‘Perfect storm’ of personal investing and technology transforms wealth market

Joe Parkin, distribution boss for UK banks and digital channels at $8.5tn fund management giant BlackRock, recalls a more innocent time, earlier in his city career. Along with other junior staff at Goldman Sachs Asset Management, he would accompany the firm’s CEO for early morning rooftop workouts, when the leader would share a cocktail of economic intelligence and tips about life with his young, ambitious workforce.

“Much of that would not be allowed today, either by the HR department or health and safety,” remembers Mr Parkin fondly. This was several years before the 2008 Global Financial Crisis, when US fund houses were making inroads into the UK and planting flags across Europe. Both equities and bonds sold well to fund-of-funds and sub-advisory players, and passive investments were beginning to make a serious dent.

Fast forward to 2022 at BlackRock, where Mr Parkin has worked for the last 10 years, and the distribution picture is almost unrecognisable. “The whole industry is evolving and changing, with one real megatrend in and around the wealth market for me, which is responsibility for retirement ultimately shifting from the state and corporate players to individuals,” says the still youthful Mr Parkin, outlining fundamental changes to the landscape in which he operates.

Then there is technology. “It’s only 13 years since the iPhone came out. But the effect that has had, combined with the internet, connectivity and the cloud, is creating a technological supernova that has disrupted and evolved so that every industry was in some way touched. Wealth management is no different.”

He also highlights “Moore’s Law entering the second half of the chessboard”, referring to the theory that numbers of transistors in a dense integrated circuit double approximately every two years.

The “perfect storm” which this combination of a personal investing boom and technology revolution has created, is transforming the previously sleepy wealth management market into something more dynamic. “Millions of people will have to take responsibility for their retirement, plus technology allows us to scale up,” he says. “For me, this means there is a choice every wealth manager needs to make: either the industry can stay as it is and continue to serve customers face to face, or they can choose how digital it ultimately becomes.”

Accelerating trends

The recent Covid pandemic has accelerated these trends by “seven to 10 years”, with assets and clients nearly doubling across the personal investment industry between 2019 to 2021. “We had a period when people were locked down at home and couldn’t gamble on football matches so stocks and shares suddenly became the thing they were interested in,” says Mr Parkin, explaining the surge in “rainy day” investments from the retail market.

Wealthier investors found time to re-organise portfolios, allocating assets more efficiently. This bottom-up trend from consumers led, eventually, to a concerted response from financial intermediaries targeted by product suppliers such as BlackRock. “Banks have started to re-engage in the investing landscape,” he says, describing an “absolutely fascinating” 10 year period for UK banking between the end of the Global Financial Crisis and the start of the pandemic, with consolidation down to six high street players eventually leading regulators to boost competition and innovation. This sparked the birth of “challenger banks”, such as Monzo and Starling Bank, which may eventually play a more important role in the distribution story.

“There is a whole suite of challengers emerging, the way we think about banking has evolved and additional players are popping up all the time,” says Mr Parkin. “But these banks are still focused on the initial stages of their journeys. We expect more savings and investments initiatives from them. These will come after a time.”

Incomers from across the Atlantic will also play a role. “We have seen major US players, such as JP Morgan and Goldman Sachs, enter the market with force,” he adds. “We are already seeing the battle for the personal financial hub going on.”

Planning re-entry

Currently, his 10-strong sales force focuses on three key segments: platforms such as Hargreaves Lansdown and Barclays Smart Investor; high street retail banks and private banks; and recently emerging robo-advisers and fintechs.

“The biggest question for us is how quickly banks re-enter the investment market,” says Mr Parkin pensively. “After the financial crisis, they pulled out, then following the RDR (Retail Distribution Review), they retreated even further. We have lost 10,000 financial advisers, many of them from the banks. Bank re-entry will be very important for us.”

Managing the relationship with these banks and championing the BlackRock brand will also be key points on the agenda of Mr Parkin’s team. “You need to be very clear about what you stand for and how you operate. We are trying to help our customers build improved financial futures with better investment products right across the board, offering active, passive or alternatives, plus technology on top,” he says. “Our mantra is pretty clear – we don’t go direct to the consumer, we partner.”

The nature of these partnerships has evolved significantly from the model 20 years ago, where each bank chose six to eight big brand providers in a “guided architecture” system. “Banks now have fewer partners, and ask more from them, so the relationship has changed,” he says. In the early days, “there was ambiguity around the economics, but now it’s a clear distinction between manufacturer and distributor”.

Dancing to a new tune

Moreover, the banks have started focusing on providing advice, driving top-down asset allocation decisions and conducting client relationships. “They are getting more comfortable with evolving their business models to focus on their core strengths within the value chain,” he says, citing Coutts as an example. “They are very good at providing advice across the full spectrum of Coutts and NatWest customers and delivering investment products across the Group.”

But there are other capabilities which banks are happier to outsource to asset managers. As well as investment expertise, these include providing wrappers, manager selection and ensuring clients’ ESG (environmental, social and governance) requirements are delivered across portfolios.

Yes, things have changed dramatically, he nods in agreement, looking out of his 13th floor window at the new high-rise buildings, belonging to tech firms, now obscuring the view of the traditional banks which previously constituted his client base. This rivalry between banks, smaller wealth managers and tech players will further fuel the distribution dynamic, he believes. “The banks are going to try and offer investments. So what will wealth managers do to help their clients understand how best to invest?”

The choice of platform will be paramount in this battle, he claims, with all players in the distribution markets acknowledging they can no longer build their own technology and need to buy in outside expertise. “Pre-pandemic, the ecosystem was like a teenage school disco, with the traditional banks on one side of the room and the fintechs on the other,” he says smiling. “But now there is a lot more collaboration. Wealth managers need to choose: do they want to scale up and let their advisers cover a thousand clients? Or do they want to stick to 100?”