Wealth management firms are missing the mark when it comes to implementing digital capabilities, and as a result are putting profits, as well as client and employee retention, at significant risk.
Faced with disruption caused by startup fintechs in wealth management, established firms must explore collaborations and partnership. Fintechs also would benefit from such arrangements.
So says a recent report by Capgemini, based on responses from more than 5,200 high net worth individuals (HNWI) and 800 wealth managers across 23 global major markets.
Cost of inertia may be high
Up to 56% of firms’ net income could be at risk due to client attrition stemming from a lack of digital capabilities, the report states.
Also, more than half of wealth managers surveyed (55%) are not fully satisfied with their firm’s digital capabilities. As a result, more than a third (39%) would consider looking elsewhere for employment.
“While most firms have laid down an enterprise level roadmap, defining the vision and scope of their digital ambitions explicitly and execution challenges afflict these plans,” says Nilesh Vaidya, senior vice-president, Capgemini Financial Services, in response to Banking Exchange.
“The most disconcerting cause for the slow adoption is the lack of responsiveness shown by ʻlaggards,’ owing to their conservative culture, resulting in a lack of both vision and execution,” Vaidya says. [“Laggards” is a demographic term used in Capgemini’s report.]
“These firms have yet to realize that the shift in HNWI behavior and needs is already underway, and a myopic, short-term view of the digitization of the industry has resulted in a situation where such firms do not have a strategic roadmap for digital enablement,” Vaidya continues. “The resultant disjointed approach to capability enhancement forms the greatest barrier to achieving digital transformation.”
The report uses HNWI to means those who have more than $1 million in investible assets excluding primary residence, collectibles, consumables, and consumer durables.
Customers actually want digitization
In the past year, the report found HNWI demand for automated advisory services had shot up from 49% in 2015 to 67% in 2016. Also, 47% of HNWI say they now use peer-to-peer platforms at least weekly to find out about investment ideas.
Digital capabilities most desired by clients include automated advisory platforms; open investment communities; and third-party capability plug-ins, the report says.
From the wealth managers’ point of view, says Vaidya, the most desired digital tool is the ability to use social media in order to collaborate with and increase access to clients, and the ability to prospect clients.
Vaidya added that mobile and remote access to applications and information, as well as the ability to leverage customer data with cutting edge analytics, in order to provide tailored and customized recommendations to clients, are deemed significant.
“Real-time access to client data along with a single customer view that provides a holistic overview of their portfolio will help in delivering more pertinent and focused advice,” he says.
So what’s the holdup? Money
As to why many wealth management firms lag behind digital capabilities, Vaidya says budgetary constraints account for the main reason.
“The cost of acquiring the digital capabilities is not prohibitive, but firms are struggling to balance this against changing dynamics of the industry,” he says. “With the acceleration in fintech activities, we are going to witness the commoditization of several functions along the value chain as a realignment of business models across the country.
“In this context the digital competencies will be the salient competitive advantage,” Vaidya continues. “The cost of not being able to compete against this new normal could range from loss of significant amount of revenue to complete disintermediation of the incumbent firms.”
The report finds the correlation between digital maturity and asset acquisition and retention is only expected to increase in the coming years. Seventy-three percent of HNWI reported that digital maturity is very or somewhat significant in their decision to increase assets with their wealth management firm over the next 24 months; this increases to 86% among HNWI under 40.
How fintechs create an edge
Meanwhile, says Vaidya, fintechs have come up with innovative and improved ways of performing standard wealth management functions encompassing services across the value chain, from client acquisition, to advice, to compliance.
“Advice, which used to be the foundation of the wealth manager-HNWI relationship, is a prime example of a function that has also become a critical target for disruption,” he says.
On the other hand, he points out, fintechs themselves would find advantages in seeking ongoing relationships with wealth management firms.
“Such partnerships would be mutually beneficial, as the new products and services could reach an already existing client base without significant marketing costs, thus allowing fintechs to achieve considerable marketing penetration and helping incumbents develop advanced digital capabilities to get ahead of the competition,” says Vaidya.
Wealth managers are going to be an integral part of the process of bringing fintech products into the mainstream, according to Vaidya.
“Hence,” he says, “wealth managers should act as the advocates for new-age services as supplementary to traditional services for their clients. And it is imperative for fintechs to ensure buy-in from wealth management firms to collaborate and upgrade their capabilities.”