How Tech Drives Wealth Management Change

Tom Burroughes Group Editor 28 January 2019

How Tech Drives Wealth Management Change

This feature delves into the different ways technology in various forms is changing, possibly revolutionising, the wealth management sector.

It is hard to avoid seeing how technology is changing the face of wealth management. There is a buzz about how artificial intelligence, robotics, mobile devices, Big Data and distributed ledger tech such as blockchain are forcing change. Even allowing for PR spin, the significance of these forces cannot be doubted. 

The term “fintech” embraces a wide field, ranging from the technologies that institutions use to change their mode of operations, such as collecting more data about their clients, or giving customers tools to view portfolios on a tablet or mobile phone 'on the go'. Or the term can also refer to new business models which rival banks and investment houses, such as the employment of robo-advisors and online-only banks. (See examples of research on such topics by this news service here and here.)

This publication has been talking to industry figures about what they see as the biggest effects technology has on the sector.

“The mobile phone is still the biggest ultimate driver for how wealth professionals are affected by technology simply because it has empowered consumers to be much more demanding in their interactions,” Daniel Semal, director of information technology architecture at BNY Mellon’s Pershing, said.

“This doesn’t necessarily concern the quality of an app but the overall, individual connection with any service provider – think Amazon, Apple, Spotify, Netflix. This is especially true for any premium service, where consumers are becoming less willing to be treated as yet another number and demanding an obvious effort to be treated as individuals with very specific preferences,” he said. 

“This is a key message for the industry right now – there is plenty of competition for customers and whilst the underlying financial performance of the service is important, the desire for a high quality, seemingly customised, customer experience is in demand. Technology plays a large part in shaping the customer experience, both with respect to creating efficient processes behind the scenes and facilitating an easy, personalised interaction with the wealth professional, but it should never be considered the be all and end all,” Semal said.

To spend, or not to spend?
Keeping abreast with all this is tough enough but a particular challenge for wealth managers has been figuring out how much of their IT budget they want to spend for future business growth, and how much they must spend to comply with regulatory forces such as the European Union’s MiFID II directive, the EU’s General Data Protection Directive, new anti-money laundering rules in various jurisdictions, and so on.  According to a 2017 Duff & Phelps report, regulatory costs could more than double in five years. The report found that firms typically spend four per cent of their total revenue on compliance, but that could rise to 10 per cent by 2022. And this hits margins: in 2017, Boston Consulting Group said that  pre-tax margins at global wealth managers had fallen from 33 basis points in 2007 to 22.4bp in 2016. 

The drive to pile on new regulations post-2008 dominated a lot of IT spend, and it arguably deterred some in the sector from being radical. A report early last year by MyPrivatebanking, the research firm, concluded that projects addressing deep, disruptive and strategic change do not get enough funding, even though managers know that they matter for the future.

This year might come as a relief after a decade of compliance-driven work has dominated budgetary priorities.

“A lot of wealth management firms are looking forward to being able to focus back on investing in product/service enhancement, but the specifics will be where each wealth manager is looking to differentiate themselves or make-up lost ground from the last couple of years,” Semal said. 

It is possible that firms chose the incremental route rather than a “big bang” approach because budgets have been pressured. A question is how much is traded off between must-have spending and want-to-have spending. (Some will claim that good compliance is a value-add, but if that is true then firms would presumably do it anyway.) In any event, if the sheer pace of regulatory spending decelerates this year, it will be interesting to see if there is a genuine shift towards capital spending that actually grows the bottom line.

Connections, integrations
One of the most important ways tech affects wealth management is giving information to clients more quickly and in a digestible form. For example, at UK-based Kuber Ventures, the UK firm which provides a platform over which advisors can source specialist investments, says providing data that is accurate and relevant is what counts. 

“It is more important that when a client switches on a screen they have the right numbers rather than that being a cool tool,” Dermott Campbell, chief executive, Kuber Ventures, said. 

