WealthTech Tsunami: Will you ride the wave or wipe out?

Introduction

The wealth management industry is undergoing a significant transformation driven by the need to adapt to changing investor expectations. The tsunami of change from new regulations putting the customer first, adoption of artificial intelligence (AI), alternative data, to advanced analytics is reshaping traditional business models, emphasising the need for a more personalised, efficient, and adaptable approach. Let us dive into the ocean of WealthTech and see if you will ride the wave or wipe out.

 

Key Takeaways

1️⃣ AI automates wealth management processes, optimising investments, personalising strategies, and ensuring precision in financial operations.
2️⃣ Embrace digital transformation in response to the rise of passive investing. Consider integrating robo-advisory services and adapt continuously to meet evolving client preferences and industry trends.
3️⃣ Alternative data broadens insights for investment professionals, offering unique perspectives beyond traditional sources. Advanced analytics and machine learning enhance decision-making through meaningful information extraction.

 

What is coming next?

In July 2023, the Financial Conduct Authority (FCA) introduced ‘Consumer Duty’ requiring 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.”1 Financial institutions are advised to show evidence of this in their annual board report before 31 July 2024. 

Consumer Duty is not a “once and done” exercise – warns FCA according to Financial Times

As 2024 has begun, 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.2

 

What is WealthTech?

We see WealthTech as three ways where technology can help the wealth management industry:

  1. New entrants using the latest innovations providing an alternative to traditional, and perhaps old-fashioned, wealth management firms
  2. New firms providing specific advanced technology solutions for incumbent wealth management firms to incorporate in their existing operations
  3. Firms offering new opportunities to expand traditional wealth management firms

WealthTech refers to the utilisation of technology, for example, big data and AI. This subdivision of FinTech aims to make wealth management and investment services more automated and efficient. There are various companies that are there to support the existing wealth management firms.

 

How will the “Great Wealth Transfer” transform the markets?

As trillions in assets flow to heirs over the next two decades, their investing preferences will create new opportunities. Some trends are already emerging, with increased desire for sustainable investing and an inherent mistrust of traditional “old school” wealth managers. According to Merrill, a Bank of America company, “  is set to change hands over the next 20 years, making it an opportune time to identify how using Wealth Tech can improve the customer experience.”3

We see these as drivers and opportunities from “Great Wealth Transfer” impact:

  • Hyper-personalised service
  • Growing adoption of digital experiences
  • Deep understanding of the connected consumer
  • A growing WealthTech ecosystem through financial data aggregators
  • Expanded access for investors and advisors.

 

WealthTech companies disrupting traditional wealth management business models

Fundrise, Stash, or Toggle AI are typical WealthTech companies that are making a mark against traditional firms.

Fundrise helps investors invest in a portfolio of top-tier private technology companies before they IPO.

Stash makes investing easy for people by building on their own terms, making it stress-free, automated, with personalised & recurring investing advice.

Toggle AI is the user’s own financial analyst. Monitoring all market and fundamental data in real-time, it distils the observations into a cogent stream of timely investment insights. There is an element of “gamification” by allowing users to compare their predictions with actual market movements.

According to Deloitte, ‘The single most important disruptor in the industry today is the client. Investors and families have higher financial awareness, literacy, and access to information than at any other point in our history.’4

 

Ten disruptive trends in wealth management

1️⃣ The re-wired investor – Investors seek personalised and distinct advice, expecting tailored solutions aligned with their unique circumstances

2️⃣ Science vs human-based advice – The ongoing debate and integration of advanced analytics challenge traditional human-based advisory models

3️⃣ Analytics & big data – big data and analytics reshape decision-making, offering insights beyond traditional methods for more informed wealth management

4️⃣ Holistic, goals-based advice – shifting from product-centric approaches, wealth management embraces holistic, goals-based advice tailored to individual client aspirations

5️⃣ Democratisation of investment solutions – increasing accessibility and inclusivity in investment opportunities challenge traditional exclusivity in wealth management

6️⃣ Catching the retirement wave – Addressing the unique needs of an aging population and adapting services to cater to the retirement planning needs

7️⃣ Aging of advisors & upcoming transfer of wealth – A generational shift prompts the industry to prepare for the transfer of wealth and adapt to a changing advisory landscape.

8️⃣ New investment environment with three lows and two highs – low interest rates, low inflation rates, low rates of economic growth, high volatility, and high levels of financial leverage are redefining the investment landscape

9️⃣ Rising costs of risk and heavier regulatory burden – Increasing regulatory demands and risk management costs reshape operational strategies for wealth management firms

🔟 Convergence and new competitive patterns – Traditional boundaries blur as various financial services converge, introducing new competitive dynamics in the wealth management sector

 

Impact of the rewired investor on wealth management companies

The rewired investor views advice differently than prior generations and anticipates engaging with advisers in a new manner. Investors, for example, no longer wish to be addressed as a segment but as distinct people with distinct interests and preferences. Instead, they expect to receive advice tailored to their unique circumstances.

They also want to maintain control over their financial life, grasp the information they are given, and make critical decisions for themselves.

 

How is AI and machine learning influencing the wealth management industry?

Virtual assistants, fraud detection, algorithmic trading — these and more AI/ML use cases in finance can enrich your business. With these advanced technologies, you can benefit from enhanced security of the data, streamlined operations, reduced need for a workforce in repetitive tasks, informed decision-making, reduced human mistakes, and the resulting financial consequences and high customer satisfaction and loyalty.

To meet modern customer needs, wealth managers are succeeding with two key approaches:

1️⃣ Flat-Fee Advisory Models

  • * Move away from product-focused models
  • * Implement flat-fee advisory pricing based on client investment value
  • * Enhance efficiency and productivity to maintain revenues

2️⃣ Personalised Services

  • * Embrace needs-based personalisation
  • * Equip relationship managers (RMs) for a range of solutions
  • * Utilise advanced data and analytics for effective relationship management aligned with client life stages and goals

 

Conclusion

The “Great Wealth Transfer” and the emergence of the rewired investor underscore the importance of meeting evolving customer demands through tailored services and a client-centric focus. WealthTech companies are disrupting traditional models, and the industry must navigate disruptive trends, embrace digital transformation, and leverage AI and machine learning to stay competitive. The future of wealth management lies in a dynamic balance between technology and human-centric approaches, ensuring a seamless integration of innovation and client satisfaction. The key lies in riding the wave of change rather than risking wipe-out in the evolving landscape.

 

References

1 https://www.fca.org.uk/news/speeches/consumer-duty-not-once-and-done

2 https://kidbrooke.com/blog/gamification-and-simulation-tools-enhancing-the-wealth-management-customer-experience/

3 https://www.ml.com/articles/great-wealth-transfer-impact.html

4 https://www2.deloitte.com/content/dam/Deloitte/ch/Documents/financial-services/ch-deloitte-global-future-ready-investment-firm-long.pdf

Thushan Kumaraswamy

LinkedIn

Mansi Adatiya