The Wealth Industry’s Existential Crisis: Can Technology and Transparency Save the Day?

In the world of financial advice, a seismic shift is underway. Regulated financial advisers are being pushed to segment their client bases more aggressively, aiming to tailor services to consumers’ specific needs. This ostensibly makes sense, as it focuses resources on clients with higher investable assets, complex needs, and a penchant for frequent contact—essentially, the affluent and needy. However, this segmentation exercise inadvertently contracts their clientele to a more exclusive, affluent club, alienating the broader population. This isn’t just a practical adjustment; it’s a survival strategy to justify high fees. But, is it enough to stave off criticism that the wealth industry is the least innovative and most resistant to embracing technology?

Darwin’s Lesson for Financial Advisers

Charles Darwin famously said,

“It is not the strongest of the species who survive, nor the most intelligent, but the one most responsive to change.”

This quote rings true for the wealth industry today. The industry’s reluctance to innovate and adapt could be its downfall. While they continue to serve the wealthy few, they risk neglecting the vast majority who are left underserved and disillusioned.

The Innovation Deficit

According to Ruth Handcock, CEO of Octopus Money in FT Adviser, the wealth industry is notorious for its lack of innovation. Speaking at the Lang Cat AdviceTech Catwalk, Handcock noted, “This industry has a remarkably long tail. We have 25,000 financial advisers in the UK with an average firm size of five advisers. It’s quite hard to innovate when there’s only five advisers in your firm, everyone’s really focusing on the day job.”

Handcock highlighted the industry’s complacency: “The technology is probably quite old by now, that’s not their fault, it’s just technology becomes obsolete quite quickly. But critically, these big firms tend to make nice revenue. So they think ‘what is the massive incentive to change? My business works, I’m making money, I don’t need to do anything that differently’.”

This attitude has created an environment where there is no real pressure to innovate. Yet, Handcock warns that this must change. The introduction of the Consumer Duty by the Financial Conduct Authority (FCA) is one such push, emphasising the need for firms to improve consumer outcomes and track them diligently.

The Tech Opportunity

Handcock believes that the next five years will bring more change to the wealth industry than the past 15, driven largely by technology. The challenge, however, is that the industry lacks digital natives. “Help is at hand,” she assures. “What we will see is the people who are coming into the industry now will save you. They are the people with new ideas. They’re founders who are brave, who will think about breaking barriers.”

The wealth industry’s operational difficulties, often due to outdated technology that doesn’t integrate well, are a significant barrier. Startups, with their agility and innovative spirit, could be the solution. But Handcock cautions that these young businesses need to be treated with care. They are, after all, still finding their way.

Segmentation: A Double-Edged Sword

Client segmentation, as promoted by M&G Wealth and NextWealth and reported by FT Adviser, is a tool to help advisers meet their Consumer Duty obligations. By identifying and catering to specific client needs, firms can theoretically deliver better outcomes, improve value for money, and justify their fees. However, the approach is not without its critics. Segmenting clients based on their investable assets often leaves out those who cannot afford high fees, thereby perpetuating inequality within the financial advice sector.

The M&G Wealth guide highlights that effective segmentation isn’t about shoehorning clients into predefined categories but understanding their unique needs and behaviours. Despite this, the emphasis remains on those with significant assets, inadvertently sidelining the average consumer.

A New Paradigm

The real existential threat to traditional financial advice firms isn’t just regulatory pressure or outdated technology—it’s the burgeoning realisation that they are failing to serve the majority of consumers. As the wealth industry clings to old models, a new paradigm of holistic financial planning, driven by technology and transparency, is emerging.

These new-age planners are ready to embrace the underserved communities, providing scalable, tech-driven solutions that offer transparency and accessibility. They are the embodiment of Darwin’s lesson—responding to change with agility and innovation.

Conclusion

The wealth industry’s future hinges on its ability to adapt and innovate. Firms that fail to embrace technology and transparency risk obsolescence. Meanwhile, those willing to challenge the status quo and serve the broader population have a beacon of opportunity before them. In the words of Charles Darwin, survival isn’t about strength or intelligence, but the ability to respond to change. The question is, which path will the wealth industry choose?

Q&A: The Wealth Industry’s Innovation Crisis

Q: What’s the big deal with client segmentation in the financial advice world?

A: Oh, it’s the latest trend where financial advisers finally realise they can’t serve everyone equally well, so they focus on the rich folks with complex needs. Apparently, this helps justify their hefty fees. Because, you know, serving the average Joe just isn’t lucrative enough.

Q: Why does Ruth Handcock think the wealth industry is so innovative?

A: Ha! She doesn’t. In fact, Ruth Handcock, CEO of Octopus Money, outright called it the least innovative. She pointed out that small firms are too busy with daily tasks to innovate and large firms are too comfortable with their profits to bother. So, innovation is basically on vacation in this industry.

Q: What’s this about the Consumer Duty shaking things up?

A: The Consumer Duty is like the FCA’s way of saying, “Hey, stop slacking!” It pushes firms to actually improve consumer outcomes and track them. Imagine that—actually having to prove you’re doing a good job! It’s a wake-up call for an industry that’s been snoozing for years.

Q: How is technology supposed to save the wealth industry?

A: Technology is the shiny new toy that’s supposed to drag the wealth industry kicking and screaming into the modern age. Handcock claims that the next five years will see more change than the last 15, thanks to tech. But let’s be real, considering how little they’ve changed so far, any progress will look monumental.

Q: Are startups really the saviours of financial advice?

A: Supposedly, yes. Startups are the new kids on the block, full of fresh ideas and willing to break barriers. But they’re still figuring things out, so they need to be handled gently. It’s like asking a baby to solve your tech problems—cute, but messy.

Q: Why does client segmentation sound like a bad thing?

A: Because it often is. Segmenting clients based on their wealth means catering to the rich and ignoring the rest. It’s a convenient way to justify high fees while leaving those with fewer assets out in the cold. So much for financial advice for all!

Q: What’s the future of the wealth industry according to this article?

A: The future looks grim for those clinging to old models. Traditional firms might just become relics if they don’t embrace technology and transparency. The real winners will be those who innovate and serve a broader clientele. In other words, adapt or die.

Q: Any last words of wisdom from Charles Darwin?

A: Yes, Darwin’s timeless wisdom: “It is not the strongest of the species who survive, nor the most intelligent, but the one most responsive to change.” So, if the wealth industry wants to survive, it better start evolving—and fast.