Technology in Wealth Management: Drivers for Adoption and Future Trends

Table of Contents

EXECUTIVE SUMMARY 2

1.1. Adoption of technology in wealth management will accelerate 2

1.2. Key findings 2

1.3. Critical success factors 2

2. WEALTH MANAGERS AND TECHNOLOGY: GENERAL TRENDS 9

2.1.1. Private banking has traditionally competed upon the basis of relationships and alpha 9

2.1.2. Private banks have recently awoken to the need for digital innovation in their service delivery 9

2.1.3. Robo-advisors have lit a fire under the industry in regards to the utility of digital solutions 9

2.2. Wealth managers are investing in front- and back-office tech 10

2.2.1. Client-facing solutions have been seen as a higher priority, but back-office is still a focus 10

2.3. Understanding technology is essential in order to benefit from it 11

2.3.1. Other branches of financial services will continue to lead in technology 11

3. TECHNOLOGY IN WEALTH MANAGEMENT: DRIVERS FOR ADOPTION 12

3.1. Drivers for technology investment have come from many different quarters 12

3.2. Lower fees and simplicity attract investors to digital platforms 13

3.2.1. Wealth managers once again need to adapt to a step-change in fee tolerance 13

3.2.2. Price-sensitivity fuels interest in low-cost, digital-only investment managers 13

3.2.3. User-friendly platforms are welcome among more hands-on investors 15

3.3. Intergenerational change is fueling the need for a shift in how wealth management services are provided 17

3.3.1. Wealth managers must incorporate digital services ahead of millennials coming into wealth 17

3.3.2. The current aging HNW demographic remain loyal to their advisors 17

3.3.3. As wealth is passed on, wealth managers’ client demographics will change 17

3.3.4. Wealth managers should not underestimate the utility of digital services to older clients 18

3.4. Large wealth management organizations struggle with costs 18

3.4.1. Expenses have been growing faster than revenues 18

3.4.2. Staff reductions require better advisor effectiveness 19

3.5. Regulatory requirements have weighed on the efficiency of many firms 20

3.5.1. Mounting compliance requirements have resulted in higher costs for wealth managers 20

3.5.2. The fiduciary rule in the US will encourage firms to invest in technology 21

4. THE NEXT STEP FOR ROBO-ADVICE: HYBRID OFFERINGS 22

4.1. Incumbent wealth managers feel the pressure from robo-advisors 22

4.1.1. Automated investment platforms will try to win private banks’ audience 22

4.1.2. Robo-advice platforms can complement wealth managers’ services 23

4.1.3. Digital players are yet to find their ultimate place in the market 24

4.2. Robo-advisors only really launched into the market following the financial crisis 24

4.2.1. Challenger brands are not able to compete with incumbents on reputation 24

4.3. Traditional wealth managers are venturing into robo-advice 25

4.3.1. Inclusion of the human element is key to bringing in significant AUM 25

4.3.2. Security and trust remain essential in investment management, making brand a key consideration 26

4.3.3. The roles of humans and technology are not fixed 27

4.3.4. Client segmentation and tailored targeting strategies are essential 27

4.3.5. There is HNW appetite for digital solutions 28

4.4. Hybrid human-digital offerings are the future 29

4.4.1. The hybrid proposition must not undermine a provider’s image, values, or core business 30

4.4.2. The right combination of human and digital elements will resonate with a wide audience 31

5. DIGITAL EFFICIENCY TOOLS 32

5.1. The industry invests in technology that allows savings 32

5.1.1. Wealth managers are investing more in tools supporting front- than back-office 32

5.1.2. Drivers of investment in efficiency tools have mainly been cost-related 32

5.2. Innovative communication platforms save time on travel and meetings, but will not replace human contact 33

5.2.1. Improving communication flow between clients and advisors has been the focus of North American wealth managers 33

5.2.2. Portfolio management software will be most beneficial in markets with low discretionary mandates penetration 35

5.2.3. Digital workflow tools support the administrative duties of relationship managers 37

5.3. Automating compliance work will trigger efficiencies 38

5.4. Big data analytics can help tailor products, but on the top level only 41

5.4.1. Analysis of investors’ history of trades provides information about their attitudes 41

5.4.2. Less than a third of wealth managers use big data 41

5.5. Blockchain remains untouched territory in wealth management 42

6. WEALTH MANAGERS’ COLLABORATION WITH IT VENDORS 45

6.1. The wealth management industry presents an opportunity for IT solution providers 45

6.1.1. Emerging markets have been early adopters of innovative solutions 45

6.1.2. Wealth managers look for support in client acquisition and gaining efficiencies 46

6.1.3. The opportunity for IT vendors lies in developed economies with big established firms struggling with outdated systems 47

