Wealth Management is Dead, Long Live Wealth Management
By Kamales Lardi
Founder and Managing Partner, Lardi & Partner Consulting GmbH
Wealth management is facing an unparalleled transformation as a wave of disruption sweeps across the industry. Although rapid technology developments are a significant driver, disruption has also been prompted by evolving consumer behaviour, emerging agile competitors, new business models, shifting regulatory landscape and democratization of knowledge. Additionally, client expectations have been transformed by superior interfaces and hyper-personalization offered by digital businesses across various industries such as Amazon, Netflix and Uber. Wealth management clients now seek immediate responsiveness, 24/7 information access, visualization of content, flexibility and control over data and decision-making. As wealth management firms grow to realize the true impact of disruption, many scramble to compete with young, innovative start-ups by adopting new technology solutions.
Although still a developing sub-industry within the overall FinTech ecosystem, the number of WealthTech start-ups has been growing steadily since 2012.1 Asset and wealth management firms are struggling to achieve excellence in creating superior client experiences. As a result, WealthTech start-ups are utilizing emerging technologies to capitalize on the growing gap between consumer expectations and traditional players. Start-ups such as Wise Banyan, True Link and Personal Capital are demonstrating that consumers now have an alternative to traditional, outdated financial technology offerings.
WealthTech Start-Up Collaboration Models
In a recent global FinTech survey by PwC, the asset and wealth management industry was ranked as the third most likely to experience the disruptive impact of start-ups.2 Furthermore, over half (60%) of asset and wealth managers surveyed believed that at least part of their business is at risk to WealthTech start-ups. It is becoming increasingly clear that traditional industry players need to explore start-up collaboration as a way to stay relevant, transform offerings and continuously connect with clients. Several overarching collaboration models exist in the market today, described as follows.
- Detached
- This model probably offers the easiest way for wealth management firms to get involved in the start-up scene. For example, organizing or sponsoring start-up pitch events offers a good way to build a presence in the start-up community and benefit from engagement with innovative teams. Additionally, wealth management firms could ease into start-up collaboration by offering mentorship programmes or free access to resources such as corporate office space, collaboration tools/platforms or key personnel.
- Organizations such as Startupbootcamp.org actively work to match start-ups with mentors from banks and wealth management firms who offer advice and feedback on their pitch, products and overall market. Specifically, financial institutions such as Santander, Rabobank and Deutsche Bank use mentorship to participate in the start-up ecosystem and draw open innovation to their organizations.
- This model allows firms to maintain control and independence, particularly if they are not ready for digital transformation or full start-up partnerships yet. However, it is challenging to stand out against numerous other firms also competing to make an impression in the start-up ecosystem.
- Overlapping
- This model is suitable for wealth management firms looking to accelerate innovation and explore offerings through co-development or co-invention with WealthTech start-ups. Common approaches such as hackathons, start-up accelerators, incubators or innovation hubs offer great ways for traditional firms to participate in innovation initiatives outside of the existing organizational structures.
- By sponsoring, participating in and/or conducting innovation programmes, traditional firms are able to rapidly and actively explore emerging technologies, new offerings, and collaboration partners, as well as potential acquisition targets. Additionally, these initiatives create an opportunity for asset and wealth managers to flex their creative muscles and explore entrepreneurial thinking in a fail-safe environment.
- The overlapping model allows innovation initiatives to grow independently towards more aggressive goals, undisturbed by existing business constraints and boundaries. However, organizers may require specific experience in innovation models, such as Sprint or Design Thinking to ensure value-added outcomes are achieved.
- Embedded
- This model is commonly applied by larger wealth management firms and involves two distinct approaches to accelerate innovation and explore emerging technologies or offerings. The first approach involves setting up an in-house digital innovation unit to explore, test and develop new offerings based on evolving market trends. For example, wealth management divisions of international banks such as UBS are actively setting up “intrapreneur” environments to generate innovative ideas and challenge existing internal processes. The second approach involves investment or acquisition of promising WealthTech start-ups to diversify or expand their firm’s offerings. Acquisitions offer a quick way to get direct access to entrepreneurial teams/skill sets, new technologies and an evolving customer base.
