Private banking and wealth management are being reshaped by technology. How clients react, and benefit, will determine the future of WealthTech.

Emerging technologies are driving major changes throughout the banking industry. The entire meaning of wealth management and private banking services is being turned upside down by technology that is providing unprecedented access to data, information and advice. This revolution is already affecting how investment decisions are made. And most importantly, the evolving relationship between clients and private banks is changing the future of how money is managed.

The banking industry has also been reshaped by regulatory changes related to new technologies. They have altered competition, services and products in traditional banking activities from payment processing to asset management. Financial regulations are already shifting certain financial services activities from banks to non-banks. This has prompted the emergence of a class of “shadow banks” such as peer-to-peer lenders, and robo-advisors for wealth management. Traditional lines among financial products and services are being crossed and blurred.

Technology has surfaced as an enabler to entry, lowering barriers so new institutions can challenge big banks. Big data analytics and new distribution channels have allowed technology start-ups to disrupt the traditional business of banks. Most of this has occurred in the consumer lending space, but private banking and high-net-worth wealth management segments are also being altered.

The Promise

For the last five years, regulators have benefited from the early phases of FinTech evolution. Regulators and financial institutions have been able to observe a wide array of start-ups to determine which models are realistic and feasible. Accommodative measures – such as allowing FinTech start-ups their own regulatory “sandbox” – have encouraged explosive growth.

FinTech’s ultimate promise emerges from its potential to unbundle banking services into their basic functions and re-price them. In wealth management, the new entrants driving this trend include robo-advisors, and incumbent financial institutions complicate change by experimenting and adopting new technologies to build upon their existing business models.

Amid a complex mix of operational expectations and real returns for investors, regulators and financial institutions, FinTech is now entering a more difficult phase. They need to identify, assess and respond to the risks posed by FinTech innovations. How these risks should be mitigated – or technology restricted – is a matter of macroeconomic, technological and regulatory importance.

For example, an inherent contradiction has not yet been resolved in the blockchain proposition. Its most important concept is anonymity among counterparties. However, financial institutions and markets work in a way that requires transparency and party identification for security and regulatory reasons. Compromising this element would reduce blockchain to another form of data stack, making it difficult to fulfil its original promise.

Disintermediation – Always Unpredictable

The disintermediation inflicted by technology has affected banking in unpredictable ways. What is occurring can be described as “modularization of supply”.

Increasing digital capability and availability is carrying out more of the business of wealth management. Discretionary management is being encroached by robo-advisors like Mint and Nutmeg. Clients are shifting to these alternatives from existing, traditional providers of private banking services.

A global private banker observed: “The challenge is how to provide bespoke investment advice in a digital environment. The advisory model has been traditionally human-to-human. But, banks are looking at combining artificial intelligence (AI) and robo-advisors.”

He predicts: “This would result in a standardised, advisory process without a human involved. In five to 10 years, digitalisation will probably be possible and allow end-to-end profiling and setting of investment goals.”

The entire process includes scenario building and portfolio exposure management. It would allow the construction and execution of a portfolio with alerts and management through dashboards. Portfolios can be balanced and risk levels adjusted in a humanistic way, yet without much human involvement.

High-end private banking requires a deep understanding of each individual client’s needs and demands, while providing a global set of products. Addressing the tide of uncertain technological change is best done from the client’s viewpoint. “The best solutions consider the customer as the starting point for technology solutions”, said a private banker. “Clients want relevant information about how we make it work for them as we hold their portfolios. It is not a competition against traditional services, but rather a complement.”

Communication with clients is also changing. Innovation is opening differentiated, easy-to-access communication channels, allowing clients to be reached quickly.

Obstacles Facing WealthTech

It is no surprise that FinTech innovation has made relatively more progress in China. The reason is that the country’s developing banking system and regulatory framework must deal with a shadow banking sector that serves the world’s largest and fastest growing customer base. Western economies and financial systems are saddled with legacy systems that are far more difficult to adapt and coordinate with regulatory requirements. FinTech trends in emerging markets are often able to bypass current technologies and produce greater financial inclusion.

However, FinTech is one of the most regulated sectors of technology. To assess its relative benefits and risks, governments must consider its impact on investor protection, market fairness and integrity, and financial stability – both locally and internationally.

Regulatory planning for FinTech start-ups cannot be confined to local or national disclosure requirements. In his capacity as chairman of the Financial Stability Board, the Bank of England’s Mark Carney questioned how and where FinTech might generate risks to financial stability.

In a speech on 25 January 2017 at the Deutsche Bundesbank G20 conference, Carney said:

In this process, systemic risks will evolve. Changes to customer loyalties could influence the stability of bank funding. New underwriting models could impact credit quality and even macroeconomic dynamics.

