Negative interest rates, inflated asset valuations, and fee compression do not generally make for a happy wealth manager, but these headwinds are at least spurring an efficiency drive across the industry.
One of the strongest investment themes to have emerged from the World Economic Forum in Davos last month was the challenge of choice facing wealth managers today — that is to say where they should deploy their clients’ funds.
While squeezed returns across equity and debt markets have led some money managers to seek alpha in other sectors – such as infrastructure, real estate and private equity – it has also forced the industry to look inwards at itself.
As in other sectors where the digital disruption wave has hit, there is a certain amount of acceptance that the industry needs in order to grasp the opportunity that technology offers; not only to solve some operational challenges faced by wealth managers themselves, but to offer a better and more nimble service to clients.
Technology is at the heart of the changes we are now seeing in the way money is managed, while tech is moving from the back office world of administration to the very front of the client interface. It is not just cost analysis that is driving the trend — it is also increasingly client-driven.
The digital economy has brought about new standards in terms of customer experience that are essential for those involved in wealth and wealth management.
To some extent the changes underway in our industry are mirroring similar developments in the world of trading where increasingly sophisticated algorithms compete to execute buy and sell orders at speeds that are beyond human comprehension.
But they are also impacting the way wealth managers interact with their clients. This is especially true of the millennial generation nourished by digital experiences. Over the next 20 years, the number of millennials swelling the ranks of wealth management clients will increase significantly. They are not only less suspicious of automation and other forms of wealth tech, but actively embrace it. For them, interacting with their adviser over WhatsApp might be preferable to a personal visit and having the ability to actively manage their portfolio on their phone is just as important.
Some wealth management firms have already acknowledged the potential disconnect between older advisers rooted in the old ways of the industry and a younger generation of clients seeking a different kind of experience.
So-called Robo-advisers, the financial stock picking algorithms that conjure up images of a pinstripe suit clad C-3PO, are undoubtedly on the rise.
Depending on which estimates you want to believe, they currently manage anything between $300bn to $500bn in assets, but their growth has not been anywhere as rapid as some other investment vehicles such as exchange traded funds.
The steady rather than stellar growth of such platforms in recent years suggests that choosing a human or algorithm-based approach to investing does not really need to be a binary decision.
Successful wealth managers will be able to blend the efficiencies and savings offered by a technology-driven approach with the personal touch that many clients still demand.
The deployment of digital tools should allow wealth managers to free up time so that they can focus on services with higher added value.
No two clients will want exactly the same investment advice offering, so successful advisers will exploit technology to deliver a pick and mix approach tailored to the needs of the individual.
While machine learning will inevitably broaden the range of investment advice tasks that emerging algorithms can deliver, there remains much that is still beyond their current wit.
All these elements should lead to a serious rethinking of the role of face-to-face advisers. Face-to-face is indeed still a prerequisite today to build trust, even to initiate the relationship. However, the fact remains that the proliferation of digital features and services, the rise in the number of remote interactions, may end up undermining the usefulness of the advisor, particularly with a more demanding millennial. The challenge therefore lies in the ability of wealth managers to reposition the physical component of their contact points.
The applications born of new technologies and initially destined for clients, must therefore be just as much useful to their advisers, helping them optimise the efficiency and productivity of appointments. That could be anything from taxation mitigation to estate planning or simply the retelling of an anecdote that better connects with a client in a way that code cannot, ultimately sealing the deal.
Francois R. Farjallah – Global Head of the Middle East & Africa for Indosuez Wealth Management