We are becoming accustomed to hearing the phrase ‘digital transformation’ used ever more frequently in the US wealth management industry, as a combination of escalating investor expectations and profitability pressures compel firms to commit a higher proportion of budgets to technology spend.
But to what extent will higher spend by firms lead to revenue growth? Using proprietary Aon analysis and our client experience research insights, we find that, so far, increased investment has not translated into improved value creation.
As they look ahead to 2021, wealth management firms must optimise the mix of transformational and ‘Business as Usual’ (BAU) initiatives, and consider their impact on clients and advisers, if they are to improve revenues.
Tech costs have been rising in recent years
A rising expectation of digital delivery is one factor driving the significant increase in tech investment by firms in recent years.
Our own analysis shows that total tech expenditure in 2019 was up by 30 per cent for the average US wealth management firm, compared to 2016. The mix of spend between transformational projects and BAU initiatives remains decisively in the BAU corner, with 70 per cent of budgets going toward ‘running-the-bank’. Platform enhancements, information security and data privacy remain top-of-mind for business leaders, but only comprise the minority portion of budgets.
The challenge is that although tech costs per adviser have increased by 30 per cent for the average wealth management firm since 2016, firms have struggled to realise value from these investments.
Challenging to determine a responsible level of investment
The pandemic and ensuing economic uncertainty has dialled up the pressure on budgets, making it imperative that leaders carefully prioritise 2021 initiatives. At the same time, businesses cannot afford to lose their appetite for innovation or fall further behind wealthtech firms and more agile competitors.
Rather than cut back in the coming budget cycle, more focus is needed on which functions additional investment could be sourced from. In the short-term, this could mean diverting unused T&E [travel and expenses] budgets for 2020/2021 as business travel and events remain on hold. In the longer term, savings could come from reducing real estate costs, and even a wholesale change to location strategy, now that virtual working is increasingly seen as a win-win for firms and employees alike.
Priority projects must support growth through the client experience
To improve the chances that their digital investments will pay off in the future, firms must have a line of sight into evolving investor expectations.
Much is made of millennial investors demanding changes to the digital experience, but similar sentiments are now prevalent among older generations too. Client feedback challenges some long-held internal assumptions on what the priorities need to be. Indeed, without this insight it is difficult to identify the initiatives that will improve engagement and wallet share.
A 2019 study conducted by Aon for Appway, the technology firm, showed that high net worth clients scored US wealth management firms just 6.6 out of 10 for the user friendliness and innovation of their online tools. They seek improvements across multiple areas, from reassurance on data security to wanting a truly end-to-end digital experience without having to speak to their adviser. Failing to address their frustrations harms the relationship, belies claims of client-centricity and fuels switching.
Not enough focus has been given by firms to adviser productivity
A final critical piece of the puzzle is understanding the impact of planned tech initiatives on adviser productivity. The risks of getting this wrong can be significant: millions of dollars might be spent developing tools to enhance adviser productivity that are subsequently not adopted by the salesforce.
Here, best practice on the tools that have made a difference to the most successful advisers can help. Our 2020 research conducted on behalf of Money Management Institute showed that a digital mindset is not just a ‘nice to have’ for advisers, it’s a revenue generator. But firms need to do a better job of educating advisers on new capabilities as they are introduced. Critically, they should also seek feedback from advisers prior to making innovation decisions.
New sources of data in decision-making
To improve effectiveness, wealth management firms must broaden the inputs of tech spend decisions. Financial benchmarking analysis can identify cost savings from ‘run the bank’ tech initiatives and repurpose these budgets to invest in new platform capabilities. Tech development should be tested against client priorities to ensure evolving needs are met, while benchmarking the client experience will identify gaps that could be addressed to improve share of wallet.
Ironically, given the narrative of technology and talent coming into conflict, the effectiveness of tech spend will fundamentally be determined by advisers. The successful roll-out of platforms relies on the adoption of new tools that have been developed. This requires a firm-level commitment to invest in people and help advisers realise value from technology, as only an agile workforce will be able to quickly leverage new capabilities to respond to changing client needs.
Without a doubt 2020 will be remembered for many things. But it could still be a turning-point for better data-driven decision-making.
Peter Keuls is partner and Thomas Griffin manager at Global Wealth Management, Aon
