Wealth management is increasingly evolving with a new form of a digitised business model. According to an Ernst and Young (EY) report published last year, holistic wealth managers, who incorporate technology, are expected to gain a 30 percent market share by 2025, challenging the traditional wealth managers.
The effects of new digital capabilities, according to an EY report, will improve strategic alignment, create appropriate demand for IT services, and manage the slow evolution of core platforms. The EY analysis showed that 23 percent of wealth managers perceive digital transformation to be relevant to their business within the next one year, 36 percent in one to three years and 42 percent in three to five years.
China, the UK, the US and Singapore are the four major markets for wealth management — with China’s wealth management market exceeding $21 trillion last year, it has become the third-largest wealth management market in the world.
What drives wealthtech
Typically, client and shareholder expectations and new regulations open up the industry to use technology to drive future growth opportunities. Research suggests that technology will be the key driving force behind most innovations in wealth management practices. For example, recently, a new wealth management service was launched that allows clients to open accounts using video conferencing. Now other wealth managers are also digitising client on boarding processes using electronic signatures and biometric signatures — but there is a huge difference in the approaches to leveraging technology for wealth management across markets.
For example, China and the UK have developed competitive advantages from their fintech ecosystems in recent years. For China, the ecosystem is largely underpinned by global fintech powerhouses, state-owned funds, and access to an active IPO market. Chinese fintechs are particularly strong in wealth management. For instance, in China, companies have built technology-designed business models built for investment advisory services, or for providing trading access to the mass market. In comparison, the strength of the UK’s fintech ecosystem mainly stems from a supportive policy environment comprising tax incentives, regulatory initiatives, and government programmes.
Keith MacDonald, Partner, Head of Wealth Management at Ernst and Young UK, told International Finance, “The wealth sector’s use of technology is at best mixed in the UK. The last few years have seen heavy lifting around regulatory work such as MiFID and GDPR to name but a few. Some firms have replatformed and built out their front office during this time, but many are only now turning to the task now.”
Most UK wealth managers lack embedded technology
Although value creation opportunities remain stark for both new and existing clients in the UK wealth management industry, most wealth managers lack embedded technology. Sergel Woldemichael, an analyst from GlobalData told International Finance, “Technology has recently begun cementing itself in the UK wealth management industry and usage is expected to continue growing in the future.”
Clients are mostly given a one size fits all approach. This approach is adopted because the power of technology is not fully realised — and it is creating an opportunity as well as a threat to the current market situation. Another interesting point that Eric Mellor, Wealth Management Strategist at Temenos,a leading provider of software for global financial services companies, tells International Finance, is that the UK industry previously adopted fee-based models on hourly rates for holistic planning or percentage-based assets under management charges for portfolio management. Because of that many wealth managers are compelled to focus on high net worth individuals — leaving behind small investors unadvised.
Temenos conducted a survey The Next-Generation Wealth Manager with Forbes, which found that three years ago, only 33 percent of wealth managers in Europe believed digitisation is important to do business. Currently, 52 percent of European executives find digitisation of wealth management services essential. According to the survey, executives are by a vast majority aware of the need to incorporate technology in virtually all aspects of wealth management.
Cognitive computing the new reality
It is possible for wealth firms to deliver deep cognitive personalisation and address complex client questions in real-time through virtual advisers. According to a Capgemini report published last year, automated advisers using artificial intelligence are expected to have assets worth $2.2 trillion by 2020.
An example of cognitive computing-led personalisation is the fact that investment managers are using predictive analysis to create investment ideas or to detect assets at risk in early stages. A report published by BofA Merrill Lynch found that advancements in computing technology, machine learning, and user-friendly interfaces will generate higher efficiency and output worth $5.2 trillion to $6.7 trillion. BofA Merrill Lynch is testing an AI stock-picking tool to identify potential value in small-cap stocks. This will help to cover the loophole of what conventional analysts might miss while doing the same.
To common knowledge, the crucial aspect of a wealth management firm’s appeal is client engagement. Globally, high net worth clients between the age group of 20s and 30s generally seek a good mix of digital investing tools and human advisers for their wealth management needs. For that reason, a new hybrid strategy is what is necessary for wealth firms to draw value out of client data and align with evolving industry demands.
Wealth managers should consider robot advisers because they function similar to self-driving cars. Essentially, the algorithms will handle basic services but won’t completely replace the human presence. That sort of an approach will help them to progress from selling basic services to advanced market insight, while the full extent of technology is being offered to the industry’s tech-savvy wealth clients.
Woldemichael of Global Data explains that, “From robot advice to software that can automate compliance tasks, wealth managers are now at a stage where technology can no longer be ignored in this historically paper-based and aged industry. Robot advice remains top of the list when it comes to what technology players are using, with both startups and incumbents introducing their own platform.”
