Robo-advice just one piece of digital puzzle for private banks

The wealth management sector is changing and thoughts of wood-paneled boardrooms, exclusivity, heritage and tradition are fading into the past. 

Even if change appears slow, and some do not like to acknowledge it, society around us is evolving and there is a knock-on effect on the wealth management world. The industry, which has changed little through the years and remains tightly wedded to several key aspects such as personal service, is gradually being shaken up.

A striking example of this is robo-advice. This technology-led model is an affront to the traditional, ripping into the rule book on who wealth management is for and how it is delivered. Robos are attacking many long-held principles, claiming they can engage and service clients differently and more efficiently, target clients never reached by wealth management, charge them less and, critically, do so with modern, flexible and constantly evolving technology at the core. 

What started with names like Betterment, Wealthfront and WiseBanyan in the US is an increasingly global phenomenon and fast-evolving in terms of service proposition. While these firms remain tiny compared to the incumbents, their momentum is having an increasing effect. 

Why? Because they have tapped the pulse of the future and are attacking the weaknesses of the past. Like a snowball, their movement is getting larger and gaining pace. For incumbents, they retain the option to ignore these developments but that comes with the risk of being flattened. 

An example highlighting the relevance of the digital model was produced by Capgemini in 2014. As part of their World Wealth Report 2014, produced with RBC Wealth Management, it ran the 2014 Global HNW Insights Survey in cooperation with research firm Scorpio Partnership. A core finding was 64.2 per cent of high net worth (HNW) individuals globally expected their future wealth management relationship to be mostly or entirely digital. That is a number that should have drawn attention. 

Ignore , laugh, engage

Let us look back a little. Robo-advice really started to emerge four to five years ago, but there was understandably little reaction from the incumbents then. 

As the sector progressed (more firms, geographies, services and wider awareness), we have seen the first incumbent adopters and others increasingly engaging. “There was a lot of talk but not a lot happening,” explains Adam French, founder of robo start-up Scalable Capital in the UK. 

“First, the incumbents ignored it, then laughed, then fought and now they are joining in,” he adds. Digital allows wealth managers to serve new client segments that were unreachable before, says Mr French, highlighting the area between retail and high-net worth. 

“The incumbent private banks currently turn those clients away as they have no effective way to service them,” he says. 

That message seems to have gotten through and it is now clear that some incumbents have started to engage. 

An incumbent that has built and launched a digital wealth solution sees it similarly. An enormous sea change has taken place in the last nine months, believes John O’Connell, chief investment officer, Banking & Financial Services at Macquarie Group in Australia, and founder of the bank’s digital solution, Owners Advisery.  

“Lots of incumbents now see the advantage in providing a digital service,” he explains, and sees a clear advantage in using technology to power advice. “No adviser or client can filter through the investment options available to find what is right. That needs technology.” 

By focusing on the technology, Mr O’Connell believes the bank can deliver a more efficient and cost-effective service. 

“The human-driven cost of getting advice means a lot of people cannot justify it. It is far more efficient to offer that through technology. We can pass the savings to the client but this technology-led advantage is still best delivered through a human.”

These views are backed by a continual flow of news that incumbent firms all over the globe, including recently Barclays and NatWest in the UK and Raymond James in the US, are entering the battle. That big names are acting is another clear sign that this movement is not on the wane. 

Complex drivers

No single driver explains why the theme of robo-advice has developed or why the incumbents are increasingly engaged. It is certainly not about the growth in numbers of start-ups or their assets under management, because question marks still remain about the sustainability of these businesses. Rather, the drivers are more complex and broad-based.

A clear reason is the reach that technology enables. Nick Middleton, co-head of the new UBS SmartWealth business in the UK, sees it similarly. “As a bank we are seen as only relevant to HNW and ultra-high net worth clients, but UBS SmartWealth can now efficiently serve different client types such as the children of existing clients.” 

It also opens the bank up to advisers, he says. “Not every prospect they meet has the assets for our traditional service, but they can now access the UBS experience.” 

Technology is able to take these businesses into new segments, but also new geographies and solution areas far quicker, cheaper and efficiently than the historic norm.

But there are other reasons to engage. For Vanguard’s Personal Adviser Services (PAS), the biggest digital wealth management business in the world with more than $50m of assets on its platform, their decision was also about opportunity and a clear consumer need. 

“Retirement and an ageing population is a big trend,” says Frank Kolimago, principal and head of PAS, explaining how there are 10,000 baby boomers retiring every day in the US, which is driving a need for high quality and affordable advice. 

“We are driven by client feedback and, while we had an advice business mostly serving HNW clients, we were hearing an increasing voice among our retail client base for accessible, high-quality advice,” he adds.  A technology-enabled proposition supports PAS’ ability to reach that opportunity.

But the sector is still at the start of this journey. This, too, is a reason for both the delayed engagement, as incumbents sought to understand the challenge and opportunity, and their increasing engagement now. 

The existing technology capability available makes it easier to deliver a digital wealth proposition and this is only set to improve as the technological capabilities continue to develop. 

“It is in linked developments like the cloud and application programming interfaces that digital wealth is becoming more relevant and powerful today,” says Ella Rabener, Scalable Capital’s chief marketing officer and co-founder.  

