The evolution of Wealth Management: what is Hybrid Advisory and why it promises to drive the transformation

The Wealth Management industry is engaged in an unprecedented transformation, traveling at double speed as compared to other segments.

It is essential, for managers and insiders involved in addressing and completing this change, to be able to make informed decisions, analyzing the causes that have favored it and respecting the key drivers of the transformation process.

This short article represents a personal point of view on the topic, aiming to promote this awareness also through the results of Capgemini's World Wealth Report 2018 (link to download the report). This research analyzes the macroeconomic conditions that are driving the change in the Wealth Management industry and represents trends and dynamics recorded on the HNWI population (High Net-Worth Individuals[1]) concerning asset allocation, satisfaction level, personal connections with wealth managers, investment preferences (including digital currencies or cryptocurrencies) through a global analysis based on the responses of more than 2,600 HNWIs from all over the world.

The causes that lead the change

In the other segments, especially the Retail one, the trend towards commoditization of basic financial services (payments, accounts, small loans) combined with the pressure imposed by regulation and the entry of new competitors (like BigTechs[2]), is leading to a gradual decline in prices and a sharp contraction in profitability, which can be countered only with the achievement of scale economies.

In the Wealth Management segment, the trend is exactly the opposite. Customers' needs are increasingly complex and require highly personalized and holistic approaches, which embrace ever-expanding services, products and asset classes and consider a very large number of variables. In this scenario, skills and specialization will drive the competition between Wealth Management firms, rather than the price.

The World Wealth Report 2018 reveals some key findings that help us to better contextualize the change taking place:

• in the last year the global HNWI wealth has grown by 10.6%, driven by improved economic conditions and accelerated equity-market performance, as well as the expansion of HNWIs proportion.
• asset allocation remained almost unchanged, although two important findings should be considered: real estate increased to the third-largest asset class and cryptocurrencies are now considered by customers an asset class (not by investment firms for the moment)
• HNWIs remain multi-banked, mainly due to a desire for specialization and for empowers them with negotiating leverage, even though an asset consolidation trend with primary Wealth Management firms have emerged
• robust investment returns, for the second consecutive year above 20%, are not increasing HNWI satisfaction to the same degree, that is still limited by several factors, including the demand for service personalization and a desire for broader value delivery that would reduce the perception of fairness in pricing
• only 55.5% of HNWIs says they connected “very well” with their wealth manager; low connectivity is due to the large use of passive and semi-passive approaches in determining how HNW clients find their wealth managers and to the high rate of administrative tasks carried out by the wealth managers
• the level of technologies used is still perceived as lacking, with younger HNWIs (under 40) requiring hybrid advisory services and advanced digital tools; this finding is even more important considering the generational shift in progress
• the inevitable global entry of BigTechs into Wealth Management is favorably perceived by HNWI, although the degree of skepticism remains high, mainly due to the poor data privacy perception and the lack of experience and specialization in the sector (link to the article "The High-Tech invasion in the financial services industry: why banks should beware of Google, Amazon and Facebook").

In businesses like payments, loans and insurance, BigTechs like Amazon, Google, Apple, Facebook, Microsoft and Alibaba, are already competing with traditional banks. In the Wealth Management industry, this entry has been announced and delayed several times, because of greater entry barriers (significant initial investments and regulation are among the most important). For this reason, in the World Wealth Report 2018, the most likely approach for BigTechs’ entry into wealth management will be based on the following models:

• Collaboration, through partnerships with existing wealth management firms, white-labeling products and service offers
• Frenemy, that could include a utility-based model that leverages BigTechs’ technology and operational scale to support wealth management firms with outsourced back and middle-office processes.

The forces that drive the change

Kevin Kelly, founder of Wired magazine, in his book The Inevitable: Understanding the 12 technological forces that will shape our future defines the inevitability of innovation, insofar as it is inherent in the DNA of things. The guidelines that are driving the evolution towards a new way of conceiving Wealth Management (link to the article "The inevitability of automated advisory in wealth management") are primarily 4.

The rising of holistic advisory services, not limited exclusively to investments but also extended to real estate, private equity, art advisory, financing, tax optimization, philanthropy, succession planning and alternative investments.

These different components must be combined in a genuine tailor-made planning, taking into account a series of variables that are both endogenous and exogenous to the customer. Among the endogenous, in addition to the traditional financial needs (return, risk, time horizon, hedging), for example, it should also be considered environmental, social and good governance preferences (ESG - environmental, social and governance) and specific needs arising during the whole investment horizon (property purchase, children, retirement, entrepreneurial activities to start or sell, ...). Among the exogenous variables, reference is made to capital markets, macroeconomic trend and regulation.

