Competition is wealth management is heating up as “Robo-advisors” increase the accessibility of wealth management services and place margin pressures on traditional players

The wealth management industry has suffered significant loss of customer trust since the financial crisis and now faces challenges from disruptors on several fronts. Automated wealth management services and social trading platforms are seeking to grow their customer bases and bringing about some fundamental changes in the way the industry operates. They can offer less expensive, highly sophisticated alternative approaches and empower customers to have more control of their wealth management.

Efficiencies brought about by automation are lowering operating costs, online and mobile channels offer customers information on demand and social trading enables individuals to gain insights from crowd wisdom. Passive investors who have in the past tended to go with the default option on their pension plan may now be able to afford a customized service that is far better suited to their personal needs. All these factors have created growing pressure for the wealth management industry to deliver greater value to customers and provide more widely accessible services.

Implications for institutions in distribution, competition and personalization

The continued shift towards great empowerment of individual investors looks set to bring substantial benefits to customers no matter who they choose to take care of their wealth management.

Competition is wealth

Competition is wealth management is heating up as “Robo-advisors” increase the accessibility of wealth management services and place margin pressures on traditional players

It is likely to have a number of important implications for traditional financial institutions:

• As more customers opt to use more cost-effective online tools and automated advisors, the ‘one-stop’ model of distributing wealth products mainly via their advisory channels will become less effective. Managers in the mass affluent market are likely to find growing numbers of clients turning to new platforms that originally catered for underserved customers and this could gradually erode deposits held with retail banks. However, many retail banks will find they could meet most needs of wealth management customers through automated services.
• The competitive advantage of large-scale businesses will be eroded as automated processes and virtual channels enable new entrants to rapidly expand and compete. Intuitive and affordable tools may even allow some individuals to act as investment experts, using social trading platforms to sell and share their expertise. This could further reduce the market share of traditional wealth management professionals
• Competition in personalised segments and services will heat up, as traditional wealth managers shift their focus. Automated investment platforms could commoditize high-value services, making them less profitable as a core area of business for wealth managers. Delivering bespoke services to a broader customer base may then become a defining part of what traditional institutions offer.

HNW relationships and the age of automated advisors

Wealth managers will have to find new distribution strategies as their customer base is eroded, as well as differentiating themselves by identifying services they can provide that new entrants will struggle to automate and replicate. In-person managers will have a critical role to play in keeping relationship-driven high net worth clients, as competition in this area intensifies. Organisational changes will also be required as many staff will be redeployed to work on different services. Looking further ahead, traditional players will need strategies to capture younger, mass affluent customers, who could enter the market earlier than ever before via automated advisors.

Streamlining services will be key for newly empowered clients

There is clearly a tangible threat to traditional investment managers from the growth of such automated services and customer empowerment tools. Nonetheless, traditional institutions that embrace new innovations to streamline their operations will have the potential to provide higher value services to a greater number of customers.

They will also need to draw on their brand recognition and customer trust wherever possible to help set them apart from sophisticated prosumers able to achieve similar returns on investment. Investment management is being transformed in a way that will have many positives for individual clients, regardless of whether they manage their wealth through a disruptive new entrant or current incumbents in future years.

Implications for financial institutions

Decoupling

Decoupling of advisory and products:

As more customers switch to new automated advisors for more streamlined and cost-effective advisory services, “one-stop” model of distributing FIs’ wealth products primarily via their advisory channels will become less effective.

Scale

Eroding advantages of scale:

Traditional wealth managers’ scale-based advantages will erode as more previously manual processes are automated, virtual channels are utilized and infrastructures become available at a low cost by new entrants.

Competition

Increased competition:

The commoditizing forces generated by new entrants will make more segments and services less profitable for traditional wealth managers and intensify competition among traditional players in more specialized segments or services.