However, the Financial Conduct Authority’s 2017 report showed how UK millennials are wary of robot advisors. The report showed that only 20 percent of 18 to 34 year olds in the country would consider using a robot adviser, while 40 percent of them distrust the technology. “Robots and robot advice are at an early stage in the UK wealth market, and we are seeing the smarter firms look at customer segments in terms of their propensities to use technology rather than traditional asset under management measures. For most clients, some form of hybrid solutions are favoured, with a heavy dependency on what service or transaction is being looked at,” EY’s Keith MacDonald explained.
Trust lacking in technology
Trust plays a vital role in establishing a fundamental rapport between top-end clients and relationship managers. A hybrid approach will enable clients to access self-service capabilities through fintech interfaces, while advisers will be able to focus on higher value-added activities, such as on boarding more clients or spending more time with those top end clients. Temenos’ Mellor said, “This model is unlikely to change dramatically, but evolving hybrid advisory solutions are likely to become the new standard, providing the best of both worlds.”
Eric Mellor says that younger investors still favour human expertise and personal interaction with an adviser, despite increasingly positive attitudes toward the adoption of technology and robot advisors in wealth management.
But this is not to say that robot advisors have no effect on the investment landscape. They target the mass affluent segments which are not catered to or underserved by wealth management firms. Despite assorted views in the current climate, the technology is likely to become sophisticated and relevant to high net worth and ultra-high net worth individuals in the future.
GlobalData’s 2018 observations suggested that only 1.6 percent of UK mass affluent population were using robo advice as their main investment provider. As of 2019, the number has jumped to 4 percent.
“Although many players are yet to make profit from such platforms, in the long term, our data shows that demand is increasing and will be even more important to the next generation of investors. Furthermore, 46 percent of UK millennials prefer to use online methods through smartphones, tablets, or desktops when arranging their investments according to our 2019 Banking and Payments Survey. And so technology is definitely infiltrating the UK and is here to stay,” Global Data’s Woldemichael explained.
Chinese mass affluent – a study in contrast
In their scepticism toward robo advice, UK investors show a noticeable difference in approach with their Chinese counterparts. Even though using wealth managment technologies is perceived as an opportunity to grow wealth, the majority of UK wealth managers are not fully convinced — as opposed to their Chinese peers about deploying technology to the extent that Chinese wealth managers have.
“The proportion of Chinese wealth managers using blockchain, voice-activated technology and robo advice is higher than in the UK,” Global Data’s Woldemichael said. This is because the emergence of digital wealth management clients in China is changing the game in the segment. Those clients’ online managed assets represent more than 30 percent of their total investable assets — showing higher trust in wealthtech among Chinese investors.
Findings published by research firm Boston Consulting Group (BCG) last year found that the affluent middle class has formed the majority pool of digital wealth management clients in China. The Chinese wealth management market is set to grow exponentially in size as the this middle class becomes increasingly wealthier. The study points out those digital wealth management clients continue to invest in fixed income products — with 55 percent of them showing a higher risk tolerance.
In the last five years, the digital finance boom in China has led to digital wealth management transformations on two fronts. China has become more receptive to online wealth management and has witnessed the first development of independent internet wealth management platforms.
By closely observing the extent of private wealth in China and the mass adoption of technology, it seems that Chinese wealth managers and investors are more positive toward new technologies than UK investors. For example, China Merchants Bank launched a robo advisor Machine Gene Investment with characteristics of both human wealth management practices and fund research experience through machine learning algorithms. The use of such goal-based planning tools can help clients target objectives more effectively and drive discipline into their investing behaviour.
Eric Mellor of Temenos explains that quant tools and Monte Carlo performance simulators, for example, will help clients to better understand investment risk. Even auto-balancing features in most robot solutions will enable quick rebalancing of portfolios. That said, Woldemichael of Global Data emphasises the importance of hybrid strategy, where the presence of a human is not all dispensed away with.
“The hybrid strategy is the best option at this current time, rather than a purely digital investment platform. Yes, users want a digital platform, but they also want someone to talk to for their emotional needs regarding their investments,” he said. “They still want guidance or advice from a human being as the technology is yet to answer every question investors have.”
One of the reasons for wealth management clients to develop distrust in the technology is cyberattacks and hacking. Their primary cause for concern rises when investing large amounts of wealth with higher risk factors attached. For that reason, “We are seeing robo startups such as Nutmeg, the UK’s largest robo-advisor by assets under management, recognise the importance of having human advisors as they have introduced human advice into their platform last year following client demands,” Woldemichael said.
Elders still hold much of the wealth in UK
It is important to understand that “The trend is China is likely a reflection of the mass affluent client demographic,” Eric Mellor said. According to the BCG report, two thirds of the world’s mass affluent will be based in Asia and only one fifth will be from Europe or the US by 2030. Also, 64 percent of the mass affluent in China are under 40 and 24 percent are less than 25 years of age. Meanwhile, the majority of wealth in the UK still remains in the hands of an older demographic — suggesting that they are likely to continue to seek advice from banks and advisers.