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GUEST ARTICLE: Making Innovation In Wealth Management A Reality

Steve Young, 9 February 2017

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This article from the consultancy Citisoft considers the digital channels and tools wealth managers ought to be considering to stay ahead of their rivals.

The following commentary about innovation trends in wealth management comes from Steve Young, who is managing partner at Citisoft, the UK-based investment consultancy. While the insights in this article originate from a UK firm, the relevance is global. The editors here are pleased to share these views and invite responses. They can email tom.burroughes@wealthbriefing.com
 
In terms of automation of processes, a large amount of investment by private wealth managers in recent years has been in the front office as firms look to improve their customer interaction. As a result we initially witnessed heavy investment in client relationship management, communication and reporting tools, areas where there is continued spend. Euromoney’s 13th annual private banking survey for 2016 confirmed that "client user experience technology" is a top priority for private bank chief executives as they think about investing.

Increasingly, however, progressive firms are considering more dynamic solutions with which to interact or share information with their customers, improving the entire customer experience.

Meanwhile, the back offices of a great number of wealth managers are often run on ageing technologies demanding far too much manual intervention. A Forbes study of June 2016 reported that: “A significant number (42 per cent) of wealth managers surveyed believe that legacy systems are 'somewhat of a problem.'’ The inefficiencies here create opportunities for new entrants that have a far more efficient business model and potentially significant cost advantages. There are few signs of real innovation or investment in the middle and back offices, with most of the “new” initiatives being delivered by the same people or vendors - or the projects merely involving slightly updated versions of the same systems. 

New breed of consumer
It is clear to me that within the wealth management industry the upcoming consumer groups will require a different and more technology-driven relationship than the traditional customer base (which was far more orientated toward personal dealings). There has also been pressure from the regulators to ensure that firms are matching appropriate products to consumers and this has led to a raft of investment in the CRM space. Regulators are pushing for more transparency, control and higher standards of proven conduct.
 
Both of these requirements necessitate the deployment of advanced tools, particularly in the client-facing areas of the business.

Customer demands have started and will continue to change, moving towards a better understanding of fees and value, an increased appetite for constantly evolving engagement tools and 24/7 investment data. Technology will therefore be a significant enabler and firms that do not have modern, well-designed IT infrastructures will be at a significant disadvantage.

Yet the industry has been slow to respond. PricewaterhouseCoopers research from June 2016 found that just a quarter of wealth managers offer digital channels beyond email. This contrasted with 85 per cent of high net worth individuals using three or more digital services in their day-to-day lives, more than two thirds (69 per cent) of HNW individuals using online/mobile banking and more than 40 per cent using online means to review their portfolio or investment markets. Perhaps unsurprisingly, PwC found that only 39 per cent of HNW individuals are likely to recommend their current wealth manager.

In the short term, however, wealth managers will still need to cater for the more traditional approach. I don’t see the “old style” wealth manager disappearing in the immediate future. The technology needs to allow the newer type of client to be in control (e.g. to provide an online view of investments) but still give the investor access to informed guidance. 

Lack of innovation
In my view, however, there is still a huge lack of innovation in this industry. Wealth and asset managers are very slow at adapting to the changing world and have an inherent conservatism that is stifling investment and holding back the development of new business models. There is a growing opportunity for a disruptive market entry, particularly from a firm with a stronger technological outlook and large distribution capability.

Most solution providers in this area are usually small and become big (if at all) by being acquired. It’s ironic that large vendors buy what will shortly become legacy systems to get into a market (although many get bought as cash cows). In my experience, few wealth managers really interrogate vendors as to how many clients are running a current or similar version of your software. Often firms with a long history in the market have a disparate release strategy and many firms are running on effectively bespoke versions of the software. For the vendor this equates to a strong and high margin revenue stream and it increasingly becomes challenging for them both financially and operationally to move to a release-based model. Of course, vendors will always say that the next big release is “on the horizon” – but rarely comes into port.

An interesting test is the view on regulation and new requirements. Vendors who look for individual funding or funding consortiums to “invest” in regulatory enhancements are almost always those with a legacy approach and bespoke implementations. Modern, insightful firms will invest in the requirements, building them into a future release and then enable/encourage users to move forward onto this version. If you are unwilling, unable or discouraged from moving forward regularly onto a standard release, this is a sure sign that you are paying individually for requirements and not benefiting from a shared cost model with your peers. In the middle and back office it is difficult to see how this spend can equate to competitive advantage. Unfortunately, in the UK wealth space this inefficient, bespoke approach is far too common.

Vendors need to evolve
Too many vendors have talked about innovation and the use of cloud technologies to deliver better, more cost effective and more creative tools - but without any substance behind the words. As yet we have not seen this move beyond marketing-speak into reality. As with the clients they serve, the software vendors will need to evolve very quickly or run the real risk of an accelerated decline into, or further into, the legacy world.

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