disruption in wealth management

Disruption in Wealth ManagementA major earthquake is long overdue…

Paper 1: Disruptive Behaviors in Wealth ManagementInevitable and wide-ranging impacts

Paper 2: Institutionalising Data in Wealth ManagementPractical and commercial examples

Paper 3: Holistic Approaches in Wealth ManagementTechnology as a conduit to success

Disruptive Behaviours in Wealth ManagementInevitable and wide-ranging impacts

Disruption in Wealth Management – A major earthquake is long overdueGreg Simmons | December 2016

In common with other parts of financial services, wealth management is facing the most unprecedented challenges in generations. Weak client trust, anaemic economic growth, higher regulatory burdens and lower client investment returns have all contributed to increased threats. Despite this, significant opportunities exist for incumbents and new entrants alike to take advantage of this state of flux.

Major disruption is inevitable

For decades, industry participants have not needed to change their business models dramatically to earn acceptable margins and although service propositions have evolved, they have done so lethargically. In an (admittedly) simplified look through the lens of Professor Michael Porter, pricing power has been strong and industry rivalry low – until now.

Geoscientists will tell you that the longer the period of inertia, the more severe the next earthquake will be – therefore it follows that the only thing more concerning than an earthquake, is actually no earthquake. Somewhat ironically, many disruptive technology industries are clustered around exactly the part of California that is physically on the move; it seems that residents living adjacent to the San Andreas Fault have a physical and metaphorical fear of inertia. The long-term inertia in the wealth management industry has made the next earthquake likely to be more powerful than ever before.

Innovative behaviours from HNW providers

Disruption is not just a case of having a flashy client facing platform. Three years ago, UBS Wealth Management quietly launched an internal system called Cornerstone (a comprehensive platform to carry-out ‘Health Checks’ on all impacted client portfolios). The system was specifically developed to cater for HNW clients and seeks to de-risk portfolios, improve client investment performance and enhance connectivity with the adviser and client.

Wealth Management

Industry Rivalry

Threat of New Entrants

Threat of Substitutes

Bargaining Power of Suppliers

Bargaining Power of

Buyers

FinTech, Boutiques, Multi-Family Offices, Accountants, Retail

P2P Lending, Cash, Unlisted Equity, Real

Estate, Passion Assets (Cars/Art/Wine)

Industry consolidation, Standard Pricing, MIFID II regulatory obligations

Execution-Only, Self-Service Platforms, RDR transparent pricing

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What is the adviser experience like right now?

High touch, bespoke client service is a commonly held differentiator for HNW providers, but the so far adviser are the ones feeling the strain. There is a rumbling discontentedness from advisers feeling squeezed by the challenge of using sub-standard tools which are wholly inadequate to deliver the HNW client experience expected today. Regulators too, are demanding ever increasing suitability safeguards and commensurate reporting from firms. A vicious circle emerges were advisers are spending increased time on remediation and compliance leading to declining client satisfaction and lower commercial returns. There is a ray of light for embattled advisers, with senior managers directly being held accountable for the adequacy of systems and controls, the opportunity to seek ways to ameliorate these challenges looks good.

Will HNW clients trust non-financial services disruptors?

The short answer is, yes. In a survey of 1,022 HNW investors, Scorpio Partnership/Factsetfound that 38% of HNW clients under 35 were most excited by Google as a potential new entrant. While the definition of trust varies between sociologists, philosophers and psychologists, in financial services, what I believe we are really talking about is competence – firms like Google ooze this.

We have all cringed at the words “If you cannot produce my portfolio statement correctly, why should I trust you with my investments?”. Trust is relative and once lost is hard to redeem. Disruptors have the luxury of starting with a blank data-set and will be more likely to ‘institutionally’ understand their clients and by doing so, are more likely to deliver on their promises.

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Is disruptive behaviour only for new entrants?

No, but new entrants have received high-profile attention for good reason. My most striking takeaway from a catch-up in 2010 with Nick Hungerford (Co-Founder of Nutmeg) was his pithy articulation of the prevalent ‘client need’, the identified gap in the market place and the requirement to find a superior way to use client information to generate a clear set of outcomes.

However, incumbents are also developing new ways to serve their clients. I was intrigued to see that HSBC had taken part in the FCA’s first Regulatory Sandbox (which helps both authorised and unauthorised firms test new delivery mechanisms). According to the FCA it “… creates a safe space because, if you act in accordance with this guidance, we will proceed on the basis that you have complied with the aspects of our rules that the guidance relates to”.

