advisor. These younger clients are looking for new ways to invest in their future, and because of this increasing demand, global assets under management are projected to hit $171 trillion by 2028. Additionally, with 80% of consumers reporting a firm level of trust in their insurance providers  specifically with their advisor — the scene is set for insurers to capitalize on their wealth businesses to serve their clients.

So, if wealth management is such an important tool for long-term growth at insurance firms, why have we seen a trend of industry consolidation and wealth arm selloff over the past 10 years?

A simple answer: It comes down to the bottom line.

In the insurance industry, running a wealth business means managing a complex set of costs and investments that elevate year over year. As insurance companies look to grow their wealth management businesses, they must weigh the financial implications.

These financial outlays are critical for sustaining brokerage operations and ensuring that clients receive the best possible service. Additionally, the technological and infrastructural investments required to support these operations are significant. This includes the implementation and maintenance of advanced trading platforms, data analytics tools and communication systems, all of which are crucial for facilitating smooth and efficient transactions.

Adding to the complexity is the intensifying regulatory environment. Increased scrutiny and the introduction of new regulations are compelling insurance companies to adapt swiftly. Compliance has become a critical focus, with firms investing heavily to meet evolving standards. This regulatory pressure, while challenging, is also an opportunity for the industry to enhance transparency and accountability, ultimately fostering greater trust with clients. Insurance providers are leveraging these changes to bolster their reputations and demonstrate their commitment to ethical practices.

On the other hand, continued consolidation is limiting who insurance firms can partner with to provide these services.

Deloitte recently explored this trend in their 2024 Insurance M&A outlook. In the new year, it’s likely private equity and external investors will continue to pursue a strategy of buying up smaller firms while brokerage houses will look to capitalize on the holistic advice trend by bringing product manufacturing in house through M&A deals.

We should not be surprised when we see a resurgence of consolidation and divestiture of wealth programs from insurance institutions. Opportunities are endless, but resources have become limited.

However, there is a silver lining.

The industry that’s facing these hurdles and uncertainty is the same industry that for hundreds of years has successfully endured and thrived — through worldwide financial depressions, geopolitical instability, rapid technological advancements, expanded competition and societal shifts.

The insurance industry isn’t afraid of a challenge, and the battle for dominance in the holistic financial advice sector is just getting started.

As the insurance industry continues to adapt to these trends, they are poised to provide even more impactful, meaningful financial guidance that authentically meets the needs of their clients. I encourage insurance firms and advisors to double down on their trusted role and relationships with their clients to make the most of a promising opportunity in wealth advice.

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