Profitability is now evaporating as margins come under pressures that are endemic to the industry. Fortunately, for many firms active in this sector, they start from a level of profitability that was high. Various studies have shown that revenue is generally down around 30% from the pre-2008 levels.

Across the asset management industry the genie is out of the bottle in terms of fees; clients will never be prepared to pay the levels of fees that had historically been raised and there is potentially much more noise with respect to fees yet to be heard. The value destruction that ensues from the compounded consequences of elevated fees is now better, and increasingly, understood by investors. The low-interest environment post Crash has only served to heighten the relief in which these fees can be understood - any increases in inflation further challenging the preservation of wealth; which it must be remembered is for the vast majority of wealth management clients their primary concern.

However, despite these headwinds, by the very nature of wealth creation as the world develops economically, the market for wealth and asset management remains a large and growing one. The drivers being the democratisation of wealth, the effects of globalisation causing the growth in wealth to both Eastern and Southern continents, increasing longevity and the increased self-reliance for individuals to fund their own retirements. As the model across most developed markets transforms, the paradox here is the need for wealth management services has never been greater and is set to continue to rise.

With fees only likely to evolve in one direction there is an urgent and pressing need to re-invent. Wealth management and private banking are in need of a new taxonomy and definition. Change is afoot and the good news is that institutions are all aware of the imperative to adapt in order to survive. Not all, of course, will be able to do so successfully. A number of valued commentators on the sector have predicted further consolidations. Some even looking to ‘dramatic change’ in the shorter term. In truth, as is often the case, there is likely to be an overdeveloped concern for the short-term, underestimating the longer term impact and structural changes.

Differentiation is key
To meet these challenges, in addition to the inherent competitive challenges of being in business, the institutions will need to develop strongly positioned and differentiated strategies and branded identities. Organisational change and development are inevitable and are already apparent as either mergers of firms with each other, or take overs of their smaller peers, continue.

Amongst financial services firms wealth management and private banking has been one of the laggard areas for investment in technology that enables its clients. There is a paradox here to, at the heart of this underinvestment that is now poised to be challenged by both the speed and the functionality of digital transformation. A delivery model that has for ever relied upon the notion of a highly personalised service is under threat.

From within financial organisations the advance of technology enabled solutions has been readily apparent. The introduction of systems that enable operational execution has been a matter of fact for a generation, or more. The introduction of solutions that enable ‘straight through’ processing of operations had been a very organisation-centric view; not one that extended to the client’s need or experience.

Digital transformation and reinvention is key
The compression of profitability, especially for the established incumbents as structural revenues decline, in the face of the inexorable growth of operating costs, forces strategies to be cost, not revenue driven. Typically, the cost structure of most wealth managers is 75 to 80% related to personnel costs. Therefore, the only strategy that can really open the jaws of biting costs is one that reimagines the cost to serve of the client. This can only be achieved through a reimagined service model that looks to totally and radically change the style, process and management of clients. Most notably, the mix of analogue (i.e. human), to digital (i.e. technology), must be subject to recalibration to reflect the structural changes that are the new economic reality for the wealth management and private banking industry.

The answer to this challenge is the commitment to Technology Enabled Asset/Wealth Management (TEAWM) - part of the FinTech revolution that will change the way clients are served, utilising technology to enhance wealth management and the investment process.

As Bill Gates put it… ‘Banking is necessary, banks are not’.

This situation is evolving rapidly as the digital transformation takes hold and the disruption across functions that have traditionally been executed by financial services companies are increasingly dis-intermediated by disruptive new providers and alternative solutions become every day more familiar to clients.

Disruption becomes a way of doing business… and a fact of life
Because there have been thick margins in certain parts of the wealth management and private banking value chain, new entrants have been attracted in with lower cost, or better value service models. This trend has been exacerbated by two other observable models - the more innovative firms that have out-manoueivered the behemoths of banking and the behemoths of asset management that have had a singular focus in asset gathering. This has led to a further fragmentation of an already hugely fragmented sector.

The disintermediation of established players is now clearly apparent to all as we can see every service area or product subject to disruption, be it in the realm of money transmission, currency exchange, various forms of lending, stock trading, etc. Even the notion of currency is subject to challenge with the crypto-currencies.

The changed topology of the wealth management landscape requires a taxonomy that better describes the needs of the clients, and the propositional functionality of the emerging lead players. Enhanced technology enabled suitability, making use of Artificial Intelligence and Machine Learning to create a dynamic suitability, should be the start point; this in turn should be premised on a fundamental re-think of how data is owned and managed - by both the client and by the solution provider. Technology derived from wealth management firms, research tools that generate investment solutions, and platforms to support financial advisors - increasingly premised on an open architecture that draws on the expertise of external and 3rd party suppliers.

There is a danger of a race to the bottom, with fees and price being the determinant criterion in client decision-making and driving choices. The driver of client choice should be based on the complexity of the needs and the fitness of the provider to both meet and exceed their requirements.

Financial advice becomes a societal requirement
The provision of financial advice is a fundamental requirement in an economy with a sophisticated wealth management, pensions and savings ecosystem. Financial services firms wrestle with regulatory directives about what constitutes advice. This has caused a growth, alongside face to face, in tram-lined, automated financial advice. The hope for many providers of investment products is that robo-advice will funnel clients along a sales pipeline to their asset management arm, thereby preserving revenues.

