Cyprus: Digital Wealth Management: Innovation Gap Vs. Transformation

Simply putting it, Digital Wealth Management (DWM) Industry is the NEW TRASFORMED industry that has already been created WITHIN the Traditional Wealth Management Industry, which utilizes digital technologies, information technologies, Distributed Ledger Technologies, artificial intelligence (AI) and robotics as well as other disrupting technologies to bring about the required service and/or product standards and results that will successfully be consumed by the new generation of High Net Wealth Individuals and investors.

The digital technology is an incremental disruptive technology, with exponential growth.

A disruptive technology is one that displaces an established technology and shakes up the industry or a ground-breaking product in an unprecedented way and to that degree that it actually creates a new industry.

Another way of putting it is that, forced by the Technology Evolution, the Traditional Wealth Management Industry is TRANSFORMING by introducing disrupting (information and digital) technologies to digitize or digitalize its business activities. These disrupting technologies, outperform in effectiveness and costs and sometimes, even become cheaper to the point of being free as a result of which the digital WM Industry rapidly displaces the traditional WM Industry.

Here are a few examples of disruptive technologies:

  • The (PC) which displaced the typewriter and forever changed the way we work and communicate.
  • The Windows operating systmem's which was instrumental in the rapid development of the personal computing industry in the 1990s which in its turn disrupted the television industry.
  • The Email, which largely displaced letter-writing and disrupted the postal and greeting card industries.
  • The Cell phone technology which has disrupted the telecom industry.
  • The laptop computer and mobile computing disrupted the way we work and made a mobile workforce possible. Also in many organizations, laptops and mobile computing devices replaced desktops.
  • The Smartphones largely replaced cell phones and PDAs (personal organizer with email and internet access) and, because of the available apps, also disrupted: pocket cameras, MP3 players, calculators and GPS devices and other... For some mobile users, smartphones often replace laptops. Others prefer a tablet.
  • Cloud computing has been a hugely disruptive technology in the business world, displacing many resources.
  • Social Network has had a major impact on the way we communicate and -- especially for personal use -- has disrupted telephone, email, instant messaging and event planning.

According to the World Wealth Report 2017 of CAPgemini's organisation and as per ACCENTURE"s study, certain key drivers and trends drive the digital transformation within the WM Industry.

Baby boomers, who are today at the ages between 53 and 71 have started to pass along their life savings and wealth to their heirs. This process will continue over the next few 15-30 years and more.

When done, some $30 trillion will be transferred from one generation to the next. This is the largest wealth transfer of big fortunes from billionaires to younger and rising generations X, Y (The Millennials) and Z, EVER IN HISTORY! In fact, Generations X and Y (the Millennials) are now poised to become the wealthiest demographic globally!

A "great wealth transfer" is under way!

Surveys show, and in particular Capgemini 2017 Wealth Management Report, that, the new generations of financial services consumers (investors) and in particular WM services consumers and HNWIs, think differently and have different expectations. These new generations consisting of digitally savvy-end-users of wealth management services are the new cross generational norm across all geographic regions. This same generation have already driven change in consumer banking and now they are driving change in wealth management. Client demographics are shifting!

They expect wealth management advice tailored to their own particular needs and unique circumstances.

They demand and expect efficiency, a better overall experience, personalized services and lower and transparent costs and fees and want themselves to play a significant role in the decision-making process.

They demand to understand all the WHYs, WHEREs and HOWs and they usually conduct their own researches on the subject.

Generally, the new generations X and Y who will soon be the new owners of the wealth are looking for a different way of interaction with their WM advisor, anytime, anywhere.

At the same time, this generation constantly look for easier, cheaper, faster and better investment alternatives and are far more willing to switch financial and wealth management advisors if they are not satisfied. Client expectation, therefore, is probably the strongest driver among several key drivers and trends in the industry.

As consumers needs and the digital technology evolve, the pace of change multiplies shaking the foundations of the traditional wealth management model which needs to adapt to digital advice and digital delivery.

What is digital advice and digital advice delivery?

Digital advice is the one generated by the use of or through internet based platforms using algorithms-based portfolio management strategies and practices and may be delivered in an automated format.

Such digital advice may constitute the totality of the wealth management advice and stand-alone and be delivered digitally or be part of a traditional advisory model. Digital advice may increase efficiency in communication with clients and allow them to access advice in the comfort of their own homes.

Another key driver for transformation in the Wealth Management Industry is the increased scrutiny and regulatory requirements and pressures, as well as the Regulators' expanded fiduciary responsibility onto Wealth Managers (which means disclosing costs, fees and conflicts or threats), which play a critical role in the transformation of the wealth management industry.

Higher compliance and costs pressures driven by stricter regulations, advanced customer expectations and demands require effective cost take out to remain competitive and profitable. Effective cost take-out can only be provided by the use of the new technologies and digitization.

This will lead to a shift towards a fee-based advisory model.

