In the wealth management industry, technological developments have taken hold to such a degree that prominent managers no longer enjoy the monopoly over market information they once did. Easy and immediate access to performance metrics, and the tools to break down and digest complex data patterns means that wealthy individuals need no longer put their faith in asset managers to secure a healthy return. Advantageous for moneyed individuals in that the digital age allows them to decide for themselves how best to spread the wealth, the upshot for financial services is that the business of wealth management is shrinking.
“Technology advancements, client demand for digital services, and current industry dynamics are creating an environment conducive to the development of self-service capabilities”, according to a recent Capgemini report titled: Self-Service in Wealth Management. “In the past, self-service capabilities in wealth management have been restricted to online accessing of account information and transacting online. However, firms can offer richer features to promote a collaborative investment management experience.”
This rise of the digital consumer (see Fig. 1), coupled with a real and growing pressure on fees, has asked that wealth managers embrace technology, if only to keep a hold of a shrinking opportunity. Though the transition is not all one sided, and a second look at the market shows that technology is unlocking new opportunities elsewhere.
So far, the internet has been used as a weapon against the
adviser community
Digital invasion
The realisation that revenues were on the decline set in last year when studies compiled by ComPeer showed that wealth management firms in the UK were being squeezed, increasingly so, by a changed operational environment, born largely of technological innovation. “The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency”, said Bill Gates in an ATKearney study titled Wealth Management in the UK: Survival of the Fittest. And in many ways this quote perfectly encapsulates the issues dogging wealth management currently, with technological change interpreted both as a threat and an opportunity.
The age-old method of face-to-face delivery has been overhauled recently, as a technologically orientated financial landscape, in which access to information is immediate and expert opinion never less than a few clicks away, has taken hold. Cognitive computing technology has made data far easier to digest, and a greater degree of independence has piled the pressure on operating costs. Yet wealth management, even in mature markets, has been slow to adjust, to the extent that private banks are losing ground to new market entrants.
Perceived by slow-to-move parties as a threat more than an opportunity, the proliferation of technology in financial services has brought a swift and decisive end to the days when traditional wealth managers were considered the singular authority in handing out investment advice. With fees bordering on the extreme and their services reserved only for the ultra wealthy, a new breed of wealth management is encroaching upon their ever-diminishing slice of the pie.
Newcomers and game-changers
Promising reduced fees, lower entry costs and more immediate access, online wealth managers are snatching customers away from the competition, and will continue to do so for as long the competition’s competencies fall short. “Technology has always been at the heart of how wealth managers do business”, according to an Ernst & Young report titled Digital Disruption and the Game-Changing Role of Technology in Global Wealth Management. “The emergence of digital technologies for delivering services is forcing wealth managers to invest in their front-office digital capabilities or run the risk of falling behind. The digitisation of the wealth management value chain and the increasing use of mobile devices for doing business is making it easier for new entrants to challenge the status quo and exploit areas of dissatisfaction and underinvestment.”
With this, so-called ‘digital disruptors’ such as Nutmeg and Wealth Horizon have crashed the party, with expertise comparable to that of their better-known counterparts and at a reduced rate. In a market dominated still by business on a face-to-face basis, access to multiple platforms, whether on tablets, mobiles or computers, is doing much to quell frustrated clients for whom old systems are failing to meet their lofty standards.
Though in its infancy, this online wealth management subsector has succeeded so far in attracting investors with modest portfolios, yet failed to reel in the ultra-high-net-worth individuals (UHNWIs) that traditional wealth managers have worked so hard to retain. “The current market share of these firms is marginal (concentrated mainly in the lower end of the market), and their underlying business models are still untested in down markets”, according to another Ernst & Young report. “However, we believe their steps to streamline the client online experience, provide greater transparency and improve the economics for the mass segments are irreversible. While traditional firms will continue to focus on the wealthier segments, those that also want to compete for the lower end of the market and/or improve their clients’ digital experience will need to determine if and how to adjust their offerings accordingly. All in all, this offers new opportunities for expansion while challenging some of the aspects of the traditional advice model.”
In this respect, web-based advisory firms have done little to threaten the collective might of the industry’s larger powers, having collected only a small share of assets lower down the pecking order. However, as their presence grows, as indeed it looks certain to do so, online managers could conceivably profit from the frustrations of more sophisticated clients, should they – like their lesser counterparts – opt to depart from the traditional model.
Analysts have been quick to draw parallels between the wealth management industry of today and that of tourism in the 1990s, during which time travel agents lost market share to online alternatives such as Expedia. And while it’s unlikely, at least in the short-term, that start-ups will alter the traditional wealth management landscape in quite the same way, or to the same degree, new models of wealth management have succeeded at least in unlocking underserved segments of the investment community.
“New digital technologies – mobile, analytics, social and cloud – are enabling both unencumbered development and unprecedented disruption, right across the wealth management value chain”, according to an Accenture report on digital wealth management. “Using readily available components that cost little or are actually free, digital disruptors leveraging open platforms can enter the market directly, with more cost-effective, more innovative, more customised solutions that compete with incumbents on all three core value disciplines: operational excellence, product leadership, and customer intimacy.”
The consulting firm goes on to stress that clients expect wealth management solutions to be designed with both transparency and customisation held in high regard; a feat made possible by the latest technological developments. And with lesser clients migrating to lesser-known names in the business, more experienced firms are exploring new methods, again utilising technology, albeit for different purposes altogether.
Wealth matchmaking
“So far, the internet has been used as a weapon against the adviser community”, said one spokesperson on behalf of broker-client matchmaker Advisor Finder, in an interview with welathmanagement.com. Dreamed up by Boston-based Dalbar Financial and Microsoft, the firm entered the scene as far back as 1999, though only in recent months and years have wealth management matchmaking services come into their own. “We’re turning the equation around here.”
Far from alone in the market, rival matchmaker FindAWealthManager.com secured a £500,000 ($768,792) investment earlier this year to launch its service in Asia, and similar such solutions are fixing a much-needed element of digitisation to otherwise traditional models. Even today, those at the top of the pile depend largely on face-to-face interactions, though by honing their focus on UHNWIs, ambitious managers must employ technology in matching their services to the right clients.
While the broker to client matchmaking business represents only a fraction of the changes sweeping the industry, it goes some way towards demonstrating the lengths by which technology has infiltrated wealth management.
For those looking to slash costs, technological improvements will prove a popular strategy. However, more important than these broad-based improvements even are the smaller concessions of larger names that – despite their leanings towards traditional models of doing business – depend largely on technological improvements. True, the digital revolution has cost certain segments of wealth management dear, but succeeded also in bringing fresh opportunities to the fore.
