In the dynamic realm of wealth management, 2023 has unfolded as a pivotal chapter, sculpted by a confluence of regulatory shifts, the rise in AI implementation, political mayhem across the globe, and ongoing inflation. Furthermore, with retail investors seeking increasingly personalised services and regulatory bodies worldwide recalibrating their expectations concerning measuring climate impact, it is fair to claim that we are on the brink of entering a more scrutinised, digitally empowered and environmentally conscious phase of the industry’s lifecycle.
Generative AI has been a potent instrument in driving the change, and a slew of wealth management companies are using AI tools to streamline their processes. On average, financial companies in the UK have allocated between £800,000 and £1.6 million towards Gen AI solutions to increase consumer satisfaction. While Gen AI tools will undoubtedly change how the industry works, it is crucial for firms to balance technological advancements with the human element and educate their customers about the capabilities and limitations of the new tools.
In the previous quarter, we also noted how retail investors are increasing their investments in sustainable businesses. However, Forrester predicted that 2024 will be a challenging year for wealth managers looking to grow their roster of ESG investors and that “inflows to ESG products will remain flat in 2024.” With ESG regulations getting stricter, wealth managers need to ensure that they incorporate environmental, social and governance considerations in their decision-making.
Adhering to FCA’s Consumer Duty regulation remains a challenge the industry faces, and it seems that turning to financial analytics to deliver better outcomes at scale is imminent. As we prepare for the end of the year and chalk out strategies for 2024, let us delve into the trends that dominated the sector in the last quarter of 2023 and will undoubtedly continue to define the wealth management landscape.
Personalisation takes centre stage.
Personalisation has become crucial in wealth management customer journeys as clients increasingly demand tailored experiences. Retail investors expect wealth management firms to deliver the same level of customisation and personalisation as in other sectors such as entertainment and retail.
A new report from PIMFA found that more than a fifth of non-investors would be encouraged to invest if they could access some form of essential personalisation. However, investors and non-investors saw greater value in deeper personalisation for longer-term financial planning, with fully personalised options perceived as most likely to encourage some to start investing. 57% of those who had already received advice said they valued a fully tailored personal advice model compared with 42% of non-investors. The report concluded that non-investors require targeted advice to gain confidence to act to make initial investment decisions. It also mentioned that “the subsequent guidance which UK savers have been able to access has been useful but, for many, remains generic in its nature and, as a result, lacks impact.”
While hyper-personalisation is important, the report underplays the role of basic financial guidance for first-time investors. The technology and tools to do this at scale are easy to access. Advanced analytics and machine learning algorithms play a critical role in personalisation. By analysing vast amounts of data, wealth management firms can discover patterns and trends and generate personalised insights that can lead to better customer investment decisions. Tools like our financial simulation engine can enable financial professionals to create a fully personalised investment strategy, optimise portfolios, and make real-time recommendations based on individual client preferences and goals.
Consumer Duty is not a “once and done” exercise – FCA
In July, the FCA introduced ‘Consumer Duty’ urging banks, insurers and wealth managers to provide a better standard of service to consumers. The FCA believes the regulatory benefits will only be felt if firms ensure they are “learning and improving continuously”. Financial institutions are advised to show evidence of this in their annual board report – before 31 July 2024.
This regulation demands a significant cultural change, particularly in informing customers of the benefits of wealth management services. Companies must consistently demonstrate that they are achieving good customer outcomes for all retail customer groups and in-scope products and services. This means going beyond updating company policies and processes and including more transparent value communication, meticulous data analysis and monitoring, and regular internal quality assessments. It is crucial for firms to review the effectiveness of changes made as per their initial plans and evaluate whether these amendments ensure good consumer outcomes.
Firms, particularly those looking to manage books of legacy business efficiently and profitably, face additional challenges in making those compliant by 31 July 2024. It is indeed far from easy to fulfil the regulatory requirements. According to Oxford Risk, the UK wealth management sector paid circa £3.8 million in fines from the FCA this year. The report stated that the fines resulted from the introduction of Consumer Duty and that the figure could rise further. These fines could be avoided if wealth managers use technology available on the market. The report said, “Wealth managers need to document behavioural biases and risk tolerance as part of their suitability systems and processes and crucially need to understand how to act upon the information to ensure good customer outcomes.”
Embedding Consumer Duty will not be easy, but for wealth managers to ensure complete compliance and avoid fines, consistency throughout the customer investment journey and using a financial simulation engine such as Kidbrooke’s OutRank®, is crucial.
Build? Buy? Or both - Rise in technology collaborations
Wealth management firms are increasingly expected to support their clients with personalised financial decision-making capabilities. But the question is, how can firms deal with legacy infrastructure, ensure consistency within the existing and emerging services, and monitor as well as support the analytics as they operate? Now, collaboration within the financial services ecosystem is becoming increasingly prevalent. Wealth management firms and financial incumbents are more likely to partner with technology providers and financial software firms to provide comprehensive solutions that they can either build using the elements provided or purchase in its entirety.
The main reason is that the complexity of adapting to rapidly changing landscapes and emerging technologies often exceeds the capabilities and resources of internal teams. In such instances, external assistance and adopting an API-first approach becomes beneficial and necessary to construct journeys that align with strategic roadmaps, help adhere to regulatory standards and scale the businesses.
In fact, four out of five of the top 100 banks have partnered with at least one financial technology provider in high-margin areas such as financing and investing, according to McKinsey & Co., and fintech partnerships are the most effective step banks are taking to digitise. Wealth managers can leverage the latest predictive analytics technology to analyse massive amounts of data and provide personalised, fact-based investment recommendations. Partnering with financial analytics providers and integrating their tools allows wealth management firms to capitalise on external expertise, implement innovative solutions more efficiently, and retain more customers.
As 2023 concludes, the wealth management industry faces significant developments, including the rise of AI technology, a focus on sustainability, and the demand for personalised services. Regulations like the FCA's Consumer Duty are pushing firms towards a more customer-focused approach. In response, wealth managers must effectively balance technology with customer engagement to meet compliance requirements and adapt their businesses to the evolving customer demands. Looking ahead, the industry's success will hinge on its ability to respond to these emerging trends seamlessly, leveraging tools such as Kidbrooke’s OutRank® to offer tailored, data-driven financial solutions that resonate with the ever-changing needs and expectations of investors.
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