The Analogue Castle of Wealth Management is Under Siege

In recent years, private banking and wealth management (PBWM) executives have been so busy staying abreast of new regulatory issues and the associated fundamental changes to their business models that most have understandably had little time to explore the latest developments in technology and assess their impact. But while digital has not fundamentally disrupted the PBWM industry yet, it becomes clear that executives around the world are required to make clear choices on where and how they want to play in a digital age. Enter WealthTech, as a specialized form of FinTech. The question of WealthTech is not if it will disrupt PBWM, but when.

Clients Request Tailored Solutions and “Bring Back the Fun”

The urgency comes from clients themselves, who prefer solid brands and long-term relationships, but whose lifestyle becomes increasingly digital beyond financial services. Also, client satisfaction with today’s PBWM services is not overly high. In a recent study, only 39% of interviewed high-net-worth individuals (HNWIs) would recommend their current PBWM provider to a friend. With HNWIs above $10 million assets under management (AUM) that rate drops – counter-intuitively – even down to 29%. An alarming statistic indeed in an industry that typically relies heavily on referrals, image and word-of-mouth.¹

Survey results showed that affluent, high-net-worth (HNW) and ultra-high-net-worth (UHNW) clients clearly want a provider that matches their needs and lifestyle, and provides a tailored, highly customized user experience. They also request more transparency: on risks, on pricing, on peer choices and on competitors’ offerings and benchmarks. It is 2018 not the 1990s, after all. The quality of advice, interestingly, still stands at the heart of a PBWM offering, in line with the most-cited preference around wealth preservation and generation, but clients also want more fun, engagement and entertainment alongside.

Understanding the Relevant Technologies for WealthTech

Talking to many PBWM executives across Europe, the Middle East and Asia, most of them clearly understand the shifting tectonics of their industry. However, basic knowledge about some of the key technologies is usually low to very low. But in order to make the right strategic decisions, a clear understanding of what is coming at you with WealthTech is critical, isn’t it? Artificial intelligence (AI) and machine learning (ML), for example, have not been deployed broadly yet across PBWM, but the potential is big. Supporting advisory processes is just one of the many applications, and AI/ML will fundamentally change the way investment products are originated, managed and distributed. Also, AI/ML can transform mid- and back-office processes so that they no longer need (many) people to run them.

Big data and cloud-based services are introducing new ways of managing data within the PBWM industry. But the new PBWM level playing field requires PBWM players who are able to leverage all the data available – internally and externally – to provide the best and most tailored service possible to their clients. And that means managing data well. Cloud-based services are also gradually becoming as common as in other industries. And utilities (e.g. for know-your-customer (KYC), anti-money laundering (AML) and client onboarding, or product data) will further reduce cost-to-serve in an industry under margin pressure.

Cryptocurrencies – still for many a source of scepticism – will soon become just another asset class and foreign currency. As the first providers are launching cryptocurrency-based investment products, the first mutual fund products are coming to the market, with many more to follow. Thus the time is ripe to open up to a new trend in global money and payments, especially as the next generation of clients will definitely be much more open to cryptocurrencies than today’s clients. Blockchain, alongside cryptocurrencies, has been one of the most hyped technologies over the past one or two years. It is beyond doubt that blockchain can help rationalize mid- and back-office processes in the PBWM industry, and reduce costs for registries, custody, trading, clearing and settlement. The first applications are already being tested, and blockchain has definitely moved “out of the lab”, as a recent survey among 1300 global banking professionals shows.²

Another technology to watch is virtual and augmented reality (VR/AR). While still in its infancy 20 years after the first experiments in the 1990s, this is probably one of the most disruptive technologies for PBMW – not in the short term, but over the coming three to five years and beyond. VR/AR will radically change the way we interact with people, computers and the internet. In PBWM this technology will also change the way we advise, how we represent data to our client and how we work internally in the industry.

Barbarians at the Gate? – The Forces of Disruption

Disruption is felt within financial services, no doubt. In the most recent 2017 edition of PwC’s global FinTech survey, 80% of respondents felt that their business model was under threat of disruption. Poking a bit deeper, the most prominent fears are (in order of importance): (a) increased margin pressure; (b) loss of market share to attackers; (c) data protection issues and threat to client privacy; (d) increased customer churn.³

With regard to where the disruption will be coming from exactly, the jury is still out. There are three likely camps. Either banks or wealth managers themselves will apply these new technologies in such an innovative way that they will create or adapt their business models for the future. Another source of disruption could be from non-banks, which rapidly innovate and suddenly enter the market with new offerings. Similar patterns have been seen in other industries. As a third group, large tech companies – the Amazons, Alibabas, WeChats, Googles and Facebooks of the world – strategically decide to leverage WealthTech to enter the PBWM arena, where margins are still significantly higher than in other industries.

Act Now: Strategic “Ways to Play” in WealthTech

In the WealthTech future, private banks and wealth managers will have four possible strategies to choose from, within client preferences that range from face-to-face communication to digital only, and from delegators (“manage my wealth”) to self-selectors (“I manage my money myself”). These four strategies (traditional face-to-face models, online-only platforms and robo-advisory, and hybrid models, “high-tech/high-touch”), as shown in Figure 1, can be pursued either stand-alone or in combination (likely the choice of large international banks).⁴

For traditional PBWM incumbents, hybrid models are clearly the best strategy going forward, as the traditional face-to-face model can be largely maintained in that approach while new, innovative ways to deploy WealthTech can be chosen. Thus, the business model needs to remain agile and resilient, and change fluidly as the market and client behaviours evolve.

How to Win in “High-Tech/ High-Touch”?

Easier said than done. In talking to PBWM executives in Europe and the Middle East, many confess that they struggle (primarily internally) to get the organization and strategic direction headed towards a hybrid “high-tech/high-touch” business model. After all, the cultural and technological legacy in PBWM weighs in heavily, while clients, especially in mature markets, are not pushing the envelope on innovative business models. There are a well-documented number of ingredients to a successful and winning recipe: invest, partner, cooperate, co-create with your clients, foster internal innovation, etc. But most importantly: put the right strategy in place and align the culture around it. And if the culture doesn’t fit, change it. All the mentioned initiatives will help transform a traditional PBWM culture over time.

While it is hard to predict precisely which technologies will disrupt PBWM and how, it is clear that the industry will be transformed via WealthTech. All the above-mentioned technologies that form part of WealthTech exist and are irreversible (i.e. they will enter PBWM and WealthTech will not just “go away”). We all struggle naturally with the basic understanding that many of these changes are happening on an exponential curve, not in a linear fashion. Just like Moore’s law shows a doubling of computer power every two years, the above-mentioned technologies will provide opportunities in three to five years that seem impossible today.

Final Remarks and Outlook

Some open questions remain though. How will regulation of PBWM evolve? The current trend points to higher degrees of regulation, with a specific focus on consumer protection and full transparency of data. The latter point collides with a very traditional theme around PBWM, which is client confidentiality and privacy. Regarding data handling and protection, we currently see two fundamentally different approaches: the “US model” drives full disclosure and an open market for client data, while the “EU model” defends a more citizen-centric “right to own your data” approach. New, innovative PBWM business models – especially cross-border – will depend on the outcome of these two opposing, potentially antagonizing, antitheses.

To summarize, WealthTech is forcing the PBWM industry to rethink models and mindsets. We can sit back and react more or less passively to technological developments, or we can view digital transformation as an opportunity to get closer than ever before to our clients. The choice is ours, and technology can either help along the journey to “high-tech/high-touch”, WealthTech-driven business models or become a disruptive force that will transform those too slow to adapt to the new realities.