It is no secret that the wealth management and private banking industry is perhaps the most technologically under-evolved section of the entire capital markets industry.
According to a 2016 PwC report, “Sink or Swim: Why wealth management can’t afford to miss the digital wave”, only a quarter of wealth managers offered digital channels beyond email.
Couple this with the fact that, at the time of the report, well over two-thirds of high net worths were using online/mobile banking and it is hard to argue why this is not an industry that is ripe for disruption.
Over the last three years, wealth managers and private banks have become starkly aware of the need to address the impact and use of technology and the way they do business.
This sea change in attitude to technology is borne out of threat as much as opportunity, writes Ian Cadby, chief executive and co-founder of Tiller Investments.
Not only will clients expect better and more sophisticated methods of engagement, but client managers and advisers are under pressure to serve more clients and for lower fees.
Cost burden
Wealth managers are already struggling with the increased regulatory burden – such as GDPR, Mifid II and the money laundering regulations (MLR) 2017, to name but a few.
Indeed, the costs of simply (though it is anything but simple for incumbents) bringing a client on board range from anywhere between £1,500 to £3,000 ($3,744, €3,331) per client, and now they face the requirement to review their customer suitability and money laundering paperwork – every year.
For example, for a wealth manager to on-board or re-paper a client account of £200,000 we estimate costs in the region of £2,000.
This can be reduced to a little over 10% of that figure, however, through partnering with a quality technology provider, which can significantly lessen the regulatory burden on the wealth manager overnight.
Wealth managers are also looking at factor risk management analytics. Factor risk is becoming more sought after. The capability to produce investment reports is not in the gift of many players.
True, it is the more sophisticated client who will require this information; but private banks managing a savvy entrepreneur’s £100m account might face questions such as:
“What will the effect of Brexit have on my portfolio?”
“How sensitive is my portfolio to a sterling collapse?”.
Next generation communication
But it is not just the obligatory requirements that the sector needs to consider.
A growing risk is in inter-generational asset leakage, as the younger generation inherit the assets of their parents. Anyone with teenage children will know it is virtually impossible to get them to use a phone to actually make a phone call, or to bother to spend time with older folk.
What chance does a family office or the wealth management arm of a bank have in communicating with the ‘digital’ generation when the inheritance passes down the line?
We know of one retired client, with £150m, who loves the chance to visit his bank to chat about markets and his investments.
He will shortly hand over his account to his son, a person who hates the old fashioned ‘push’ approach to investment updates. He still wants the ability to speak with an adviser when he requires it, but demands a ‘pull’ 24/7 digital functionality, allowing him access to real time reporting, assessments and portfolio overviews, which he can use when he wants wherever he may be.
This is just one example, but it is indicative of tomorrow’s investors who manage many aspects of their lives digitally whether it be banking, healthcare or grocery shopping.
I have no doubt that these investors will gravitate towards the platforms that can and do cater for their engagement needs.
Investment proposition
On-boarding and reporting are two of the key areas that really need to be addressed. But let’s not forget completely the critical investment engine.
Most large managers wish to ‘own’ their investment capability, however we are seeing a very interesting transition in thinking of late. With approximately 20-25% of wealth firms having a sub-optimal book of clients, for cost reasons mentioned above, the undertaking of outsourcing the investment process is gaining traction.
The problem for wealth managers is finding an alternative solution which actively manages client money, adding alpha through hand-picked portfolios by fellow investment experts rather than simply offering a passive portfolio and at a cost which benefits both clients and wealth managers themselves.
Industry cost pressures and customer demand pressures have been a game changer over the last three years and wealth managers are feeling the pinch.
There hardly seems a week that goes by where a UK wealth firm does not either report a loss of AUM or operating margin pressures. The dramatically rising costs of being a wealth manager with a rising book of smaller accounts is a major issue.
The issues for the industry are many but it might just be that digitalisation offers a very clear, practical and superior solution for the core issues wealth managers currently face.
This article was written for International Adviser by Ian Cadby, chief executive & co-founder of Tiller Investments.
