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Digital Disruption in Wealth Management

Jeremi Karnell
Apr 10, 2017

Beginning in the 1990s, iTunes, Netflix, and Spotify transformed the way consumers purchased, used, and shared music, photography, and video. By the 2000s, travel, news, and recruitment had been upended by disrupters like Monster, Expedia, and LinkedIn. During the third wave of digital disruption, which began around 2000 and is still unfolding today, Amazon.com, Uber, and Airbnb revolutionized retail, transportation, and accommodation business models.

These disruptions not only changed the way people bought and sold goods and services, they also changed how industries made money -- and how much money they made. According to IFPI, in 2000, the global music market was worth $26 billion. By 2014, it had shrunk to $15 billion. During that same period, advertising revenues for newspapers and periodicals fell more than 70%.

As automation streamlines consumption and distribution patterns, profitability takes a hit. For every success story like Netflix who adapted early and often, there's a Blockbuster that failed to see the writing on the wall.

Today, big data and the cloud are accelerating the pace of change by making disruption less demanding and more affordable. Even banks and insurance companies -- rarely seen as early adopters -- have entered the fray with popular conveniences like e-wallets, mobile payments, and comparison engines.

The financial services industry seems poised to experience the next great wave of disruption. Venture capital investment in Financial technology (FinTech) companies hit $17.4 billion in 2016 according to PitchBook. But few of the top ten WM firms have jumped in head first. Most have adopted a wait-and-see attitude.

There are several reasons for this. Senior management at traditional firms continues to believe that personal contact is of the utmost importance to customers. While this may hold true for older clients, as we'll soon learn, it's an assumption that is becoming less true as a new generation of investors enters the market.

Many old-school leaders also fear that offering clients automated platforms will cannibalize their core business and undermine the value of their expertise. No one wants to believe that an algorithm can replace 30 years of experience.

Consumer wants and needs have changed.

After the financial crisis, many investors became wary of financial advice. Some believed that their adviser wasn't always acting in their best interest -- a perception that's likely to increase now that the Department of Labor is rolling back the Fiduciary Rule. Others simply believed that they could do better on their own. 

These empowered consumers are in control. They use social media, search, and mobile apps to begin their investment journey, and they expect a seamless, omnichannel experience that lets them interact anytime, anywhere, and on their own terms. They can -- and do -- comparison shop in a marketplace where it's relatively easy to determine which product or service offers the best value for money.

Although some older, affluent investors may prefer hands-on attention, millennials are more self-directed. According to the Global HNW Insights Survey, 64.2% of High Net-Worth Individuals (HNWIs) expect their WM relationship to be either mostly or entirely digital in the future.

The next generation of wealth managers understands this and realizes that robust digital tools can make them better at their jobs. Instead of being threatened by technology, they are often frustrated by the lack of it. In fact, many young professionals consider changing firms in order to have access to better data. 

Digital disrupters are making inroads.

A new generation of investing sites like Betterment and WealthFront is addressing shifting consumer needs with low-cost, online investment advice and a better user experience. Many of these disrupters also offer low or no minimum investment, no exiting or trading fees, and a declining-fee structure.

Other innovative start-ups are taking advantage of the ubiquitous connectivity provided by mobile and social media and the explosive growth of data, robust analytics, and the cloud to better understand the needs of their customers and respond accordingly. 

Sometimes referred to as robo-advisers, these sites ask users a series of questions and then use algorithms to make recommendations. While most customers have been satisfied with their performance, they've yet to be tested in an extremely volatile market or recession.

Because digital technology automates what were once time-consuming tasks like asset allocation, digital disrupters can charge lower fees, offer real-time insights and information, and provide investments that were once reserved for institutions, professionals, or high net-worth individuals. 

Sites like Mint and my myprosperity allow users to see all their financial information -- banking, credit cards, auto loans, investment accounts, mortgages, etc. -- in real time on a single dashboard. Users can budget, track and adjust spending, better manage cash flow, and establish financial goals quickly and easily.

To overcome skepticism, best-of-breed sites provide access to third-party articles and white papers, informative and relevant blogs, as well as a straightforward, transparent, and interactive online experience. Several feature online chat so clients can get quick answers to their questions. And all our optimized for mobile.

Although these early movers remain in the minority, conventional WM firms remain on the sidelines at their own peril.

The risks of standing still.

While staying the course may seem prudent -- after all, business transformation is costly, time-consuming and disruptive -- firms that fail to evolve are likely to be left behind. Because although there has been a dramatic increase in the number of HNWIs, the rise has been accompanied by a decrease in the profitability of WM firms.

Tech-savvy, young HNWIs who are inheriting their parents' money and are in the process of creating their own have a greater number of investing relationships and keep more of their wealth in cash. Increased regulation has caused compliance, infrastructure, documentation, cyber security and other costs to rise, while competition from digital disrupters is driving down fees. 