New investing and risk management paradigms could affect market functioning. A host of applications and new infrastructure could reduce costs, probably improve capital efficiency and possibly create new critical economic functions.

FinTech’s threat or promise to disintermediate financial services is constrained by regulatory criteria, which require that functions representing traditional banking activities under another description be regulated as such. Therefore, those systemic risks and products related with credit intermediation – including maturity transformation, leverage creation and liquidity mismatch – should be regulated in the same way, regardless of how they are delivered.

Carney questions how technological developments could alter the safety and soundness of existing regulated firms. Macro- and micro-economic, financial and supervisory responses need to be clearly defined for systemically important markets. He asked which FinTech activities would demand more operational oversight as they become systemic.

Fintech and the Next Financial Crisis

Financial crises are cyclical or secular events. Modern national and international financial systems are particularly vulnerable to crises and inherently prone to panics and runs.

FinTech firms and shadow banking could magnify the challenge for regulators trying to stem a financial panic. They may reduce the incentive for individuals and institutions to flee from one another. Any failure to reverse the level of fear may precipitate a wider collapse in the financial system.

But this fragility does not mean they cannot be made safer. Indeed, failure creates the right management incentives and encourages innovation and renewal. Policymakers should instead try to build a system in which an unregulated or poorly regulated shadow banking sector doesn’t allow an idiosyncratic event to catalyse a systemic crisis.

How FinTech could play an accelerating and exacerbating role in the next crisis remains an open issue.

Risk of Information Overload

Private banking clients already have unprecedented access to financial data and research reports on smartphones, tablets and desktop devices. How banks deliver, present and interpret all this information throughout the client relationship is important for how a portfolio is structured and managed. Gaining clarity and mutual understanding is a constant struggle, with the avalanche of data available from banks and on the internet.

According to the head of information technology for a European private bank: “Big data is an evolving development. Banks are still struggling to manage the large quantity of in-house data while at the same time complying with secrecy laws and record-keeping regulations.”

He points out: “The relationship manager needs to help clients make both technology and investment decisions today. In the beginning of the client–advisor relationship, it is necessary and practical to define how much information the client would like to receive on a day-to-day basis.”

He also observed that technology is being pushed and pulled by clients and banks alike: “Big technology changes are being adopted by all demographic segments, not just tech-savvy millennials. They are being driven by their own needs and forces that continually seek improvement. But these changes are enablers, rather than hindrances.”

New tools are being used differently, depending on the client. Emerging technologies allow for better monitoring and presentation of risk scenarios. Even then, high-net-worth individuals (HNWIs) generally prefer paper over tablet presentations.

Relationship managers improve communications and frequency of dialogue with their clients in a more meaningful way. They can be better prepared for meetings.

However, the ability to access a world of information with an array of analytical tools doesn’t reduce the uncertainty over markets and investment opportunities. According to a strategic management consultant: “People are using lots of different tools these days. But market uncertainty remains. Despite all the information, uncertainty is high so is the need for service.”

The consultant pointed out:

The popularity of robo-advisory indicates that life planning has always been difficult for advisors so robo-advisory algorithms are useful. Digital platforms have proven to be intuitive and cheaper.

There is lots of data available. The issue is how to capture and sort it out to provide useful advice. Clients need to get more comfortable with the risk and return of their investments relative to their own lifestyles and goals. Actually, more information may not necessarily assist this particular dynamic.

When Tech Generations Collide

Millennials are at the vanguard of how FinTech is redefining financial services and products. However, older and more traditional high-net-worth clients are also redefining private banking.

As millennials age, they will be used to the digital experience, but they may also want to meet with a relationship manager. Like the generation before them, millennials are still choosing banks based on experience and service. But one key difference is that they don’t want any information on paper.

One wealth manager remarked: “The ability to serve clients completely through digital channels will become an industry standard. Leading banks will be able to provide product specialties and experts in areas beyond general banking services.

The fluctuations of investing performance affect each client in unique ways that technology cannot cope with.

When a client hits poor returns and makes losses, perhaps loses lots of money, they want to talk to someone. Investment is a mixed bag of results and emotions. Quarterly meetings to talk about the client’s portfolio, feelings and goals are part of the portfolio rebalancing process.

One of the most overlooked opportunities in FinTech is finding a way to increase the application of instant messaging to communicate with clients. While it is commonplace elsewhere, banks have been slow to use it for numerous reasons.

One wealth manager said: “It is more effective and popular for reaching clients than email. Although email is a standard corporate platform and a significant and transformative platform for many industries it will slowly fade away. So instant messaging is the most important technological change emerging. However, security and compliance remain key problems.”

Whatever changes and surprises arise from all of the new services and platforms being developed and launched, private banking and wealth management clients should benefit from a combination of personal service as well as technology.