Old and new: the rise of the hybrid proposition

After much debate, traditional wealth managers are increasingly catching on to the idea of robo-advice or digital wealth management. Rather than scrap everything from their pasts, however, the favoured path emerging is one that mixes the old with the new, meaning an increasingly digitised version of the traditional model, a so-called ‘hybrid business’. 

Two research numbers help to highlight why. In July 2017, BI Intelligence forecast that by 2022, robo-advisers will manage $4.6tn in assets. However, suggesting a mix of personal and digital will be the best route forward, research by MyPrivateBanking predicts the hybrid model will generate assets of $16.3bn by 2025.

Real-life delivery

Despite these optimistic forecasts from research firms, the size of the current digital wealth market remains tiny in comparison to the incumbent market. More tantalising is a real-life case study of Vanguard’s Personal Advisor Services (PAS).

Only recently, Vanguard announced PAS had surpassed $100bn in AuM. Arguably, it is the success of this business, by far the biggest of the so-called robo-advisers, that is really driving the interest of the incumbent wealth management market.

The US-based firm is showcasing the impact of mixing old and new. Speaking about the launch of PAS back in 2015, Frank Kolimago, head of Vanguard Personal Advisor Services, said: “With PAS, we leveraged scale, expertise, and powerful technology to broaden the breadth, depth, and reach of our advice offer. Essentially, we’re lowering the cost and complexity of investment advice.”

While the role of technology is key to the reach and delivery of PAS, Mr Kolimago made clear there remains a clear future role for the adviser. “We believe the human element is vital to addressing an investor’s individualised goals and challenges. Ultimately, we knew a hybrid offer would give investors the best elements of a robo-adviser coupled with a personalised experience only a human can provide.”

Steps to take

PAS provides perhaps the best evidence yet that a mix of technology with the personal element is the most effective path to take. But the development has left other wealth managers at a crossroads, pondering their own digital trajectory.

The first challenge is to recognise that things in the sector are changing and that holding onto the past is no longer an option. 

“The wealth management market is now in a transition period,” says Jonathan Wyatt, managing director and global head of digital at consulting firm Protiviti. 

“The established market has to ride this period and engage with change if they wish to remain relevant into the future.”

Offering a clear note of positivity, however, Mr Wyatt also  explains that while the incumbent firms need to establish their right to play in this game, people will still naturally gravitate towards the brands they trust. “As long as these incumbent firms have a reasonable proposition, customers will come back to them.”

While they are not start-ups and lack the same greenfield advantages of these new entrants, incumbent firms can still take on board some similar principles. For Jane Warren, CEO of Investec’s Click & Invest business unit in the UK, one of those is to “begin with a blank page and build your business from there, just as all business start-ups do”. This is perhaps new thinking to traditional firms, so ingrained many are in the legacy of their businesses. 

Additionally, a further deeply important aspect which also signals new thinking in this space is to “build something that is relevant to the user, meaning the end client”.

The new importance of a closer focus on the client is shared by Vincent Lecomte, co-CEO of BNP Paribas Wealth Management. “Fundamental to what we are doing is engaging our clients to understand exactly what they want,” he says. “They have told us that they want to interact, to be able to connect with their peers and have fun. Rather than a robo, they told us that they wanted an interactive engagement, through apps, that enriched their relationship.”

From conversations with private banks, thinking like a start-up, getting the full support of the business and building with the needs of clients at the heart appear to be the three key pillars of building a digital wealth proposition. 

Everyone’s a winner

But banks are not just pleasing the client for the sake of it. For BNP Paribas, what is good for the client is good for the bank. “If we can deliver increased client satisfaction, we grow revenues and win more new client referrals,” explains Mr Lecomte, suggesting incumbent firms should have a clear interest to add service offerings into their businesses which support an enhanced wealth management experience. 

“This move is very much about providing an enhanced experience for the client alongside the relationship manager,” according to Christine Ciriani, partner and head of Switzerland at Capco.