UK regulator, Financial Conduct Authority (FCA), which has invested substantially on a robo-advice advice unit. The FCA’s desire is that robo-advice could enable the provision of advice to mass-market segments, including those that have previously been excluded, unreached by financial advice.

The regulator estimates this could be as many as 16 million people in the UK alone; the results in terms of the implementation and adhesion to the regulator’s Financial Advice Market Review (FAMR) will be key to determining the impetus this advance acquires.

The new taxonomy defines the requirements
The relevant modules and focus for a financial services provider looking to create robo-advisory:

• Digital client on-boarding – particularly important when regulations put so much emphasis on anti-money laundering (AML) and combatting terrorist financing
• Automated and augmented KYC and AML  -  search, analysis and process accurate, regulatory compliant, combine external and internal sources, multi lingual aware, automatic, immediately readable and audit-ready
• Suitability – the product must be suitable, as the FCA defines it, for the client and the technology must ensure that this is the case. Artificial Intelligence can enable a dynamic suitability to be developed
• Investment process – likely to be more important as the industry matures and user experience becomes commoditised
• Research and insight - machine learning and AI can be deployed to more closely mirror the needs and better define the clients’ potential
• Document management - keeping timely and relevant documentation and file management has proven its worth in any number of remediation events
• UX – the front-end and digital engagement module. This must be FCA-compliant and refer back to other modules. But as the “shop window” should be used to increase client acquisition and retention by ensuring a smooth customer journey.
• Smart digital content - enable multi device and multi-channel digital content and media distribution to sales channels, partners and customers facilitating aggregation from multiple CMS sources, content oriented interactions and meetings, rule base access and tailored sharing
• Client views - improving the experience and meeting the clients needs; what they want, where they want and how they want in… in real time…
• Banker and adviser views - prompted and proposed activity and action plans designed to reinforce the client and prospect requirements
• Management views - providing real insight that enable supervisory management to better manage both risks and opportunities to fulfil the clients’ needs and ensure the business is managed in a profitable way.

The King is dead, long live the King!
For too long, the formula for success has been premised upon a partial and incomplete understanding of the wealth management market. The idea was that the private banker is pre-eminent and owns the relationship with their clients, and that in turn they are able to move their clients from one firm to another according, for the most part, to their own agenda and terms and conditions, rather than the needs of their clients. This led to a para-industry, not dissimilar to the agents in today’s football and sports industry, of executive search partners or head-hunters, who would hunt for and tout private bankers and their books of business.

This is now clearly understood to be a ‘zero-sum’ game - meaning that no firm really wins in this model… but also the sum of assets moved and the asset growth achieved turned out to be nearer to zero than the percentage mooted when agreeing the remuneration package.

This model only takes the clients’ needs into consideration as a subsidiary issue. In truth, in a growing and profitable market segment that private banking has been, it makes little sense to spend so much resource on enticing assets away from the competition. Far better to develop home-grown talent, and better by far to attract new assets within the framework of a profitable proposition that reflects a cost to serve model that is sustainable and deploys a talent and technology mix that is both differentiated and sustainable.

The realisation that the only way to maintain profitability within the old private banker-led model is to deal with clients with an ever higher net worth in order to raise sufficient fees in order to cover the elevated levels of remuneration and to deliver to the shareholder their profit. In the future, only the very UHNW, sophisticated investors or family office category clients will be serviced by the universe of talent to meet the complexity of their needs.

Technology allows us to break out of this infernal spiral for those clients that are HNW and below, and to reassert the bank/client relationship. The deployment of technology enabled relationship and asset management is key to improving the delivery of a systematic and ‘suitable’ service and product set; artificial intelligence and machine learning can further enhance the engagement and client experience.

The new relationship paradigm is highly personalised to the clients needs, systematic, reproducible, documented and professional.

The opportunity
A further development is the General Data Protection Regulation (GDPR) which comes into force in 2018 and will change the way financial services firms obtain and process data – there is a tremendous, potentially market-changing, opportunity around the client/data interface and the opportunity for clients to take ownership of their data.

There is a real opportunity to redefine the relationship with HNW clients, and to create high value relationships, beyond a boutique model. And with the democratisation of wealth, technology enabled access and distribution includes many of the segments of society that have never previously fully benefitted from financial advice.

Conclusion
There is much to be excited about. Most of the obstacles to profitability are within the gift of the management of the banks and wealth managers to overcome. This does not mean that achieving and maintaining profitability is easily achieved, nor indeed a given. The pace of technological change and the complexity of achieving digital transformation calls for bold moves, innovation from within, a willingness to embrace change and a culture that celebrates disruption and seeks to incorporate disruptive technology.

Legacy and conduct reviews can seem like a heavy burden; however, incumbents would do well to remember the huge benefit that having an established client base confers upon a firm. Regulation is everywhere a constraint on unshackled business, but in truth the regulation and its incorporation into conducting good business lends itself to technologically enabled wealth management.

The continued and further professionalisation of the wealth management industry can look to digital transformation to speed its incorporation and can help secure its profitability. Improvements in speed, quality, and efficiency make digital transformation a compelling case; its contribution to reducing costs and low cost delivery might just be the key to profitability and client service.

© Ian Ewart