Attrition and retention are other serious problems. According to the Capgemini Financial Services Analysis, 2016, 79.9% of investors under 40 would leave their WM firm if they could not provide a seamless, integrated omnichannel experience that let them start a transaction in one channel and finish it in another. While more than 50% of wealth managers says they are at least somewhat likely to leave their firm according to the Capgemini and RBC Wealth Management Global HNW Insights Survey 2015, Q1 2015. And many of those who leave will take their clients with them. 

To remain profitable, WM firms must not only retain their existing clients and wealth managers, they'll also have to attract a new generation of investors and employees with different wants, needs, and priorities -- which is exactly what several WM disrupters are already doing.

As simple investment advice becomes commoditized, wealth managers will need to position themselves as financial planning partners who can recommend tax, insurance, cash flow, and estate-planning strategies designed to augment each other.

The benefits of going digital. 

Clients are no longer satisfied with receiving monthly statements in their mailbox. Investors want to be able to use their data to look at outcomes for a series of what-if scenarios in real time. Traditional infrastructure has not been robust enough to enable this, but big data collection technology makes running simulations fast and easy.

Customers can now generate their own reports and glean insights that would have previously been hidden or expensive to obtain. Based on clients' online activities, digital WM firms can learn what clients want, how they make decisions, what additional input they need before deciding, and what events trigger action.

These insights can be used to develop products, services, and capabilities that can increase revenue and share of wallet. At the same time, marketers will gain a better understanding of when the best time is and what the best way is to communicate with customers and prospects.

The data footprint captured by these activities can also be used to create sophisticated models based on the key characteristics of the most profitable customers. Not only do these models improve customer acquisition efforts and lower acquisition costs, they also help refine targeting and messaging for marketing initiatives.

By seamlessly integrating other banking, retirement, and investment accounts, digital not only improves customer experience, it also improves the advice financial planners can offer by giving them a 360-degree view of the client's assets, liabilities, and net worth. Sophisticated algorithmic engines can drive down the cost of customized advice and make highly personalized recommendations affordable for more investors.

Digital improves wealth manager productivity, increases revenue by identifying cross-sell opportunities, lowers operating costs, and enhances risk management and regulatory compliance.

What's more, by providing more opportunities to engage with clients, a strong digital presence improves visibility, helps builds company brand, and keeps you top of mind as investors move through their journey.

Transforming your organization. 

Converting your WM business from a traditional model to a digital one isn't just a matter of implementing new technologies. It's a cultural change that requires rethinking the firm's value proposition.

Senior management must be willing to make sufficient investments in technology and human capital and to commit fully to becoming a data-driven organization at every level.

Developing a clear strategy with a roadmap that lays out a methodical path is essential. The strategy should address how investors can connect with advisors, peers, and third-party resources; how advisers can tailor the advice they offer clients to make it more impactful; and how firms can offer more unique, non-traditional investment opportunities than they have in the past.

The overarching goal should be improving the client experience at every point of the investment journey. 

Some firms will choose to rebuild their systems using a Service-Oriented Architecture (SOA). Some will opt for the greater scalability, flexibility, agility, and cost efficiency of a cloud-based platform -- which makes it easy to merge both up- and downstream applications, provides fast access to actionable business intelligence, and offers seamless integration with other tools. And others will partner with a FinTech company in order to enjoy a fast, affordable transition. 

WM firms that embrace the cloud are able to increase productivity, identify opportunities for engagement, refine segmentation, and increase collaboration -- while also enjoying the benefits of a more environmentally friendly solution with quicker deployment, backup, and recovery,

Most WM firms lack the requisite skills, and the absence of a visionary leader can derail even the best intentions to modernize. So hiring a Chief Digital Officer (CDO) to lead the charge may be the most expeditious way forward.

In addition to being willing to cut through the bureaucracy and challenge traditional thinking, the ideal hire will also be a self-starter who is willing to own the initiative and keep others on track. 

In conclusion.

Although most WM firms have been reluctant to embrace digital, modern consumers are demanding greater control, more personalized information and advice, and omnichannel access.

A number of disrupters in the field are addressing their needs with automated, easy-to-use digital tools that provide seamless integration of accounts, real-time intelligence and insights, unconventional investment opportunities, and lower fees.

WM firms that continue doing business as usual will watch their profits plunge as they lose market share to these competitors, spend more on cyber security and regulatory compliance, and fail to attract new customers.

In order to grow and prosper in the future WM firms need to use digital capabilities to improve customer experience, increase revenue, lower costs, and be poised to tap into emerging markets. Utilizing the cloud to gain a holistic view of the client and then using data and analytics to inform decision making and identify opportunities for engagement are top priorities.

WM is evolving rapidly. The time to prepare for the future is now.

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