Similarly, in the UK UBS have launched their own online platform recently called SmartWealth. At the launch, Jamie Broderick commented that “The UK has developed a reputation for technology-led innovation in financial services. Regulation in the UK is progressive and has established support for new innovations”.

PwC offshoot, World in Beta, recently summed-up the environment clearly: “Collaborations between FinTechs and incumbents will deliver commercial advantage for both parties… In short, FinTechs can be the force for good that the financial services industry so desperately needs”.

Final thoughts on Part 1: Disruptive Behaviours in Wealth Management

Some of the highest calibre advisers in the world are based in London, furnished with strong industry knowledge, intensive regulatory training and high EQ. Through appropriate investment in technology we have a tangible opportunity to create an environment where advisers focus less on the mundane and more on value-added advice.

According to Cognizant “The digital ’dark side’ is real but manageable. Pessimism and denial are not good business models; the spoils will go to those who take the (managed) risk”.

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Institutionalising Data in Wealth ManagementPractical and commercial examples


In the words of Bill Gates, “How you gather, use and manage information will determine whether you win or lose”. We are seeing an omnipresent trend towards robo-advice, experimentation with Artificial Intelligence and Big Data. Despite the hype, it seems prudent that Small Data should be mastered first.

Only through a firm-wide culture of effective data analysis can we be sure to improve client outcomes, improve business strategy and enhance commerciality.

Most technology solutions on offer are aimed at improving the link between the adviser and client; this is highly noble but incomplete. For example, there is little point allowing clients to digitally communicate: their changing needs and circumstances, their willingness to invest in solutions, or request after-sales service (in a format suitable to them) unless this data is transmitted seamlessly to all relevant departments.

Through better understanding of the client journey, multiple benefits emerge

i. Previous Client Experiences• Improve investment product or service design where risks have been identified• Ability to learn from biases identified by Behavioural Finance• Create targeted information updates to clients (and their advisers)

ii. Current Client Needs• Design systematic campaigns, tailored to specific groups of clients based upon needs• MiFID II obligations to share data with product manufacturers on “target audience”

iii. Future Client Requirements• Allow more strategic investment into new propositions• Assess enhanced two-way client communication methods to meet expectations

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Client Advisers

Products & Services

Executive Office

Finance & Operations

Legal & Compliance

Marketing & Comm’s

Current Client Needs

Future Client Requirements

Previous Client

Experiences



Predicting and delivering client needs

It isn’t in a world of science fiction where we can predict human needs – quite frankly, great advisers can do this on autopilot. The reason why we need to fully institutionalise this process (through better data sharing) is because too many firms have consistently struggled to demonstrate to the Regulator that, all advisers, are doing this, all of the time.

Consultative selling

Selling has become a dirty word in the industry but unless advisers are consultatively selling firms are left at risk of merely executing orders – this feels like a race to the bottom on price and an unnecessary diminution of the role. Clients have begun to feel the negative impact of a fear to advise which has contributed to the current malaise. The fact that the headcount of advisers is probably the largest single expense in the business highlights the necessity to give them the systems, services and tools to allow them to succeed in providing (and executing) genuine advice. Improvement in technology related to client data capture and transmission has to support consultative selling but here must be carve-outs allowing for sensible deviation where necessary, rather than only offering ‘Big Brother’ oversight.

Re-think what data to record, how to record it and how to use it

Success requires collating and analysing client behaviours and needs, in logical groups. Some will suggest that it is not possible to group HNW clients into boxes – I disagree. HNW clients have clearly identifiable needs but usually cluster by their attitudes and values, such as Next Generation, Philanthropy or Impact Investing.

Creation of firm-wide templates, which gather more relevant and comparable data, alongside previously captured data, should be a priority before embarking on more ambitious but necessary approaches. When developing a new approach to client insight, be very clear (internally and with clients) about why it is so essential. Simply stating a need to comply with incoming regulations is not the reason – it is to serve clients better.

There will always be business areas that feel they lack the existing data, or cannot commit more time to cleanse the old data but this must be rebutted. I came across a statement that is over a hundred years old from Charles Babbage, yet still has relevance today “errors using inadequate data are much less than using no data at all”.

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Final thoughts on Part 2: Institutionalising Data in Wealth Management

It is a fact that Millennials are demanding changes in service delivery. Even HNW clients are generally happy to self-serve in a multitude of financial services from basic banking to derivatives trading. However, when they do speak to an adviser, they expect the interaction to be fast, efficient and cerebral. In relation to HNW Millennials, Scorpio Partnership/FactSet note that: “HNWIs are not simply passive consumers of insight – they want a dynamic data system whereby information is shared both ways”.