The enabling factor for such a large and complex service model, able to meet the needs of the final customers, is technology. The use of available data and their subsequent processing with predictive analytics techniques, allows Wealth Management firms to manage customers’ assets and needs differently from traditional human-lead approaches. Furthermore, technology is seen as an enabling factor for ATAWAD models (AnyTime, AnyWhere, AnyDevice), especially taking into account the generational change taking place in HNWIs’ wealth.

In shaping the Wealth Management of the future, building and developing distinctive skills is essential. The possibility of generating value with respect to the rest of the market is crucial in a segment where pricing is not perceived as a key variable in the choice of a Wealth Manager. The World Wealth Report 2018 clearly highlights the HNWIs’ trend to differentiate their assets among multiple Wealth Managers, depending on their specializations. The quality of connection between the advice provider and the taker is crucial for the perception of the value generated. In this sense, it is essential to actively manage the allocation of wealth managers to customers and prospects, using intelligent allocation tools.

Hybrid Advisory: what it is and why it promises to drive the transformation

The Hybrid Advisory is an innovative model, defined in Capgemini's World Wealth Report 2017, which combines both human and digital approaches, allowing HNWI clients to benefit from customized financial planning and wealth management skills in a modular service model, that combines:

• the automatization of basic low-value-added activities of the whole advisory process, such as execution, monitoring, tax optimization and reporting
• a specialized wealth manager that manages high-value-added and more complex activities of the advisory process, such as the definition of a tailor-made investment strategy and the business relationship, or
• a truly hybrid approach, exploiting the activity of a specialized wealth manager in a mainly digital relationship.

The Hybrid Advisory manages to handle the complexity of a holistic advisory service, whose width expands in relation to the customer's needs following a genuine tailor-made approach, exploiting big data analytics technologies, financial and life planning algorithms and digital tools to enable ATAWAD accessibility.

To be successful, such a model should be distinctive with respect to the market, focusing on the specialization and core competencies of the firm to generate value for customers with very complex needs, like HNWIs. Without that, the model would be a nice empty box. Wealth Management firms must be careful about the adoption of one-for-all / ready-to-use models. The transformation should be managed taking into consideration these fundamental guidelines, applying them to the company business environment and to its core competencies.

The World Wealth Report 2018 highlights the benefits due to the adoption of a Hybrid Advisory model by investment firms:

• reduction of legal and compliance risks, automating manual processes and decisions that were previously entirely delegated to wealth managers
• cost reduction
• increase in the productivity, unloading wealth managers from standardized and administrative tasks in order to focus on high-value-added activities
• personalization and agility in commercial propositions
• access to new market segments
• protection from the upcoming entry of BigTechs in the Wealth Management market.

The interest of HNWIs (especially the younger ones) in the Hybrid Advisory is growing steadily, just like the pace of the transformation process towards hybrid consulting models of Wealth Management companies (according to the World Wealth Report 2018, 57.1% is the percentage of wealth management firms that have hybrid-advice transformation program underway).

The transformation towards a hybrid advisory model can be conducted with different levels of intensity[3]:

• Catch-up: Investments allocated to upgrading tools, processes and platforms, with the intent to retain competitiveness
• Maintenance: investments in legacy systems, process improvement, training and skills development, acting as a market follower
• Big Bets: investments in new initiatives, such as M&A, entry into new markets and segments, development of new platforms, new propositions, with the intention to differentiate the firm from its competitors
• Ventures: investments in experimental areas such as software, FinTechs, direct acquisitions, new models, with the aim of developing new distinctive skills and generate ROI over the long-term.

From the analysis carried out by Capgemini, the Wealth Management industry is still strongly focused on Catch-up and Maintenance approaches, nevertheless Big Bets are very relevant (and growing). This proves that in the Wealth Management industry, investments in the transformation process are oriented towards generating benefits over the long-term, contrary to the rest of the banking industry.

[1] “HNWIs are defined as those having investable assets of US$1 million or more, excluding primary residence, collectibles, consumables, and consumer durables.” (Source: World Wealth Report 2018, Capgemini)

[2] “BigTech is a general term for data-driven tech firms not traditionally present in financial services such as Amazon, Google/Alphabet, Alibaba, Apple, and Facebook.” (Source: World Wealth Report 2018, Capgemini)

[3] BigTech Entry into Wealth Management Requires Incumbents to Accelerate Hybrid Transformation and Transform Budget Approaches. World Wealth Report 2018, Capgemini