Data gathering and analysis is also key to establishment of digital offerings. “These efforts are also rapidly driving these banks’ ability to collect and provide more in-depth management intelligence,” she adds. “Considering digital wealth management tools broadly has many benefits beyond robo-advice.”

This means a much more holistic re-assessment of the potential across the client-adviser-bank relationship. “Banks can leverage their client intimacy, while also employing technology to increase product availability and suitability,” explains Ms Ciriani. 

This engagement gives them the ability to not only service more clients with a wider range of products, but also to do that with increased quality. “Customisation becomes easier with technology, not more complicated,” she adds, in the belief that a well-executed hybrid approach, mixing technology with the traditional human-centred approach, can bring a new level of opportunity to the market. 

Let’s get technical

Once the strategy has been decided, it is vital to get the right technical tools into place. In turn, the structure the tools fit into, or the ‘orchestration’ as it is known in the industry, is also key. A great tool can be badly delivered and there is no lack of tools available. According to Mr Lecomte at BNP Paribas, it is “the ability to integrate all of these into a seamless experience”, that matters.

 His vision is one of modern technology fitting into the bank’s established process, while also further enabling the adviser.

Investment advisory includes elements such as risk profiling, portfolio construction, portfolio health and pre-trade suitability checks. “A well designed, intuitive user interface can cover the core aspects of this process while also offering information which the adviser can draw upon in case of additional questions from the client,” believes Florian Mueller-Reiter, partner at Zurich-based swissQuant Group.  

Enabling relationships

“During the discussion between adviser and client, portfolio positions can be changed and effects on the portfolio can be shown and discussed between client and adviser instantaneously,” says Mr Mueller-Reiter. A standard robo-advice model will offer the client the technical experience, but not access to the insights and know-how of an adviser. 

While there is a clear element of user experience technology, behind the scenes other buzzword technology terms are at play. 

“While offering advice to the client, the adviser can be provided with inputs such as investment recommendations or event suggestions based on client data and sophisticated artificial intelligence algorithms,” says Mr Mueller-Reiter. “This is where new tools can enhance the process for all participants.”

For some, the fear of legacy technology remains a deep concern and there is often a panic among private banks when discussing a full scale move to a more digital model, with the entire technology stack either renovated or replaced. 

But there are increasing numbers of alternatives to this all-or-nothing solution. Financial technology has progressed and, according to Mr Mueller-Reiter, “a traditional wealth manager can use a flexible application programming interface (API) to implement new tools on top of their existing legacy systems, as on example”. 

In other words, the tools exist, they just need a plan to support.

Define the business need?

The selection of the right tools should always reflect the needs of the business. “The best technology decisions are tied to business objectives,” believes Craig Ramsey, chief operating officer of New York-based digital advice technology firm AdvisorEngine. 

“If the objective is the client experience, the key focus should be behavioural science, user experience design, artificial intelligence, machine learning and voice.”

The options can be flexible, depending on the need. “Many of the labour-intensive, time-intensive processes behind wealth management can now benefit from smart automation,” says Mr Ramsey. “Stacks of paper with yellow sticky notes are being replaced by paperless client onboarding. Introductory meetings are being cut from 90 minutes to 30 minutes, because prospects have already completed behavioural questionnaires and played with account aggregation tools.”

For some firms, the focus might be on differentiation and how to stand out in a competitive market. Some might feel that is a front-end issue but, for Mr Wyatt at Protiviti, true differentiation will come from the tools and engines in the back-end. “A good user experience is table stakes. Differentiation will come from the processes and engines in the back such as machine learning, data quality and algorithms. A large and unique data set, for instance, to drive good, ongoing performance. Better data, better data scientists.’

While margins may remain on a downward spiral for many wealth managers, reluctant to bear the costs of transformation, the biggest cost of all could come from not adapting to the new conditions.