Fintech has captured the imagination of many financial services firms looking to leverage differentiating technology to accelerate their innovation. Nowhere is that more true than within the wealth and asset management sector.
Increasingly, financial services organisations are becoming technology services providers. While fintechs are seen by many as disruptive to traditional financial services businesses, in reality they present great opportunities for savvy organisations.
The early impact of fintech has already been felt by the banking sector, where traditionally large value chains and highly visible, commoditised products made it ripe for disruption. Bitcoin was an early mover and progress has also been relentless in peer-to-peer lending, with a range of new market offerings launched. Banks have found themselves on the back foot, forced to adapt to compete with new challengers.
There are clear lessons here for the wealth and asset management industry. Looking at how disruption has driven new cost models and customer experience in the banking sector can help create a framework for wealth managers’ adoption strategies. One message in particular stands out: disrupt yourself and do it now.
Wealth and asset managers have so far enjoyed a level of insulation from fintech disruption. This has been the result of two key factors. Firstly, wealth and asset managers operate in a highly regulated, formal market. By its nature, this environment makes it hard for start-ups to get a foothold. Secondly, the nature of wealth and asset management products means they are not something that a typical consumer uses on a daily basis. Asset management operates differently from a cash or credit transaction. This level of complexity has made it difficult for start-ups to target the core factory of a wealth management firm. But, while these factors have provided a degree of security to date, there is no doubt that the value chain for the wealth and asset management industry is under threat.
Traditional and emergent fintechs
Traditional fintechs are large, established technology companies. They have built up industry knowledge over time, understand start-up principles and have the existing technology and a well-funded community of developers to support their aspirations.
The major upside with these large companies is their high visibility. There are opportunities here for wealth and asset management firms to form strategic partnerships that ensure they will be at the forefront of the wave of technology adoption these large players are driving.
The second type of fintechs are innovative firms with specific intermediation strategies. These are the disrupters with the ability to put elements of the traditional wealth management value chain under immediate threat. While it is unlikely these start-ups will steal core business in the short term due to the barriers mentioned earlier, the opportunities are immense and there is likely to be some consolidation in the market.
Low cost transaction platforms
As regulators apply continued pressure on increasing fee transparency across the industry, organisations with higher operating costs will become less attractive to consumers. The winners will be wealth managers who are adaptable, agile and have low cost models. These platforms are highly disruptive as the fee models are low and simple to understand. Most consumers want to maximise returns without passing income to the asset manager. In some overseas markets, new entrants have changed the revenue structure to leverage the inherent value in consumer data, rather than the trading fee. Under this model, they are able to employ aggressive advertising campaigns and upsell to other revenue-driving products.
If fintechs can cause a degree of intermediation in the value chain which reduces cost, then adopting a business model which uses the same or similar delivery models could be the strategic shift needed for an early adopter to change the game.
Transactional versus relationships
Fintech providers target two different types of client. The first is the transactional client, who is often defined by a fee for service arrangement. This type of client benefits from innovative technologies in self-service advice, payment processing and automated account management. The second type of client is relationship-based. They seek an ongoing personal relationship with their planner. Fintech can be used to enhance this relationship via integrated multi-channel communication, single customer view and ongoing risk mitigation.
Consumer experience and data analytics are key
The level of service consumers expect from their wealth and asset management providers is changing. Some new entrants in markets such as New Zealand are already capitalising on this, using real-time video chat and digitalised documentation to engage with their customers on hosted platforms. This solution is scalable and offers immense back-office opportunity, the capacity to reduce storage costs and paper use, restructure the organisation and bring increased efficiencies to the wealth management business model. It also has the added advantage of providing an immediate improvement in customer experience.
Other start-ups are experimenting with the use of social media insights to provide predictive analytics. Done well, this can provide the ability to determine emerging market sentiment and identify which stocks are going to become buy or sell opportunities ahead of the traditional stock market. It can allow for new types of risk management strategies and profiles to be defined, enabling wealth managers to respond to market sentiment and redress and balance the investment mix in their portfolio before anyone else. In a highly competitive market, adopting a solution like this could help attract new customers by maximising returns and improving the investment profile.
Mega-algorithms are coming
The rise of the robo-advisor is imminent, with pilots already running in Australia. Robo-advisors have the potential to impact the industry’s entire investment and scaled advice model, by turning the handling of consumer-managed portfolios into a computer-driven process. Considering how the use of robo-advisor models could change the way the wealth and asset manager advisory workforce is managed going into the next few years, wealth managers will need to deal with this level of change. Otherwise they may find their customers choosing the reliability and predictability robo-advisors can bring to their financial planning needs at a fraction of the cost, and switching to a competitor.
The way forward
Fintech will change wealth and asset management behaviour, and soon. The current regulatory framework provides some level of insulation, but the industry is not immune from market disruption. Preparing for the change requires new ways of thinking and a strategy, plus an operating model to support it. By taking a global view of what is happening in other markets and across the broader financial services sector, Australian wealth and asset managers can position themselves to capitalise on the opportunities fintech presents.
Anita Kimber is an advisory partner in EY’s Oceania Financial Services Office.
The views expressed in this article are the views of the author, not Ernst & Young. The article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.