Despite a running start of over two centuries, in just a few short years, traditional wealth management models have discovered that every facet of their basic business models are under threat both perceptually and economically from hundreds of new entrants.
When we look at the enormously broad landscape that comprises FinTech, the dominant conversations about the future of the financial advisory industry – in financial circles, specialized and general press, and in social media – almost uniformly fail to involve the institutions themselves.
The financial advisory industry has become completely separated from the discussion of its own future.
Much of this change is down to more agile FinTech start-ups angling for a piece of the more established institutions’ lunch, unshackled by the often stiflingly heavy regulation afflicting the bigger players. The change is also driven in part by clients wanting a different experience altogether, not just incremental improvements to what firms have done in the past.
However, established wealth management firms are best positioned to capitalize on disruptive technology. For example, the introduction of Robo-advisors (an algorithm based advisor with minimal human intervention) intended to democratise investing for investors that have been underserved in the past, by providing transparency and access that has not been readily available.
Robo-advisors have been growing in popularity as a wealth advisory service. They are inexpensive and relatively easy to replicate. Wealth management firms offering their own Robos increase customer retention rates whilst avoiding the high client-acquisition costs that most start-ups have to battle with. They appeal to new investors, especially those from the millennial generation who are attracted by low minimums, low fees and the promise of solid returns. Although the use of Robo-advisors is continuing, the service is being replaced by a broader trend with human advisors using computer programs to assist them in offering investment advice.
When asked, the majority of wealth managers believe that the impact of FinTech is a strong indicator that the industry needs to adapt to changing customer needs at a quicker pace than it is currently. Their stance is that new entrants can significantly enhance customer interactions and build trusted relationships via personalization. However, firms do not prioritise these types of investments, preferring to focus on investments around analytics and automatic asset allocation instead. And therein lies the problem.
It’s undeniable that FinTech has certainly changed the pace of innovation, and in turn reshaped customer expectations across the financial services ecosystem, laying the groundwork for future disruption in the industry. This is two pronged in that it means incumbents have the potential to improve rapidly, but also face rapid disruption going forward. Access to wealth-management services will be expanded by the advancement of FinTech, especially mid-class investors that are put off by the unaffordability of fund managers.
Despite the many positives of disruptive technology, it still carries a certain degree of risk and uncertainty that will ultimately shape the future of the wealth management industry. With Robo-advisors becoming prevalent, there are question marks around how firms will differentiate their offerings. Will the trend toward low-cost investments continue, or will clients be geared more towards guaranteed outcomes? Does this signify the end for the need for human advisors?
Only time will tell, but what is almost certain is that wealth managers should watch developments in the FinTech space closely, and fine-tune their strategy so that it is more digitally focused. Failure to do so can result in the loss of a golden opportunity, therefore making it more difficult for established institutions to understand and take full advantage of trending FinTech developments reshaping the market.