Wealth managers consider opportunities and dangers of the digital world

The risks and opportunities that technology holds for the wealth management industry was high on the agenda at the Wealth Management Association’s annual summit, held in London on November 9.

Although still in their infancy, robo-advisers such as Wealthfront and Betterment are starting to make real headway in the US, said Rob Fisher, head of growth, UK Retail, at Vanguard. “These firms are doing a good job of describing the added value then can bring to their customers,” he said. “And this is not just among millennials. The average age of their customers seems to be around the mid 40s.”

In a world of low returns, the low fees that these online firms charge will be very attractive to investors, explained Mr Fisher, and could lead to pricing pressure on more traditional players. On the other hand, by targeting individuals further down the wealth spectrum, they could also create a new pipeline of clients for the industry as a whole.

The new digital players think very differently to the rest of the industry, he added. Unencumbered by legacy systems, they tend to be much more nimble and quick to adapt to new developments. They might not be well known, but “transparency can be a short-cut to building a brand”, explained Mr Fisher. And those within the wealth management industry being disrupted by non-traditional players should be aware that they are already here. “Betterment is a tech firm,” he said.

How should the established wealth managers respond? “Partnerships or acquisitions may well be the way the industry reacts to the rise of these robo-advisers,” said Mr Fisher, explaining that some of these new players might not be able to scale up their offerings.

Building in some kind of “circuit breaker” might be something for firms with digital investing platforms to consider. “This would prevent clients from losing their nerve during periods of heightened volatility and pulling the plug on their entire investment,” he said, adding that several institutions do have this kind of capability in place in some for or other.

The threat of cyber crime is another area that the industry needs to address, warned Paul Hoare, senior manager, Protect & Prevent, at the UK’s National Crime Agency. “There is now more cyber crime than there are crimes in the real world,” he explained, adding that “traditional organised crimes groups now see this area as a new revenue stream.”

Financial services firms need to think things through before any attack occurs. “Have a plan in place so that you are not reacting in the heat of the moment. For example, when will you tell your third parties, your clients, the press, the police?”

Mr Hoare highlighted the airline industry as an example of an area where different companies have become very good at learning from each other’s mistakes, to the benefit of all. “This doesn’t happen in the cyber world.”

He also advised firms to spend money on people, not just software. “You can buy the best software, but if you don’t have the right people who really understand it, then it isn’t worth anything.”

Giles Taylor, head of data and cyber security at Lloyds Bank, pointed to the risks involved with external partners. “As we work with more and more third parties, how do we manage risk that is not under our direct control?”