Related to this are steps to integrate the financial planning sides and discretionary wealth management elements of a client’s life, and tech can be useful in doing that. Focus Solutions, which is a UK-based business, late last year launched focus:wealth, which it describes as a “cutting-edge personalised client engagement platform”, and Wealth Hub, which melds three offerings: its own focus:wealth platform, BITA Wealth by BITA Risk and IMiX by Investment Software Limited. Such a blending of capabilities in this mix-and-match approach from a range of providers is likely to be a trend to watch. 

That digital tools are seen as a must-have for clients and advisors can’t be doubted. A recent report by InvestCloud, which builds wealth platforms, found that 48 per cent of the investors it polled use digital offerings as a key selection factor when choosing a manager. The firm goes on to warn that there are “few signs of a digital breakthrough from traditional wealth managers”.

Associated with this platform development is the idea that technology “democratises” access by investors to asset classes, such as private equity, previously the preserve of large institutions and ultra-wealthy persons. (Even in the case of UHNW individuals, they can struggle to get a decent seat at the table.) Recent years have seen the rise of various investment platforms and networks not just for mass-market funds but specialist areas in alternatives, such as iCapital Network and Mercury Capital Advisors, CAIS, and Artivest in the US.  

“Since the early 2000s wealth management technology has been democratised through web-based software-as-a-service (SaaS) offerings such as Salesforce, Addepar, Black Diamond, client portals, and other tools. In 2019, wealth firms should have little need to house, operate and incur the expense of any IT infrastructure such as physical servers,” Joseph Larizza, managing partner at Mirador, a US portfolio reporting solutions firm, told this publication.

Are robots still marching?
Robo-advisors appeared to be the Big Thing a few years ago, and while there is plenty of ferment in the space, it has not been as smooth an ascent as some might have expected. 

In its 2019 Banking and Capital Markets Outlook, Deloitte said that “robo-advice will continue to bring new customers into the advice market, even mass-market customers with limited assets” and refers to JP Morgan’s You Invest digital investment offering as an example. Deloitte sees that as “likely the future model of digital advice for the mass market”. But further up the scale, matters get more complicated. When UBS launched its Smartwealth digital advice channel for the affluent client segment, it ultimately chose to pull out of the project and spin the venture off. This might suggest that for some established wealth firms, going down the digital route is far from straightfoward. Also, various reports suggest that for many HNW and UHNW clients, the “hybrid” model that retains human interaction with digital data is where people wish to go.

However, it does not always appear to be the case that the richer a person gets, the less digital interaction he or she wants. It is more nuanced than that. Practitioners tell this publication that highly mobile UHNW wealth owners expect to be able to view their financial affairs wherever they are. In developing digital channels, therefore, wealth firms may want to try an experimental approach, testing what clients want and being willing to quickly change depending on how clients react.

Talent management
The type of skills needed to work in wealth management are changing. Being comfortable with technology is now a mandatory requirement for people entering the field. As an example, in October last year JP Morgan said it was putting new finance and investment professionals through compulsory coding lessons as the industry gets more tech-driven – and this project also affects private bankers. The bank has even created the JP Morgan Chase Coding Academy. This sort of development is surely likely to grow. There is also a geographic aspect here. In the fastest-growing wealth management markets, such as Asia, newbie professionals in centres such as Singapore and Hong Kong will be tested as much for their technology fluency as for their understanding of asset allocation.

What seems clear enough is that regardless of specific client segment, technology is changing the wealth industry, so much so that at times, as the UK private bank Coutts said last year, there is almost a case for treating bank and technology stocks as the same, even though there are obvious differences. 

(This feature is part of this publication’s schedule of features about what is driving this industry. To view what this news service has in the pipeline, see here.)

Speakers at our 4th Annual Family Office Fintech Summit (21 March, New York) will discuss a variety of issues around technology and wealth management.

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