Digitisation Of Wealth Management: Not if, But When

Timing is everything. In the midst of the dotcom boom of the late 1990s and early 2000s, startling predictions were made about the impending closure of bank branch networks. Many leading players launched wealth management portals in anticipation of a great shift. But it took another 20 years for banks to rationalise their bricks-and-mortar presence, long after those portals had been closed, and their would-be internet-only rivals claimed by the bursting of the dotcom bubble.

But this time, it’s different. Many of the predictions about the pace and scale of digital technology innovation made in Nicholas Negroponte’s 1995 classic Being Digital have been surpassed, thanks to heightened processing power, ubiquitous connectivity and plummeting costs.

Digital disruption has transformed many retail industries, even though it has been slower to impact wealth management, in part because the majority of client assets have remained in situ. It is relatively cheap to join the digital revolution by streaming music from Spotify or buying books from Amazon: a lot more money is required to lend momentum to a digital wealth manager.

Nevertheless, advances made in other sectors have raised customers’ expectations and they are now impatient to receive the same quality of service and ease of use from their banks. While the older generation might want to check their portfolios via their iPads in addition to a face-to-face chat with a financial advisor, digital natives may never see the inside of a branch, but they do want control, transparency and immediacy.

How is the digitisation of our everyday lives shaping demands on wealth management providers? Increasingly, clients want a seamless, borderless and integrated user experience, which enables them to select and track investments in multiple markets by asset class and geography through a single, consistent interface. They want personalisation, meaning not only individually tailored solutions and advice to achieve risk-adjusted returns within specified parameters, but also real-time response, 24/7/365. Many also expect banks to offer the functionality provided by other apps and tools, such as recommendations on investment ideas based on existing portfolio holdings.

Not all of these needs can be met digitally. Even those of us that have built a career in the finance sector need to discuss their financial planning priorities with a trusted advisor who is aware of the complex and ever-changing frameworks within which we make the decisions that determine our long-term wealth. For the foreseeable future, customers’ preferences will vary over how these processes and workflows should be shared between man and machine.

But even allowing for a range of client preferences, it is clear that the wealth management industry is currently in no position to meet fast-emerging digital expectations. Legacy infrastructure, regulatory reform and shareholder demands all pose powerful barriers to investment in the capabilities needed to compete in a market facing accelerated levels of change.

As well as higher capital requirements, banks face spiralling costs from compliance with an ever-changing regulatory environment, which can also negatively impact strategic planning efforts. The challenge of frequently shifting regulatory deadlines means banks often have to patch up solutions and extend software, resulting in an increasingly complex, yet simultaneously obsolete, technology infrastructure.

Furthermore, scale will be critical to the success of wealth managers since fees in the industry are going to be compressed. As a result these same wealth managers will need to actively pursue and onboard new clients to make the business model sustainable. Digitisation has a significant role to play here as it can enable wealth managers to service clients in a much more efficient way. At the same time, digitisation also allows financial services organisations to interact with customers in a non-intrusive way at a time when it is convenient for the client.

Like many manufacturing firms, banks must replace an embedded operating system that has delivered products for decades, but is now ill-equipped for a future in which technology and business models will evolve on a near-continuous basis. Of many possible examples, consider the smartphone industry. Not only does its recent history show how quickly market leaders, such as BlackBerry, can fall behind. But the far-reaching, albeit theoretical, implications for app developers of the emergence of a newly dominant smartphone operating system illustrate the sheer range of sources of disruption to which all service providers, including banks, are now vulnerable.

But how to take the required leap of faith to a new paradigm when hamstrung not only by regulatory imperatives, but also short-term commercial pressures? Unsurprisingly, banks are increasingly investing in and partnering with fintechs, rather than building from scratch in the hope of reaping rewards in the distant future. With the right due diligence, collaborative approaches have the potential to meet clients’ digital expectations by marrying banks’ assets – brand, capital, distribution and domain expertise – with the ability of fintechs to deliver a differentiated user experience based on a technology infrastructure that is sufficiently flexible to handle continuous change.

Informed by their existing strengths and individual market focus, there is an opportunity for many banks to devise a sustainable and flexible strategy based on drawing in services and capabilities from third parties – using APIs and open architecture – but delivered in a seamless, simple, single user experience. This ability to adapt to change will be of critical importance, particularly given that the pace of such change will only increase. Furthermore, having a flexible business model and flexible infrastructure based on APIs and open architecture will enable firms to take advantage of new opportunities such as new markets, products, features and functionalities. These types of approaches will still need the agreement of the board and shareholders, but they can deliver more quickly and cost-effectively than traditional change management strategies.

Much about the future of wealth management remains uncertain. Service providers are only at the very start, for example, of efforts to leverage and aggregate data from multiple sources to build a more complete picture of the clients’ behaviours, preferences and needs. Even today, the timing of change cannot be taken for granted. One only has to look at residual fixed line revenues to witness the power of inertia. As such, the immediate outlook for wealth management is a hybrid model, with different market segments adopting digital tools at varying speeds. While digital disruption dictates the need for flexibility of operating infrastructure and business model, perhaps the one certainty is that no bank is an island: collaboration is key.

Matteo Cassina is Member of the Global Executive Committee at Saxo Bank Group

This article first appeared 19 September 2017 on wealthbriefing.com