- This model offers the advantage of embedding innovation culture and entrepreneurial thinking in the organization, as well as owning new technology solutions, capabilities and digital skill sets. However, it is also the most complex approach, as it involves merging distinct organizations, teams and cultures.
Key WealthTech collaboration success lies in selecting a model that fits the strategic vision and business goals of the wealth management firm, as well as taking into account the critical cultural and team sensitivities.
Blueprint for WealthTech Start-Up Collaboration
Collaboration of any kind carries certain risks. However, collaborating with WealthTech start-ups has the potential to breathe new life into traditional wealth management firms, which is critical in these disruptive times. By following some critical steps, wealth managers will be able to create a win–win situation for the company and the WealthTech start-up.
Assess Digital Maturity of Company
Aspiring to collaborate with start-ups requires digital maturity on the part of the wealth management firm. Here, digital maturity refers to the willingness to explore possibilities created by new technologies, as well as the potential to adopt new ways of doing things. Incumbent firms need to be honest about their existing digital capabilities and readiness to collaborate with start-ups.
This may mean conducting an internal audit to develop a realistic assessment of the firm’s own pain points and ability to survive in the digital age. The audit should aim to understand current capabilities and the technology landscape in the firm, as well as challenges or barriers relating to existing business operations. Additionally, an external audit of the digital maturity of peers and emerging client needs or expectations will act as a benchmark and provide best practices that could be applied.
Define Vision for Collaboration
An internal digital maturity audit will also provide incumbent firms with direction on where and how WealthTech can contribute to enhance offerings and client interactions. By identifying start-ups that align with the strategic direction and business goals, wealth management firms accelerate potential outcomes.
For example, in 2015 BlackRock acquired FutureAdvisor, a robo-advisor platform with US$600 million of assets under management at the time of acquisition. Although significantly smaller than other competitors such as Betterment and Wealthfront, BlackRock’s decision to acquire the company was in alignment with its strategic direction to offer it as part of the BlackRock solutions technology platform to other financial institutions.3
Foster Entrepreneurial Culture
By design, WealthTech start-up teams tend to be nimble, bold and explorative. In order to thrive in the digital age, investment advisors, wealth managers and private bankers must develop the ability to constantly adapt, acquire new knowledge and skills, as well as embrace the potential of new technologies. By encouraging exploration and corporate innovation techniques, wealth managers will be better prepared to collaborate with start-up teams.
For example, the UBS Wealth Management Innovation Lab was set up to help teams focus on transformational trends.4 The innovation function is deeply integrated within the organizational structure and collaborates with several divisions of the bank to promote a “permission-to-fail culture” that encourages exploration without pressures of failure or return on investment.
Establish KPIs to Track Progress
Irrespective of which collaboration model is used, it is critical to predefine key performance indicators (KPIs) to measure and track the progress of the collaboration effort. However, unlike traditional corporate success measures, the KPIs for start-up collaboration should focus on flexible outcomes, rather than quantitative investment/revenue returns.
For example, corporate members of the SIX Fintech Incubator F10 measure long-term success by the number of open innovation ideas entering their pipeline. Wealth management firms could also measure the number of new ideas generated by internal employees (indication of innovation mindset), efficiency in the WealthTech selection process, or even number of co-invention or co-development initiatives.
Future of Wealth Management in the Digital Age
As digital disruption sweeps over the wealth management industry, traditional firms need to explore opportunities for a sustainable future in the digital age by simulating, learning from and collaborating with innovative WealthTech start-ups. Some of the biggest barriers for effective corporate–start-up collaboration relates to lack of clear vision, organizational culture clashes and low digital maturity. By following a blueprint of successful corporate–start-up collaboration models from other industries, wealth management firms could avoid the pitfalls and focus on achieving the desired outcomes.