Greater investment in this area is essential but remember the size of your technology spend doesn’t matter – it’s what you do with it that counts.

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Holistic Approaches in Wealth ManagementTechnology as a conduit to success


We can learn a lot from Formula 1 teams, where data, technology and a culture of continuous improvement form the core of a winning strategy. The drivers work symbiotically with dozens of engineers, who in turn collaborate with all relevant component suppliers in real-time. Drivers are empowered by technology as opposed to disenfranchised by it. The same attitudes must be adopted in how wealth management firms operate.

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‘Le Geek, C’est Chic’

Being a geek is incredibly fashionable these days but we must take a hard look at what we need from this behaviour and how it will be both impactful and commercial. Clearly, a synergy of humans and machines is required for future delivery but we must get the balance right. Greg Davies, of Centapse, wrote a great article recently where he cautioned about the allure of ‘Shiny New Toys’ in Wealth Management, suggesting some straightforward approaches may also be able to deliver meaningful results.

A lesson from the Whiz Kids of Ford

Sometimes even the best client-centric ideas fail to yield the anticipated outcomes. In the 1950’s Charles Bates Thornton assembled a ten-strong team (nicknamed the Whiz Kids), including Robert McNamara, who later became US Secretary of Defense.

In a notable example, McNamara introduced the Lifeguard safety package at Ford in 1956. The Whiz Kids had a highly scientific approach to understanding and improving car safety –it was nothing short of revolutionary but it appeared that the sales teams and marketers were incapable of convincing the general public that they needed it (the sales gap to Chevrolet tripled to 190,000 cars in the same year). Apparently, Henry Ford II is reported to have said: ‘McNamara is selling safety, but Chevrolet is selling cars.'

A key lesson is make sure that the relevant parts of the businesses understand what the goal is, why you are trying to achieve it and the intended improvement to client outcomes. Don’t operate in a silo, do communicate clearly and always revisit the hypothesis so you can learn from any mistakes.

Holistic Approaches in Wealth ManagementTechnology as a conduit to success

Disruption in Wealth Management – A major earthquake is long overdueGreg Simmons | December 2016 Page 8

New technology requires new dashboards

Most dashboards that are circulated to Executive Committees need to be improved. The information fed-back to a driver in a Formula 1 car today has evolved with new technology so that only the most relevant information is provided to help the driver make the best decisions. Most would agree we need to do more in Wealth Management. The major reason for the mis-match stems from the fact different departments use idiosyncratic data that doesn't talk the same language – rendering many dashboards totally unwieldy.

Poorly integrated technology solutions will not give the feedback required to the Executive Committees, which hampers their decision-making. Essentially, this requires the adoption of ‘data behaviours’ across the entire business to help create smarter decision making.

Use data and knowledge gained from Behavioural Finance

In the late 2000s at Barclays Wealth, I first encountered their innovative Investment Philosophy. It occurs to me that Behavioural Finance has multiple commercial applications way beyond risk profiling, but to be truly impactful, aggregated client data needs to flow through all parts of the business. To make good strategic decisions, firms must be able to demonstrably understand the full lifecycle of service delivery and associated client outcomes.

Final thoughts on Part 3: Holistic Approaches in Wealth Management

Across the City, Executive Committees are pondering serious questions such as: Can we be sure we have the best platform to serve our clients? Are we constantly assessing the products and services we offer to make sure they are appropriate? Can we observe the spirit as well as the letter of regulations and deal with the requests for information quickly and less expensively?

These questions may seem vague, intangible or even navel-gazing but they are absolutely the right questions to be asking and have profound importance for future profitability. I remain convinced that with the right technology, data and organisational behaviours they can be answered with hard facts. The commercial upside will be enormous to a UK industry with £700bn AUM – the winners are already starting to emerge.

AcknowledgmentsHyperlinks to relevant content

Disruption in Wealth Management – A major earthquake is long overdueGreg Simmons | December 2016 Page 9

Photography Credits:

Getty Images – Big Data (Credit: Fandijki)Getty Images – Seismograph (Credit: Wf Sihardian / EyeEm)Getty Images – McLaren Pit Wall (Credit: Mark Ralston)

Further Reading and References:

World in Beta (PwC) - FinTechBarclays - Investment PhilosophyScorpio Partnership - HNWI's vision for WM industry in the information ageGreg Davies, Centapse - Shiny new toys. Does Wealth Management Need A.I. ?Fortune.com - Big Data in Formula 1Autonews.com - Ford had a better idea in 1956 but found that safety didn't sell Cognizant- The Work Ahead Mastering The Digital Economy

disruption in wealth management

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