Wealth management is one of the few segments of the financial services sector that, to date, has been relatively unscathed by digital disruption. In contrast, banks have led the digital transformation charge, spurred on by customer expectations of greater convenience in their often daily financial transactions. Meanwhile wealth management, with its lower-frequency, more discretionary customer contact – and an older customer demographic – has retained many analogue processes.

The lower levels of innovation can also be attributed to the scattered nature of the wealth management value chain. Owning all aspects of the B2C value chain, banks have been more vulnerable to disruption with new, digitally enabled entrants picking off prize elements of the chain, such as loans or payments. In wealth management, multiple players tend to own specific parts of a B2C chain, making these markets more complex and less attractive. For example, in superannuation, incumbent players include trustees, investment managers, custodians, super administrators and insurers, leaving few toeholds for would-be entrants.

With less of an imperative to change, while other industries have invested in digitizing legacy systems, the wealth management industry has had little appetite for technology investment and upgrades.

However, as digital natives enter the wealth management customer base, a large number of innovative FinTechs are arriving on the scene. New market entrants are already starting to compete with incumbent wealth managers right across the value chain. They are leveraging a different technology-based operating model to deliver better customer experiences, at a better price and a lower operating cost. Traditional wealth managers either need to disrupt themselves or risk being disrupted.

Definition of Wealth Management

For clarity, in the context of this chapter I define wealth management as:

The services provided by an institution (i.e. the wealth manager) in order to manage the personal finances of clients (ranging from mass affluent to ultra-high-net-worth individuals (UHNWIs)) in order to realize individual client goals. These goals can be diverse and will differ by individual. The products and services required to realize these goals will also differ by individual client.

Wealth Management Value Chain

The wealth management value chain is complex from beginning to end due to the nature of the participants and components that make up the wealth management ecosystem. These participants and components include the different wealth managers (both incumbents and new entrants), wealth management products and services, product providers, regulators and ultimately the multifaceted needs of the customers, including company ownership, remarriage(s), children and the associated responsibilities.

What’s Driving Disruption in the Wealth Management Industry?

Demand for transparency. Recent advice scandals have put the wealth management industry under unprecedented regulatory scrutiny, resulting in new costs and complexities that have seen international wealth managers closing or selling their businesses. We expect to see a continued focus on transparency and tax regulation of UHNWIs in geographies such as Luxembourg, Switzerland, the Channel Islands and the Caribbean. At the same time, regulations around fee structures through the Retail Distribution Review in the UK, the Future of Financial Advice in Australia or the Foreign Account Tax Compliance Act and Markets in Financial Instruments Directive II may have the potential to affect the existing operating model of wealth management by putting the emphasis less on product push and more on holistic financial planning and advisory. Wealth managers relying on legacy systems will not be able to handle the volume of regulatory change coming down the pipe.

Changing Customer Profile

Clients have become more digitally savvy, using mobile apps and social media to interact with companies or search for information 24/7. Used to transacting with retailers and other financial services online, clients increasingly expect their wealth managers to provide a seamless customer experience, where they can interact via their preferred channel or device. With generational change, trillions of dollars of wealth will soon be transferred to a new generation of wealth management clients – with new, digital preferences.

EY’s Global Wealth Research 2016² assessed clients’ channel preferences in the next two to three years against wealth managers’ expectations (see Figure 1). The findings reveal a strong preference for digital services across advice, services and education – considerably greater than anticipated by the wealth managers interviewed.

This does not mean that clients expect an entirely automated experience. Clients are simply looking for easier ways to deal with their wealth managers across their channel of preference. In particular, they expect 24/7 access to their own information and portfolio status, combined with the opportunity to speak with a person when they want to.

Changing customer preferences have also changed the definition of value. EY research suggests that more than 50% of what customers define as value, which is directly correlated with their willingness to pay for products and services, is not related to product or price. Instead, it is driven by areas such as service, recognition, engagement, experience and innovation. This offers wealth managers important opportunities to differentiate themselves from general banking services.

Advanced technology. Emerging technologies, such as blockchain, robotics and artificial intelligence, are transforming the user experience and service quality, while greatly reducing operating costs. Robotic process automation (RPA) is particularly useful, as it can be implemented on top of legacy systems, enabling transformation programs to be completed in weeks – not months.

RPA uses software “bots” performing rule-based, high-volume, repetitive tasks on a computer. The bots perform just as a human would, except substantially faster, with 100% accuracy and no breaks, leading to more than 70% productivity improvements over paper-based, manual processes. To date, the wealth management industry has been slow to embrace this technology. However, we are now seeing some exciting use cases emerge, including automated client onboarding and using chat robots to support basic account enquiries such as finding the latest discounts and reporting lost cards.

