Wealth management is the latest financial industry to face the opportunities and challenges of technological disruption. Dramatic headlines such as “Traditional wealth management is gone” point to the transformation of a historically opaque industry. The digital revolution is driving incumbents to decipher how the industry will be transformed and how traditional wealth management needs to adapt to be able to thrive in this rapidly evolving world.

The two most fundamental forces driving change are the shift in client behaviours and the evolution of technology. These forces complement each other in their pace of change and are often intertwined, having impacts on each other.

Changing Client Behaviours

The rising affluence of millennials is a key focus for the future success of the wealth management industry. These millennials have entered the work force and are now beginning to accrue wealth. It has been estimated that they will also inherit $30 trillion via generational transfer in the decades ahead.

For wealth management firms to remain relevant, incumbents face the challenge of continuing to service their existing clients, while having to adapt to new client behaviours and strategically positioning themselves to engage the next generation. There is a common misconception that millennials respond almost exclusively to social media and digital tools as methods of engagement. While they are mobile centric and tech savvy, it is key to understand that they demand the standard of service they are accustomed to receiving from leading social media technology.

A more nuanced view of their motivations is needed, which requires adapting the application of digital technologies to meet these needs. Often called “generation sceptic”, millennials tend to have a mistrust of traditional financial services. Factors such as student debt and recent financial and banking-related scandals, since 2008, all contribute to general scepticism of the industry. Transparency is consequently a key quality that millennials are demanding from wealth management. There is a trend which no longer finds it acceptable for financial professionals to hold clients at arm's length and build trust solely on the notion that the wealth manager is the expert: they need to add real value.

Millennials have grown up in a relatively transparent world of information, where they can access it usually for free. Like many other industries, the finance and wealth management sector has grown rich by creating barriers to information, keeping the end customer in the dark and enabling wealth managers to add layers of fees, giving clients a perceived greater sense of value. Technology is enabling the new generation to break down these barriers by accessing new channels of information and providing them with the tools to engage more directly in the management of their own wealth. As incumbents seek to learn from the emerging new WealthTech competitors, they need to balance pivoting completely and shunning their existing client base.

Typical behavioural traits of the new generation include being fluid in their choices and wanting to have an impact through engagement. Wealth management has traditionally focused on long-term relationships, often with long-term investment strategies. With millennials happy to switch providers at a whim and wanting to be engaged directly in their investment choices, the role of wealth management is shifting to a more focused advisory role, providing the tools for end clients to execute. With investment products being increasingly commoditized and accessible, wealth managers are having to go the extra mile to find unique and interesting investments to show their value.

Furthermore, regulatory compliance is an increasing burden on wealth management firms, driving up their costs. Historically, the industry underinvested in operations, opting to invest in client-side relationship management. With increased regulation, a fickle client base – where relationships mean less than they used to – and the demand for services in real time, forward-looking wealth management firms are focusing on investing in their own operations, where technology makes the biggest impact.

Emergence of New Technology

The emergence of robo-advisory and alternative investment platforms is reducing inefficiencies and operational costs, while providing the next generation with digital and mobile channels to invest through. Technology, in particular robo-advisory, is broadening the addressable market for wealth managers by offering services to smaller investors. Where they were previously shunned due to low return on investment, technology allows wealth managers to offer their products to less wealthy individuals through more automated channels. Young tech companies such as Wealthfront, Betterment and WiseBanyan are now establishing themselves as a significant source of competition to the traditional wealth management firms who rely heavily on manual operations.

Many forward-looking wealth managers are finding that by combining robo-advisory with face-to-face client management, they can achieve the personal touch with lower operating costs. As robo-advisory becomes both more sophisticated and more accepted, an increasing number of high-net-worth individuals (HNWIs) are taking the automated investment route for part of their finances. With technology automating many processes, such as data crunching, wealth managers have more time to analyse investment opportunities and provide value to their clients.

Beyond the high-level forces described above, there are specific areas where technology is driving efficiencies within the wealth management industry.

1. Digital Client Onboarding Process

• Customer onboarding is an important process and crucial in identifying and establishing the suitability of products for new customers. Historically, the onboarding process has been heavily manual and required extensive face time with advisors, which is costly. Furthermore, the increasing regulatory requirements – coupled with the advancement of automation technology, document management and analytics and emerging mobile capabilities – has resulted in a growing trend towards digital onboarding. Digital point solutions cover a whole range of processes, including fraud detection, identity verification, analytics, e-signatures and customer communication management. A digital automated onboarding process helps drive efficiencies, leading to increased revenue through a better allocation of resources.

2. Dynamic Risk Profiling Using Big Data Technology

• Traditional risk profiling has been relatively basic and static, based on estimates extrapolated from past data and subjective human interaction. Big data advances have the ability to process huge amounts of data, leading to dynamic, near-real-time updates with more accurate profiling, while performing scenario and stress tests at portfolio level. Technology advances enable wealth managers to dynamically risk profile their clients by constantly reviewing their existing portfolio and adjust for clients’ attitude to – and capacity for – risk, with real-time value at risk adjustments based on live market conditions.

3. Open API Approach

• The rise of point solutions, such as know your customer/ anti-money laundering (KYC/AML), has enabled the integration of financial data through application programming interfaces (APIs). Open APIs allow free linking of multiple apps, elimination of manual data entry and limited mistakes during data transfer and updates. Most platform providers and marketplaces now build their own infrastructure, so point solutions can be integrated through APIs. Open APIs have accelerated new app development and exposed new channels of engagement. In an increasingly integrated digital world, open APIs encourage innovation by enabling newer solutions to evolve and improve existing services in an integrated, seamless manner on top of the larger frameworks. It has been demonstrated that companies which build an ecosystem of solutions around them have provided a wider variety of solutions for the end user, providing services which prove more popular and, as such, are more aware of changing consumer trends. These third-party developments, which connect through an open API, also provide benefits by essentially outsourcing R&D while turning developers into brand advocates.

4. Increasing Demand for Post-Investment Tools

• Client demand for transparency has led to the growth of new tools that cover three areas: market intelligence and reporting, investor relations, and communication. The number of new innovations is vast, ranging from tracking macro factors driving the industry, to identifying the metrics investors use to gauge value, analysing and evaluating the company and competitors, obtaining investor profiling solutions, and activity monitoring and performance benchmarking. The latest technology provides several post-investment tools, which have been traditionally served through manual paper-based processes. These tools can reduce timelines where companies need to make decisions (e.g. corporate actions), by allowing voting on company matters in an instant via mobile, as opposed to waiting weeks to receive a response by mail from shareholders.

Emergence of Digital Platform Economy

As the marketplace of point solutions continues to grow increasingly crowded, there is a rising need to organize it through frameworks, leading to the emergence of platforms with an open architecture. Companies such as Google and Facebook have created ecosystems of apps that grow and thrive from their communities. However, platforms designed with an open architecture and well-thought-out frameworks are not yet commonplace in the wealth management market, due to the complexities of regulation and the resistance to change within the industry. Platforms that are secure and provide efficiencies through standardization and automation of manual processes will transform the market as we know it today.

An example of such a platform is THE HUB, which provides private, invite-only, secure environments with all the tools to manage a whole investment community. The technology matches investor preferences to available opportunities ensuring relevance, saving investors’ time and driving a higher likelihood of investment. Investors can express their interest in opportunities and even register their interest to sell their positions, providing the basis for a secondary market. Unlike most platforms, we do not market investments to the masses, but restrict the ability to promote an opportunity to the deal originator so they are always in control of who sees it.