Wealth Management is on the cusp of a digital transformation and overlooking the new competition could prove fatal.
The fintech challenge is posing a significant threat to the very traditional $79.2 trillion Wealth Management Industry, with investments in fintech doubling from US$51bn (2017) to US$111bn (2018). Despite this, traditional firms have been content to sit back issuing only half-hearted responses, such as building mobile apps to rival fintech platforms. This also emphasises that companies lack understanding in what the fintech disruption actually means for them.
While traditional firms have competitive advantages in the financial sector which somewhat mitigate the fintech risk, these advantages are quickly disappearing. For instance, banks currently have an advantage in government regulation. But as regulation-technology continues to mature, it’s only a matter of time before it’s significantly easier to set-up and run a bank, which eliminates the regulation barrier. Likewise, customer financial trust. As digital transactions dominate the field, the days where only banks were trusted with banking data and payment access are long gone. In fact, since the financial crash (2008), many tech companies like FAANG* entertain higher levels of public trust than financial advisors. (Calstone, 2019)
The Changing Ecosystem
Often misunderstood, the fintech disruption is more about the ability of fintech to evolve the Wealth Management ecosystem, where, traditional firms must redefine their business stance rather than compete head-to-head, in order to retain a significant role in the industry. Traditional firms must eradicate the belief that fintechs win because they offer a similar service at a lower cost, with digital-only customer experience. Firms must consider the wider cultural and behavioural shift that fintech enables. Again, we can turn to the impact of FAANG in their respective sectors. Each company revolutionised human and digital interaction, and competitors who failed to understand this no longer exist. FAANG may also be dipping their toes into the Wealth Management Industry, with products like the Apple Card in the pipeline, and traditional firms must be prepared.
HNWI enjoy digital tools in almost all aspects of their life, they expect the same when it comes to managing their wealth. The assumption that this is only applicable to Millennials is extremely dangerous. Despite 69% of firms stating digital transformation as a top three priority over the medium term, the digital maturity of Wealth Management is severely lacking. The percentage of clients expecting to use FinTech solutions will increase from 38% now, to 45% in the next three years. (EY, 2019) As the wider financial industry pushes the adoption of innovation across the field, many shareholders of traditional Wealth Management firms are unhappy with the unacceptably slow rate of change. Digital expectations will drive change.
Fintech platforms could answer traditional firm’s struggle to translate the growing wealth of HNWI into profits and could unlock new revenue generating possibilities. The biggest question is how to effectively leverage the digital technology. Whether this means rebuilding their technology platforms from scratch or outsourcing providers, firms must be flexible enough to ‘open up’ structurally to fintech providers or get left behind. (EY, 2018)
The digital maturity of traditional Wealth Management leaves traditional firms with limited options. Clients will no longer accept lower standards from Wealth Managers, for which they pay higher fees. Wealth Management will sink or swim in the fintech revolution, but the ball is in their court.
*FAANG is an acronym (Facebook, Amazon, Apple, Netflix’s, Google) popularised by CNBC’s personality Jim Cramer. It groups the market’s five most popular tech giants and high performing technology stocks.