In business, the importance of understanding your customers cannot be overstated. Marketing guru Peter Drucker famously said that "The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself." But getting a deep understanding of your customers is not easy. This task becomes even more challenging when your customers’ needs and preferences are shifting — which is exactly what's happening in the wealth management industry.

One way to look at the market segments in wealth management is by the age of the clients. Currently, the three main segments are baby boomers (born between the mid-1940s and mid-1960s), Gen X (born between mid-sixties and early eighties), and Gen Y (born between the early eighties and mid-nineties).

The baby boomers are one of the largest and wealthiest demographics. They are also undergoing a particularly radical change. Consider that the life expectancy in the US is 81 years for women versus 76 years for men, and that wives are, on average, two to three years younger than their husbands. These statistics suggest that many women will likely make wealth management decisions alone in their last seven to eight years. As baby boomers continue to age, investment advisors who have worked almost exclusively with men will see more women making investment decisions. They will need to respond to this shift by increasing gender diversity in their sales and advisory teams, reviewing and updating their messaging, and adjusting their product offerings.

Gen Xers are notorious for their do-it-yourself approach — from putting up a fence in their backyard to managing their wealth. Many Gen Xers, intimidated by the 2% advisory fee, end up with default choices on their 401Ks and a potpourri of stocks in their brokerage accounts based on informal tips. This group will benefit from formal investment advice, but advisors need to show them the value first. Start with something that shows these investors the power of structured planning without extreme upfront costs. Automated personalized advice powered by data, for example, has the potential to ease Gen Xers into advisory services by giving investors a sense of autonomy in their financial planning, while offering valuable insights at a lower cost than a personal advisor.

Gen Y is likely to inherit trillions of dollars from the aging baby boomers making them arguably the most critical demographic for the future of any wealth management firm. Investors from this generation are unlikely to spend time navigating clunky websites or to schedule an hour-long session with an investment advisor. They are more likely to flock to fintech firms like Betterment and Acorns, which offer their clients slick digital tools and instant advice without high-pressure sales tactics. Traditional wealth management firms are at the risk of missing this demographic if they do not become more agile, simplify their processes, and transform their delivery channels.

The wealth management business has demonstrated an exceptional risk-reward proposition. Clients are sticky, revenues are rising, and margins are healthy. This has attracted both fintech companies with innovative products, and banks that have launched or expanded their wealth offerings. While fintech firms have made space for themselves through products targeting specific customer segments, traditional wealth management firms have responded by acquisitions, partnerships with new-age firms, and increased spending on technology. But to stay relevant in this rapidly evolving industry, traditional firms will need to also sharpen their focus on new customer demographics and begin designing products that better meet their changing needs.