Distributed ledger technology (DLT) provides a more radical option, replacing existing architecture, increasing transparency and reducing costs. The most well-known example of this technology is blockchain, a technology that allows multiple parties to share data in a trusted environment, creating a single source of truth. If blockchain were used in financial services to record ownership and trading of assets, it could eventually become a single source of truth for all financial transactions. Instead of each party keeping their own record of events, blockchain allows all parties to access the same definitive record. Many new areas for the use of blockchain are starting to be explored, such as sharing know your client (KYC) data, fund transfer agency and trade finance.

Where is the Current FinTech Development Focused Across the Wealth Management Value Chain?

Currently, FinTechs are focused on the investment part of the wealth management value chain – where “money is being made” – through robo/automated advice solutions. This leaves significant opportunities for incumbents to address other aspects of the value chain, such as client onboarding, administration and servicing activities, to which clients assign more than 50% of what they value in a wealth management relationship.

The wealth management value chain used to guide the direction of this discussion is outlined in Figure 2.³

Where Will Innovation Disrupt the Wealth Management Value Chain?

FinTechs could soon be able to take over the full wealth management value chain.

Go-to-market activities for both existing and new clients. Typical activities include providing real-time data, news and analytics, market intelligence, product and service development, client communications and performance monitoring. FinTechs currently deliver intuitive, technology-enabled multi-channel experiences. This is also an area where social media insights increasingly play a role through analysing “what the market says”.

Client onboarding. This is often an area of frustration for customers, due to the high number of risk-related questions and repeated conversations required to set up an account. New entrants are solving these issues by using customer and behavioural data and gamification techniques to automatically identify the risk profile of clients, the loss acceptance levels, and to capture information as part of new regulatory requirements. Incumbents should keep up by exploring opportunities for cloud-based utilities to perform risk functions such as KYC, anti-money laundering (AML) and surveillance monitoring extremely cost-effectively.

Investment advice and distribution. Smart algorithms have led to the emergence of robo-advice, which could potentially address the advice gap as adoption scales. A key opportunity area for incumbent players will be to use hybrid models and goal-based advice. These solutions use complex algorithms to support life-stage planning, taking clients’ full-life situation (today and in the future) into account. Current options include:

• Automated transactional advice – providing investment insights, data analytics and automation of risk identification, community intelligence and end-user-created wealth solutions. However, early solutions are very transaction-driven, don’t provide “real advice” and are typically not well suited to holistic financial advice.
• Guided advice (hybrid) – providing investment strategies, investment advice, facilitation of customer interactions and advice on risk management, tax planning and financial planning. The technology performs the transactions, but leaves it to relationship managers to communicate with clients, creating an overlay of human interactions to create a quality experience.
• Goal-based investment (advised) – providing goal-based planning, product and investment selection, asset allocation, optimization of risk and return, and tax optimization.
• There is a clear opportunity for FinTech in the area of holistic and comprehensive financial advice delivery. Algorithm-based propensity models and life-stage planning could outplay a significant portion of human-based investment advice.

Investment management. FinTech makes investment management services accessible to individuals who are not yet high-net-worth individuals. Technology has the opportunity to speed up processes around decision-making, rebalancing and monitoring. Other investment management capabilities that are well suited for FinTech entrants include asset selection, discretionary management, settlement, etc.

Account administration. FinTechs are surging ahead by automating many elements of account maintenance and using self-service to support 24/7, multi-channel interactions.

Ongoing relationship management includes customer life cycle management, relationship management, performance reporting, education and coaching, and community management. This is an area where human interaction is typically preferred by (U)HNWIs. That said, these clients also have an appetite for digital and technology interactions. Some banks are trying to address this through offering the opportunity to communicate with the bank using WhatsApp. Wealth managers need to consider how to use each engagement option, what is appropriate and at which moments to use them across the customer life cycle. Also, a lot of work has been done to improve the channel experience while staying compliant with regulators’ requirements in terms of security and privacy.

How Can Existing Wealth Managers Address the FinTech Challenge?

To disrupt themselves, incumbent wealth managers need to partner with or acquire new entrants, or to build their own competitive alternative.

Wealth Managers Need to Consider Partnering with FinTechs to Keep Up With the Pace of Innovation

Traditional players have an opportunity to remain competitive by addressing the operational efficiency across their broader business operations, improving the experience delivered to their clients and focusing human efforts on the areas where they create the most value. One of the fastest routes is to partner with FinTechs to gain access to their low-cost business models and proven technologies. The overall importance for incumbent players is to ensure that any “innovation” is well integrated into their business model and operations, rather than “bolted-on” to the existing model. If wealth managers are able to integrate these developments into their existing business models and operations, it makes key aspects of running a larger business significantly easier.

Disruption of the Wealth Management Value Chain Has Just Started

The opportunities and threats from FinTech have just started. To date, we have only scratched the surface in terms of the amount of change we can expect across the value chain. Right now, the only real disruption has been on the investment side. Looking ahead, we expect to see considerable disruption across operating models, especially in terms of the workforce of the future.