Cyber warfare: old and new vie for control of North American digital wealth market

Technology has forced its way into the strategic heart of the wealth management sector. But for an industry which has placed so much value on human relationships, the continual ascent in the need for technology to support tasks has often been hard to accept. Regardless of remaining doubts or questions, realists understand this rise is not going to stop. In fact, it will run deeper to the core of the sector’s business model.

While technology has long been relevant to the needs of the sector, it was rarely seen as central. It was often viewed as a servant and a cost more than a true business enabler. It was never going to define the future.

But things have radically changed. Technology is now at the centre of the fabric of many wealth management firms and is increasingly core to the delivery of the sector’s future business model.

Arrival of a new breed 

How did we get here? Although there are multiple factors, a clear driver has been the development of technology and its application by multiple early adopters. In North America, in particular, those have often been start-up digital wealth managers – firms set-up with a technology-enabled proposition and aimed at challenging the established marketplace. 

The traditional wealth management space effectively saw two lead models: adviser-led, where the client works with an institution via an adviser, and self-directed, where the client works directly with the institution. These were polar opposites, with little filling the gap in the middle, and thus many clients missing out. 

Technology, however, has brought about a shift in the latter half of the decade, with the arrival of a third option: digital wealth management. Splitting the old models down the middle, this means the client can work directly with a provider and access a relatively simple product offering.

If anything, this is a hybrid of the two old models. “This is simplified wealth management delivered through a digital platform,” comments Kapin Vora, partner and head of North America wealth management for Capco. 

“The concept of digital advice is the driver and it is backed up by being easily accessible and cheap,” he says.

This third way has caught on. According to a research report published in April 2017 by UK-based fintech research firm Burnmark, entitled ‘Digital Wealth’, there are now a total of 200 digital wealth players in the US, the top 10 of which have seen their assets under management grow at a healthy compound annual growth rate above 100 per cent in the last five years.

These firms have hit today’s ‘Zeitgeist’ by offering a portfolio-based proposition to cost conscious investors, believes Alois Pirker, research director of Aite Group’s wealth management practice. “Before this, investors had either to trade themselves, an idea many consumers are not comfortable with, or pay a three-digit basis point fee,” he says.

The numbers have continued to grow and a second reason for their success has been a much-improved client engagement model compared to the traditional firms, empowering clients with engaging self-service user interfaces, believes Mr Pirker.

Names such as Betterment, FutureAdvisor, Motif Investing and Wealthfront, all new businesses, had tapped into the changing behaviour of clients, the evolving powers of technology and, to a large degree, the weaknesses in the traditional marketplaces. These firms were “the digital leaders”, defining this third way, according to Capco’s Mr Vora.  

The results speak for themselves. According to Aite Group research from March 2015, the market for digital wealth in the US was expected to reach $55bn to $60bn by year-end 2015. Looking forward, consulting firm A.T. Kearney projected in June 2015 that the total value of assets under management for the sector would reach $2.2tn in 2020.

Time to act

Given these numbers, the sector’s established names were never going to sit idly by and watch their leading positions be taken away. Indeed, the traditional market has looked, listened and learned and, through different paths, they are fighting back.

But this requires new thinking, new tools and new ideas. Leadership in the digital age has a new set of rules and the incumbents understand they are not yet the masters here.

Indeed, traditional firms are burdened by legacy in multiple forms. “We have embedded requirements, systems and clients,” says Bob Anselmo, managing director of wealth management technology at UBS Wealth Management. 

“We cannot just forget that. We have to be grounded and understand that any changes we want to make within our business have to be integrated into our existing frameworks.”

The challenges run deep. Further legacy factors include the high-cost of their existing business models, embedded working cultures, the slow traditional pace of change and fears over the impact on their existing business, especially in relation to their adviser workforce. 

However, while there are challenges, the opportunity offered by digital is so big that the incumbents must engage. The true opportunity of being or becoming a digital leader stretches far beyond a nice digital platform to reach and service existing clients.

Client first approach

Fundamental to the new thinking, and in line with the approach of the new market entrants, is client first thinking. 

“We have to think about how the client lives their life,” says Aditya Bhasin, head of Consumer and Wealth Management Technology at Bank of America. 

“There is an increasing view that the client lives their life in digital. The client sees no reason why their digital life should not also be extended to their wealth manager or bank. So it starts with the client. Whatever they want delivered digitally, we have to deliver.”

The other side of the coin is clearly integrating the adviser, he adds. “Successful digital is integrated digital: embedded into the client’s life, embedded into the adviser’s workflow. We want to make sure the adviser is well connected. It is adviser and technology together. Advisers see it as a way to make them more effective and more focused.”

Collaboration

Bringing new and integrated tools to bear is core, of course, but, for the incumbents to really compete in this new environment, the partnership path is now far more relevant than in the past. 

“Most traditional firms cannot make the necessary changes without working with an enabler,” explains Mark Trousdale, chief marketing officer at Los Angeles-based InvestCloud.  

It is simply too expensive and takes too long to do alone, he adds. “The big firms might be enormous, have lots of people and big budgets, but it simply takes them too long and costs too much. They work with hard-coded software. Adapting that takes time and money.”

Michael Sha, CEO and co-founder at San Francisco-based SigFig, agrees. “We have a huge team of engineers and we have been building this system for 10 years. When we work with a partner we can accelerate time to market.” 

Any incumbent building their own technology stack also faces the risk that “when the in-house own technology teams moves onto the next project, the technology is simply left as it is and hardly touched again until they next come back to it,” he adds.

That is no basis for constant innovation and improvement, two watchwords of the digital era. Indeed, the benefit of “ongoing and rapid innovation and iteration” is another benefit that can be achieved through collaboration, believes Mr Sha.

But the collaboration route also requires further learnings and commitments to align what remain two very different business cultures.

Cultural shift

In working with firms such as SigFig, DocuSign, Vestmark and others, UBS has had to get used to a “far nimbler turnaround” than it is used to, says Rich Steinmeier, managing director of UBS Wealth Management Americas.

“We are also trying to get the organisation to understand there should be some permission to fail which, in an organisation where everything is so closely measured, is a significant challenge,” he added. 

While noting clear challenges, Mr Steinmeier also sees clear benefits. In addition to a similar set of efforts as at Bank of America, in bringing clients and advisers closer together and reducing friction by developing the ease of communication between the two, the benefits to the firm have been significant. 

“[These included] changing IT delivery mechanisms, bringing so many different people to the party across the bank, bringing the business and technology sides of the business closer together, getting advisers in from the get-go and shifting from the mindset of a traditional buyer-vendor relationship to one that is far more about partnership and collaboration,” he says. 

 These efforts are clearly some of the characteristics required by future digital leaders, believes Mr Trousdale at InvestCloud. “They are willing to change, have the attitude that it is OK to change, and recognise that digital is here and it is not going to go away.”

Softer side

Digital leadership, therefore, does not depend so much on old factors such as size, heritage and budget, but rather a new set of softer characteristics such as adaptability, flexibility, willingness to change, collaboration and true engagement with the client.

But, looking forward to a world where wealth management mixes a broader set of factors into its strategic mix, including a much deeper triangulation of how the client, the advisor and the business mix together, we can clearly say that technology will play a leading role. 

But new technologies and digital tools will do little to define digital leadership unless they are clearly set within the deeper context of a new business and digital mindset. The rocket did not fly itself to the moon.