A true innovator who revolutionised an industry – the late, great David Bowie has much more in common with the wealth management sector than one might think. And it’s not just the creation of Bowie Bonds, which allowed people to invest in the singer’s future earnings, that connects the Starman with the world of finance and structured products.
Today, the Bowies of the wealth management industry are the disruptive tech firms – who are increasingly chipping away at the bigger player’s market dominance. It’s not hard to see why, as diversification is currently the name of the game – and no investor wants to put all their eggs in one basket. This in turn gives rise to more opportunities for the newer players in the market, looking at providing differentiated services at a cheaper cost.
The modern-day investors are much more savvy and better informed, and they prefer to have at least three or four specialist wealth managers looking after part of their money. For example, they may want to let a manager strong in emerging markets to manage their emerging market exposure, and at the same time use a completely different manager for their expertise in Japanese equities or US government debt. In today’s low-interest rate environment, investors understand the positive effect specialists can have on returns. One of the platform provider calls this (jokingly) Newton’s 4th law, which states that the “investors will invariably diversify”. This diversity of choice has in turn given rise to plethora of disruptive technology innovators entering the market – ranging from stand-alone robo advisers to solutions that aggregate client reporting.
Reporting aggregation solutions have been driven primarily by the desire of the investors to see their overall exposure in one report. Given the fact that these reports from various wealth managers run into tens of pages, and have been produced using archaic systems (and poor quality data), there are invariably errors that investors have got used to over time. With the latest technology stack and no “IT Debt” (legacy IT Infrastructure), investors have been able to benefit from higher quality aggregated reports.
Some of these aggregators have taken the offering further and have started to analyse the deluge of data they have access to in the form of these reports. They have diversified into upstream “robo wealth advisory” and have been able to create much more customised portfolios for the investors. Combining the cost advantage robo-advisory offers along with the usage of big-data and analytics to better match the risk/return/liquidity profile of the investors, these ‘new kids on the block’ have been able to consistently deliver an additional 30-40 basis points of returns to their investors. Their value proposition is becoming increasingly difficult to ignore with every passing day.
The demand for automated (low cost) advice, as well as aggregated and accurate reporting will continue to grow as the 2017 progresses. It’s up to the established players to decide how they want to respond to these challengers. Do they want to build competitive technology in-house, or buy services/technology from these challengers (white labelling or otherwise), or acquire one of these challengers outright? Is the organisation ready for any one of the responses better than the others? There are questions to be answered and decisions to be made, urgently.
Firms that continue to innovate and reinvent themselves like the recently departed Bowie, will be best placed to maintain their pole position as well as improve their market share. Turning and facing the technology ch-ch-changes may well be the only option traditional wealth management powerhouses have got to keep pace with the nimbleness of the competition.
Click here to view this article on the ‘Asia Asset Management – The Journal of Investments & Pensions’ website.