Advances in technology

Apart from the digital demands of the newest generations, technology is also changing other aspects of the WM industry.

The use of the advance predictive analytics technology on existing data to get additional insights into client behaviour and anticipate the clients' needs, the use of cloud computing and APIs (an application programming interface (API) is a set of subroutine definitions, protocols, and tools for building application software. In general terms, it is a set of clearly defined methods of communication between various software components) can lower the upfront capital expenditure and enhance sustainable growth, can provide new ways to engage with clients, manage risks and client relationships considerably increasing the number of the clients as a result.

The blockchain technology is also relevant. Blockchain is a decentralized ledger, or list, of all transactions across a peer-to-peer network. This is the technology underlying Bitcoin and other cryptocurrencies, and it has the potential to disrupt a wide variety of business processes within the wealth management industry from WM Firms' Intellectual property protection, to controlling technology risk taking, and developing the processes that surround the transactional layer. Blockchain is already disrupting the FS Industry and will result in a radically different competitive future in the wealth management industry.

In fact a number of leading WM firms have started to invest significantly ...

As a respond to the above challenges, digital new entrants are entering the market providing consumers directly with a wide range of digital and financial tools, new tech-driven solutions including investment advice tools that have unprecedented capabilities in research and data analytics, can manage risks better, can improve trading efficiency, compliance and reporting and as a result enable improved operations and better investment decision-making timeless and cost-less.

New entrants mainly refers to fast-moving startups, tech companies, companies focused on particular innovative technology business models, business to business platforms but also legacy providers, established financial institutions and wealth managers and incumbents such as the Bank of America, Chase, Wells Fargon, ALLstate etc offering innovative and effective tech products and solutions.

These are the digital technology dissruptors that are re-shaping the financial services industry.

Fintech, short of Financial technology, is the new technology that aims to compete with traditional financial methods and models in a better, stronger and faster way.

Reduced costs is a strong driver for more people to engage in or use these new technologies. And when more people are involved the impact is much wider making fintech an agile competitor.

Digital advisors are commonly referred to as "robo-advisors".

These are software platforms powered by algorithms, made, set up or constructed by very intelligent humans.

Robo advisors manage investments and accounts with very limited to none human intervention. Depending on the kind of the robo advisor, capabilities may include a wide range of technologies as well as Artificial Intelligence.

Investments and accounts managed by robo-advisors require less money to start and offer lower cost investment products. They customize one's portfolio by examining her personal data and investment goals. The robo-advisors, new technology-based business models and other digital and innovative technology new entrants, challenge the incumbents and other established traditional wealth management businesses and models, which, respond to these challenges by renewing their commitment to digitization and transformation.

The result is, from the one hand higher intensity for competition, for the same clients and same wealth and form the other hand, an appetite or move towards the establishment of valuable collaborations and partnerships between or acquisitions of new technology entrants who do not have the expertise but have the technology solution and product with the traditional WM firms who do have the expertise but lack the technology.

Thus, we saw already and we will continue to see, large traditional advisory firms choosing to work with the robo-advisers via acquisitions and partnerships, while others are taking it a step further by launching their own robo.

The innovation gap

Despite all the above, it seems that, most of the traditional WM firms are not able nor willing in many times, to, embrace technology and innovation strategically yet.

Their existing traditional business models remain outdated and they are failing more and more to serve their clients successfully.

Statistics, say that there is a decline of nearly 40% to the profitability of wealth managers despite market volume growth of more than 60%. Traditional WM firms' current profit pools are disrupted and redistributed towards the owners of new highly efficient digital technology, blockchain and robo-based wealth advisor platforms.

This by its turn suggests that the Wealth Management Industry is facing an innovation gap.

An attempt to bridge this innovation gap would, among other, possibly include a move towards a Hybrid advisory model.

While robos are supposed to be in competition with the traditional financial advisors, it seems that the most successful digital advisors to date are those who recognized clients' demands and expectations early enough, became more client centric and transitioned to the so called "hybrid advisor model".

Hybrid models blend many of the advances robo advisor has made with the personal experiences and emotional insights provided by traditional financial wealth advisors enabling advisors to provide different solutions tailored to their particular circumstances and unique needs at each step of their financial journey.



THE FUTURE is digital!

Digitization, automated advisory services and robo-advisors, blockchain and DLTs no doubt is the way of the future in the WM industry.

Wealth Managers and WM firms must be prepared to handle the "great wealth transfer".

For a successful future, therefore, investment in digital transformation is critical!

Furthermore, WMs and WM firms need to re-examine their value proposition and revise and evolve their fee model. They need to give to the new generations of HNWIs reasons to stay with them and continue their advisor-client relationship them. To achieve that, WMs and WM Firms need to Remain relevant! It seems that, employing the hybrid advisor model may be crucial to this effect! Shifting towards a goals-based, holistic thinking and holistic approach to wealth management is a must!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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