THE SUMMARY, HIGHLIGHTS AND FULL VIDEO OF THE DISCUSSION 20 May 2021
Is wealth management less healthy than it ought to be?
According to the BCG Global Wealth Report, the wealth management industry of today is sharing the same profits pool as it did before the Great Financial Crisis of 2007-08, despite a tripling in the value of global wealth in the interim. This suggests a shift from high margin to low margin products. The growth of indexed funds and the rise of robo-advice is a large part of the explanation. But both developments also indicate that the industry is able to adapt and use low-cost products and technology to attract new classes of customer, especially among the younger and tech-savvy cohorts of the affluent. Aviva bought Wealthify, for example, because it expects the business to grow among customers that the firm has not historically reached. It aims specifically to recruit savers with relatively small amounts of savings (say, £3,000) which have not benefited from rising stock markets because suitable investment products have not existed, and small savers have instead collected negative returns in real terms by staying in cash. The industry is also responding to disruption by FinTechs, which are “democratizing” investment by making wealth management both affordable and approachable. Some established wealth managers are partnering with FinTechs precisely in order to attract a new type of saver with an improved customer experience. The market is trending towards one driven by competition and choice and price, in which investors are willing to change their wealth manager if they can get a similar or better service at a keener price from another provider.
Can wealth management dispense with the human touch?
The short answer is, `No.’ The basic problem in wealth management is that customers want a high touch service but are not prepared to pay for it. Even robo-advice platforms have to be supported by customer call centres both for reassurance and to fix problems that arise. The answer to the conundrum lies in technology, which can enable wealth managers to provide low-cost asset management (through passive products) in tandem with personalised investment advice (through a combination of algorithmic advice and digital communication channels). However, even the most automated wealth management business will have to provide a level of customer service to imbue a sense of trust, including the assumption of responsibility when the algorithms fail, and especially in volatile markets. The cost of this human interaction cannot be avoided.
How can wealth managers control their costs?
Wealth managers should use technology to cut the cost of operational processes and compliance overhead precisely so that they can invest more in the customer contact that leads to increased revenue. This is more difficult than it sounds because legacy systems have to be decommissioned, or processes dependent on manual inputs to email or spreadsheets have to be automated. Even where systems are replaced, they have to be linked so that they can interact with each other.
Is the wealth management industry over-regulated?
Regulation is important to safeguard the savings of consumers but is sometimes disproportionate (small forms are obliged to hold the same proportion of risk capital as larger firms) and inconsistent (investors that self-select investments do not bear the cost of investor protection at all). The emergence of specialist compliance and customer due diligence firms can help to contain these costs by spreading them over a larger number of firms.
What does innovation in wealth management look like?
Attracting less affluent investors is one measure of successful innovation. At Wealthify, for example, the entry level is £1, and making small scale investing viable does require technology. Apps that offer consumers the option to divert into a savings product the difference between the price of a trivial purchase and the nearest whole number are proving popular too, because the benefits quickly become apparent. The gameification of saving will likely prove effective as well. Because technology operates around the clock, it also offers wealth managers the opportunity to manage client investments much more actively, re-balancing portfolios and issuing alerts when opportunities arise to take profits or cut losses.
How are wealth managers meeting demand for ESG investments?
Younger investors are also demanding more investments that meet environmental, social and governance (ESG) criteria and have a positive social impact. A lack of reliable ESG data means that many investment strategies and funds are easy to dismiss as “greenwash.” This has encouraged some wealth managers to turn to the private investment markets instead for ESG-compliant investments, especially in their locality, but there is limited deal flow available to them. But rising demand for ESG-compliant investments also presents wealth managers with a genuine problem: the greater the rage of investment excluded, the lower the degree of portfolio diversification that is achievable.
What is the data opportunity in wealth management?
The relatively slow progress of the Open Banking initiative in the United Kingdom has retarded the pace at which customer data has become available. It also lays on providers of apps that use the standardised Open Banking Application Programme Interfaces (APIs) an obligation to re-confirm with customers regularly that they consent to their sharing of their data. Attitudes vary. Some customers are more willing to share data to expedite, say, the on-boarding process, than others. So wealth managers have to offer a choice. The ready availability of digitised data, and the computational power to analyse it, could also tilt the balance in wealth management from passive investing driven by algorithms to active asset management driven by data analytics.
Should wealth managers embrace crypto-currencies and tokenized assets?
Digital assets offer wealth managers a range of alternative asset classes, such as crypto-currencies, non-fungible tokens (NFTs) and security tokens, but not many wealth managers in the United Kingdon have engaged with them. That can be expected to change as Stablecoins – and, eventually, central bank digital currencies (CBDCs) – reduce the volatility of the crypto-currency markets and the understanding by wealth managers of the opportunities in the tokenisation of illiquid assets, privately managed assets and securities improves. Tokenisation of privately managed, ESG-compliant assets is an obvious target market. Educational campaigns and a supportive operational infrastructure are also needed.