The wealth and asset management industry is experiencing profound changes: Although there was an impressive increase in global HNWI wealth from 2010 to 2017, wherein it grew from US$42 trillion to US$70.2 trillion, margins have declined during the same period as a result of plummeting fees. In fact, PwC sees the industry undergoing a “revolution” as it turns into a buyer’s market. With costs rising for regulatory compliance and new IT infrastructure, pressure on profitability is mounting.
Deloitte draws an even more dramatic picture of the European wealth management industry, noting a constant decline in profitability since 2000, despite a considerable 60% growth in market volume: “The growing gap between profitability and market volume shows that Wealth Managers are failing more and more to serve clients successfully.”
What’s the way forward?
The diagnoses for the wealth management industry’s worsening health vary. PwC points to traditional operating models that create too little value for the individual investor at too high a cost, and openly calls the industry a “digital laggard”. EY cites a lack of customer engagement that stems from fragmented products and services—which seldom fully address the client’s needs—as well as complicated fee structures. Deloitte suggests the tendency for wealth managers to rely on cost reductions and economies of scale to achieve growth, rather than on new, genuine value creation, i.e. an “innovation gap”.
An Oliver Wyman report from 2014 already warned that “Wealth managers must redesign their business models to be successful in the future.” Looking at key markets like the US and Switzerland, where the number of private banks has shrunk considerably over the past five years, Wyman’s call for business model innovation should have been, and still should be, taken seriously.
The path towards innovation
Innovation is sometimes seen in a mythical light, as if it were random, stemming from serendipitous inspiration, as if innovation could happen only at the hands of creative geniuses. Following classic economic theory, however, innovation is not about inventing new services, but rather about combining existing knowledge and technology, and applying the available elements to new contexts.
Here at Appway, we see innovation as an ongoing effort, driven by engaged teams, enabled by software, and carried out by entire organizations.
In working with many of the world’s leading wealth management firms, we have been involved in numerous change management projects. While many of these projects could be attributed to the domain of business optimization rather than service innovation, we have noticed our customers’ growing concern with ‘new value creation’ – and their interest in using our platform for that purpose.
The voice of other service industries
What does it take to stimulate innovation?
We should approach this question with a broader scope. As the Deloitte study asserts, the importance of innovation in wealth management has thus far been relatively minor compared to its significance in other industries. What can we learn from travel, automotive, and other industries, where innovation has had a greater impact? Furthermore, we need to align ourselves with the more diverse class of investors, particularly with the growing number of first-generation wealth creators.
To identify concrete opportunities for business model innovation, Appway has commissioned Scorpio Partnership, a leading London-based research firm, to conduct a market study: Innovate to Succeed: The Client Call to Action for Wealth Management in 2020 presented by Appway and Scorpio Partnership. In that study, to be released in September, executives from other industries describe some of their innovation challenges and how they have gone about solving them. In parallel, Scorpio surveyed 271 investors (from mass affluent to HNWI segments) across three continents to understand their desire for service innovation.
Our study report will focus on three key themes:
- The potential for technology to create additional value
- The significance of critical life moments for business growth
- The changing role of the wealth management advisor.
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