Wealth management: Digitalising a cottage industry

Digitalisation and robo-advice have been buzz phrases in recent years, but a conference in Amsterdam this week offered insights into what a digitised future could look like.

The International Customer Conference was organised by Italy’s Objectway, a fast-growing company in business since the start of the Nineties as a wealth and investment management software vendor to banking, securities and insurance (BSI) companies in 15 countries form the Europe, the Middle East and Africa (EMEA) region, Canada and South Africa. This was the second of what Objectway intends to be an annual event; the first having been held in London last year.

According to Peter Schramme, Objectway’s chief business development officer, the BSI market is made up of a “complex conglomerate of financial institutions”. Conference speaker Stephen Wall, a senior analyst at research and advisory group Aite, noted that the wealth and investment management sector has historically been very much a “cottage industry”.  However “digitalising wealth management has become fundamental to the business in the past couple of years and will shape the future of the market” he predicted.

Such is the speed of the transformation that wealth managers can no longer regard the shift to digital as an option, but rather “do or die” he suggested. They must ask what their company is doing to keep up, which in many cases means addressing its infrastructure and what will often be “a tangled and complex legacy system”.

Wall highlighted four main drivers of digitalisation across the wealth and investment management industry: regulation, clients’ expectations, technology and competition. New rules, including Europe’s adoption of the revised Directive on Payment Services (PSD2) and the revised Markets in Financial Instruments Directive (MiFID II) are transforming the landscape, while the demands of affluent and high net worth (HNW) clients are growing.

Technology is becoming steadily more efficient, can accomplish more and do so more cheaply, making it a competitive factor, while a more competitive environment has seen the new class of robo advisors come into the market.

“These drivers are putting greater pressure than before on wealth managers and highlighting inefficiencies such as out-of-date technology and infrastructure,” said Wall. “At the same time they’re also shining a light on the path to the market’s future.”

The new wave

A report produced jointly by Objectway and the non-profit European Financial Management Association (Efma), ‘Digital Engagement & Collaboration in Wealth and Investment Management’ canvassed opinion from advisors and firms across 27 countries in EMEA, Canada and South Africa. The findings suggest a relatively high level of engagement with digital strategy, as evidenced in the following question:

What is your organisational strategy in relation to digital engagement and collaboration?:

  • 46% a board level commitment with a strategic focus.
  • 22% a multi-year programme, with a multi-year budget.
  • 15% ad-hoc initiatives.
  • 12% a project, with a dedicated budget.
  • 2%  there is none.
  • 2%  don’t know

This past week has seen UBS launch its SmartWealth robo-advice business in the UK, but in addition to traditional wealth managers getting involved in digitalisation – other names include BNP Paribas, Deutsche Bank, ABN Amro, Standard Chartered and Bank of the West – there are being joined by insurers, asset managers, independent financial advisers and others, said Wall.

“Robo-advisers have seen the wealth management market as one they can attack by offering something different from the traditional service, so the wave of new entrants is growing,” he added. While the US still leads the market – low-cost asset manager Vanguard is fast developing its business outside the US – others are expanding fast. These include Middle East entrants, as Shariah-compliant firms join in. In addition to differentiating themselves from the more traditional players, the new players often offer much lower minimum thresholds for entry.

According to Wall, a number of traditional wealth managers are dismissive of the new market entrants and expect many of them to fail. However, while there are likely to be casualties both they and the survivors will changes the way in which the industry operates.

Indeed the survey shows that 71% of the survey respondents believe that online investment management will be best served by a hybrid advisory model, in which clients have the options of a totally automated service and continuing face-to-face contact with advisers. Only 10% believe that the future consists solely of an automated robo model.

“Traditional wealth managers can ignore the digital transformation, but to do so is a high-risk strategy,” Wall concluded. “The opportunities that digital can deliver are too deep to ignore.

“Clients can move deeper into existing investment segments and enter new ones; advisers can be more efficient and engaging; the business can be more flexible, efficient and profitable.”

Ultimately, digital advice will be a ‘must’ and while advisers will remain relevant, modern wealth management will place a greater emphasis on the wishes of the client. This will, in turn, require “a more flexible model and technological infrastructure.”



Related reading