The global impact of new regulations, technology advances, disruptive new entrants and demographic changes forced the wealth management industry into a state of transformation. Wealth and asset managers agree that they should act upon these game changing factors. But how will they respond in the immediate future? Thomas Martin, WW lead, wealth & asset management investment & risk analytics at IBM, comments
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The global impact of new regulations (MiFID II, RDR, FoFA, Dodd-Frank), technology advances (digitalization, internet of things, cognitive computing), disruptive new entrants (FinTech’s) and demographic changes forced the wealth management Industry into a state of transformation. Wealth and asset managers certainly recognise and agree that they should act upon these game changing factors.
However, the difficulty the industry faces is understanding the interconnectivity between these transformational factors and deciding on the "How" they need to transform. This state of transformation might well persist for some time. As per the famous JM Keynes quote: "The market ("state of transformation") can stay irrational longer than what some participants can stay solvent." The question is: How will wealth and asset managers respond in the immediate future?
Rise of the "Financial Innovation" Industry
Financial institutions are keen to create their own alternatives to traditional banking to ensure they capture significant market share in the transformational value-chain. World-wide financial institutions are investing into innovation-hubs or their own Venture Capital Fund, ensuring an environment for creative growth that is removed from their daily systematic production functions and armed with a clear mandate of disruptive innovation.
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By GlobalDataFinancial institutions are effective forced to become serious players in the "Financial Innovation" industry as they do not know where their next competitor will come from, nor do they have the ability to assess the potential impact it may have on traditional banking.
The evolution of technology, as well as the lacklustre regulatory requirements in most countries, allows nearly everyone to create a start-up company focused on financial innovation. Competitors in the "Financial Innovation" industry may arise in the form of FinTechs, E-commerce companies, Search Engines and certainly a number of other entities not yet considered. Technology industry leaders Amazon, Apple, Google, Intuit and Paypal recently announced the formation of Financial Innovation Now, a coalition that looks to engage with Washington to promote policies to essentially empower consumers in making financial services more accessible, affordable and secure. The coalition fosters the government’s key interest in promoting the "Financial Innovation" industry and also sends a clear signal of significant interest in the "Innovation Industry" to potential and existing competitors.
Throughout 2016 I expect financial institutions to increase their investment in the "Financial Innovation" industry, especially targeted towards Wealth Management revenues given the overbearing transformational landscape and answering the ‘How’ question, by acquiring the services of recognised leading innovators, acquiring proven start-ups and partnering with leading complementary innovative firms.
The Wealth Advisor "Marketplace"
Wealth and asset managers’ primary priority is not to develop the world’s best D2C Robo-Advisor or D2C Digital Investment Manager. Their real interest is to expand their distribution footprint globally and reinforce their money management brand by owning the Wealth Advisor & networking "Marketplace". Throughout 2015 large global Wealth & Asset Managers (Charles Schwab, Fidelity, Blackrock, TD Ameritrade) together with a number of Robo-Advisors (Betterment Institutional, Motif Advisor, Advisor Connexion, Jemstep Advisor Pro) adopted a "Platform-4-Advice" business strategy through partnering, acquisition or developing their own capabilities.
The choice of business strategy is also fuelled by compressed fees (moving from a bundled "rebate model" to an unbundled "service-fee" model), higher compliance costs and evolving investor demand faced by Wealth & Asset Managers as a result of regulatory and demographic change. The "Platform-4-Advice" serves as a B2B retail (advisor) "Marketplace" providing advisors with added value advisory capabilities through (automated or Robo) services and product choice, and at the same time act as an important distribution channel for fund managers. Institutions who choose to develop a Wealth Advisor "Marketplace" are seeking vertical integration from product manufacturing to advice and platform distribution, to own a substantial portion of the value chain as well as control product positioning and pricing.
The past year also saw some large institutions initially opting for a partnering business model to gain immediate access to distribution channels globally and not deal with legacy systems and cost uncertainty. There are signs that these institutions are already transitioning to a "develop their own" model.
Judging by the reaction of market participant in 2015 and the threat of new market entrants, the race is certainly on to own a substantial market share in the Wealth Advisor "Market Place", a key component of the modern investment value chain.
Thomas Martin, WW lead, wealth & asset managementinvestment & risk analytics at IBM