6.2. Fintech startups are seeking partnerships with bigger brands 48

6.2.1. In an industry that requires scale, start-ups have been eager to partner 48

6.2.2. Fintechs will struggle to attract wealth partners in North America 49

6.3. Established IT vendors have an advantage over fintechs 50

6.3.1. Upgrading is still a fraught endeavor for wealth managers, and they appreciate the experience and capacity of established suppliers 50

6.3.2. IT vendors should provide not only pure IT services, but also advice 51

7. APPENDIX 52

7.1. Abbreviations and acronyms 52

7.2. Supplementary data 52

7.3. Definitions 66

7.3.1. Automated investment platform 66

7.3.2. CAGR 66

7.3.3. Developed (mature) economies 66

7.3.4. Emerging (developing) economies 66

7.3.5. High net worth (HNW) 66

7.3.6. Robo-advisor 66

7.3.7. Standalone automated investment platform (robo-advisor) 66

7.4. Methodology 67

7.4.1. 2017 Global Wealth Managers Survey 67

7.4.2. 2016 Global Wealth Managers Survey 67

7.4.3. 2015 Global Wealth Managers Survey 67

7.4.4. Mass Affluent Investors Survey 67

7.4.5. Level of agreement calculation 68

7.4.6. Exchange rates 68

7.5. Bibliography 68

7.6. Further reading 70

List of Tables

Table 1: Forecast growth in technology investment among US retail banks, by selected business segments 11

Table 2: The largest digital wealth management platforms in the US and Europe, by AUM 28

Table 3: Regional breakdown of countries covered in our Global Wealth Managers Surveys 53

Table 4: Survey data: Proportion of wealth managers investing, planning to invest, and not planning to invest in IT solutions facilitating administrative duties e.g. CRM, KYC 54

Table 5: Survey data: Proportion of wealth managers investing, planning to invest, and not planning to invest in digital tools for financial planning, portfolio development 55

Table 6: Survey data: Proportion of wealth managers introducing, planning to introduce, and not planning to introduce new digital channels for client communication e.g. video conferencing, online meetings 56

Table 7: Survey data: Proportion of wealth managers using, planning to use, and not planning to use big data analytics like IBM’s Watson to better understand clients and prospects 57

Table 8: Survey data: Proportion of wealth managers developing, planning to develop, and not planning to develop software to automate compliance work 58

Table 9: Survey question (2016): To what extent wealth managers agree that traditional wealth managers will lose market share to automated investment services (robo-advisors) in the next 12 months 59

Table 10: Survey question (2017): To what extent wealth managers agree that traditional wealth managers will lose market share to automated investment services (robo-advisors) in the next 12 months 60

Table 11: Survey question (2016): HNW clients are showing interest in services provided by standalone automated investment platforms (robo-advisors) 61

Table 12: Survey question (2017): HNW clients are showing interest in services provided by standalone automated investment platforms (robo-advisors) 62

Table 13: Survey question (2017): My firm has, or is looking to, partner with or acquire fintech start-ups over the next two years 63

Table 14: Survey question (2017): Co-operation with regtech will reduce wealth managers' compliance costs 64

Table 15: Survey question (2017): Digital access and channels are essential for wealth mangers serving HNW investors 65

Table 16: US dollar exchange rates, December 31, 2015 and December 31, 2016 68

List of Figures

Figure 1: Key drivers of technology adoption in the wealth management industry 13

Figure 2: Low fees are the major factor attracting HNW investors to robo-advice platforms 14

Figure 3: Entrepreneurs are likely to show demand for execution-only services 15

Figure 4: Price-sensitivity falls behind other factors driving self-directed investors outside the HNW segment 16

Figure 5: UBS has been reducing its workforce while growing AUM 20

Figure 6: In 2017 more wealth managers expect to lose market share to robo-advisors than in 2016 23

Figure 7: Barring Germany, the markets where digital channels are least important are offshore centers 29

Figure 8: Leodan PrivatBank attempted to build a friendly and amusing brand 31

Figure 9: Wealth managers are introducing new digital channels for client communication 34

Figure 10: The majority of wealth managers have already started investing in tools that facilitate financial planning and portfolio management 36

Figure 11: Digital tools that facilitate the administrative duties of advisors are most common 38

Figure 12: Compliance is currently more likely to be automated in emerging than mature markets 39

Figure 13: In markets like the Netherlands and the UK, wealth managers remain hesitant about the benefits of regtech 40

Figure 14: Adoption of big data is low in the wealth management industry 42

Figure 15: Wealth managers are not sure about the application of blockchain within the industry 44

Figure 16: Emerging markets are leading the way in technological developments 46

Figure 17: IT vendors have the biggest business opportunity in developed markets 47

Figure 18: Fintechs operating in the ‘product’ area attract most investment 49

Figure 19: China’s hot fintech market has the most wealth managers that are open to collaboration 50