Those, alongside the accessibility of exchange traded funds (ETFs) and the arrival of new regulations such as the second Payment Services Directive from the European Union, are further boosts to the accessibility and growth of digital wealth management. Ms Rabener was clear in her view that these multi-factor developments offer “a set of supporting conditions for the ongoing development of the multi-market digital wealth movement”.

The response

It is now clear that digital wealth management is not going away and incumbents are increasingly aware of this. 

In their response, however, incumbents have little desire in just copying the start-ups. They view the first wave of robos as interesting but simple. Of course, there will be a mix of initiatives depending on the nature of the existing business (retail versus HNW, for instance) and their future plans but, while they are learning from these new models, they are not about to throw away their long-held strengths. 

The incumbents are seeking to marry the best of the new with their existing brand power, sector know-how, intellectual property and depth of capabilities to find the best-case mix. That approach lends itself to one core conclusion: a focus on delivering a so-called hybrid advice model, mixing technology with a human touch.

That focus on taking the best from new and old and mixing the power of technology with the touch and support of a human brings complexity and also lays open significant questions about delivery. 

One major aspect of that these firms have faced is whether to buy, build or partner. There are examples of each approach across the market, of course, but of the three incumbents interviewed here, each took the decision to build the majority of their solution in-house. They placed faith in their own internal skills, tools and talent, and knowledge of their own businesses.

This in-house approach, according to Christine Mar Ciriani, partner, head of Switzerland and lead for wealth and investment management globally at Capco, makes sense when the challenges of delivery and their broader business needs are considered.

 “The incumbents are considering the challenges of integration, the relevance of data and need to data mine internally, thinking that these robos can become internal intelligence engines,” she explains. 

“A robo or other fintech solution on its own does not solve many of the data challenges, and, as a result, there remains a credibility issue in implementation.” 

The use cases for wealth managers are also evolving, adds Ms Ciriani, with the banks having such wide needs across prospecting, cross-selling, compliance, identifying trends and behaviours and data science, so once they look at every together, they are tempted to build capabilities themselves. 

“While point solutions are still attractive for time-to-market, banks are moving past the one-off digital solution and starting to invest in the data architecture and a framework,” she explains.

This theme is interesting, with robo-advice being seen as just one piece of the broader digital wealth management needs of the incumbents. Its real relevance will come, not in the capabilities of robo 1.0, but in considering the broader capabilities and use cases of robo 2.0, robo 3.0 and so on. 

The incumbents are thinking about digital wealth management beyond robo-advice, which in large part explains their previous lack of engagement. They need to think deeply and strategically about how to incorporate robo into their business, where it is relevant and, importantly, what more they can do with those technologies. 

Those considerations turn their focus to their broader technology architecture and infrastructure which, if they can get that right, becomes an enabler of the more complex and broad goals they have. 

What they do not want is to jump into robo and as well as other areas, therefore creating an even more complex spaghetti of systems and solutions.

Getting this architectural and infrastructural issue right is no walk in the park. But having it will allow firms to be agile and allow faster and continuous delivery of application development, a necessary skill in a changing world, according to Hans Peter Wolf, CEO of Zurich-headquartered technology firm Appway.

“Wealth managers must put the right processes in place to orchestrate the required tools and interactions,” he says. “This means supporting the full spectrum of interactions: everything from a very structured process to ad-hoc interactions that are flexible to the situation at hand.’

Incumbent wealth managers are not moving into the robo space by chance or without thought for the context of their existing businesses. They are taking a considered and strategic approach which means they might be slower, their decisions more complex to act upon and with various internal challenges to overcome, but it does not mean they will lose in the long-run. 

Room to breathe

Simple or complex, buy, build or partner, whatever route a firm takes, what is clear is that the leading incumbents see the process of delivering digital wealth management as well as the internal commitment as core factors in their future successes. 

Incumbents are going to great lengths to establish these initiatives, see them succeed and use them as a platform for their futures. 

“This is a centralised initiative for the bank,” says Mr Middleton at UBS SmartWealth. “That commitment means we can build, experiment, learn and evolve without the pressures for a return faced by a normal business unit.” 

He adds that UBS SmartWealth also has its own marketing, user experience and development teams. 

This commitment, support and set-up has the benefit of not only creating new competitive solutions for the incumbents, but also new processes and delivery mechanisms that they can push back throughout their business. This ringfenced set-up, while a clear cost to each business in the short-term, is also a potential long-term driver of efficiency and profitability if its lessons can be brought back through the existing organisation. 

While there are clear challenges in bringing these projects to fruition, and changing mindsets, Mr O’Connell at Macquarie believes change is possible, as long as the firm’s leaders are onboard and supportive. 

“The key is to get leadership to understand the approach and get them comfortable with the idea,” he says. Get the firms leaders onboard, be clear about the goals and means of delivery, and there are conditions in place to deliver digital wealth management. 

What is becoming clearer as we move further into the era of the digital wealth manager is that the allure and head start of the start-ups comes with potential, but also brings limitations. Certainly, there will be leaders and long-term market winners among these market entrants, but their further development is also not straightforward. 

The incumbents, while they might be later to the game, have possibly been unfairly tarnished as clueless. Some may be just that, but there will be successes from these complex businesses as they continue to engage with digital wealth management, bringing their businesses into line with a technology-led model, based on a more agile and flexible technological framework and infrastructure. 

Robo-advice is tantalising for these businesses but it will just be one, albeit important, aspect of their digital wealth futures.