Sink or swim: new technologies are critical to the survival of wealth management firms

Fintechs are disrupting many aspects of the financial services industry and wealth management is no exception. These new entrants can provide scale and greater customisation at a much lower cost than traditional wealth management models, many of which are heavily dependent on human resource and have highly manual processes.

So, what will be the impact of this trend - will the new guard succeed in transforming the wealth management business to the extent that it sweeps away the traditional incumbents or will they simply bring more commoditisation to an industry which is already suffering from low margins? If it is the former and fintechs begin to threaten existing wealth management providers to near extinction, the incumbents have two choices. They either continue the trend as a full stack business where they own the complete value chain, which has proven to be profitable, but battle it out against the increased cost and complexity to run and maintain such a business model, or they pivot to a platform business model, where they would sit on top of a vast third party supply system and focus their capital expediture on their relationship with the digital user. 

We believe that the platform business will be the more successful model. This view is informed by what we have seen with the technology disruption in consumer industries such as leisure and travel with Airbnb and Uber, respectively. A key feature of this digital revolution has been the growth of business models that rely on service aggregation to build a superior user experience, rather than wringing more value from owned assets by offering an ever widening range of products and services. In short, an enormous amount of value has been generated by companies that build the layer (i.e. the user experience or digital relationship) that sits on top of a vast system of suppliers (the products and/or services of others).

Many people believed - and some still do - that wealth management is impervious to tech disruption due to the extent of highly customised services and deep personal relationships which most providers offer to their high net worth clients. But it is the attitudes of the high net worth clients which are changing. The digital revolution has infiltrated many aspects of their daily lives, whether it is online shopping or high end travel, and they want this level of convenience, control and high touch experience in the management of their wealth.

The combination of new powerful technologies is enabling this digital revolution in financial services.  In particular, the proliferation of Open Banking architecture is being driven by the increasing use of APIs which enable incumbents and new entrants to create best of breed propositions which draw on the services of multiple third parties. Furthermore, the use of APIs enables the customer experience to be more personable and user friendly creating greater cost effectiveness, agility and flexibility than previous technologies which were aiming to achieve this level of interoperability.

So how should wealth management firms adopt successful open banking strategies and become platform businesses? Many of them already offer supplementary services provided by third parties such as execution brokers and performance analytic specialists as part of the client experience but such services are often subject to complex agreements that take time to upgrade or replace. The benefit of APIs is that they enable third parties to access each others’ systems and platforms more easily. Wealth managers who embrace the API model will have new opportunities to select and regularly review the value derived from the various supporting building blocks on which they construct their own proposition to customers. This increasingly important form of unbundling and re-bundling is a critical differentiator between simply ‘improving’ a product/service or fundamentally ‘changing’ the establishment for the better with a completely new re-bundled proposition.  

Thus far, the changes wrought in the wealth management sector have been witnessed in the client experience rather than a reconfiguration of the competitive landscape, but the latter is on its way. In order to be successful in this new world, not only do wealth managers need a deep understanding of evolving client needs but also an understanding as to how new technologies can meet these needs. In short, if wealth managers do not embrace technology and adopt an effective digital strategy, their very existence may be threatened.