This is an excerpt from Finextra’s Research report ‘The Future of Wealth Management 2022,’ and is available for download via Finextra Research.
Over the past 20 years, one of the single biggest disrupters faced by the wealth management industry has been Covid-19, according to Christopher Low, managing director, head of wealth and asset management UK & Ireland, Accenture.
“The arrival of Covid-19 made wealth managers change the way they communicate with clients instantly. The traditional face-to-face meetings often carried out in offices or homes stopped overnight, and relationship managers and advisors had to embrace the digital world.”
This shift marks a significant reset for a very traditional sector, and Low argues that embracing the digital world has led to paper-post’s virtual eradication, and the widespread acceptance of online document sharing.
Kat Mann, savings and investment specialist at Nutmeg, explains that there was a distinct shift in late 2020 by users seeking to use the application in a hybrid manner. She notes that people really began to see the value in accessing digital services rather than face-to-face because of its pure convenience.
“If you arrive at a face-to-face meeting without a crucial document with you, you can’t just pause the meeting, rifle through your files, and return to the meeting when it suits you.”
“Both technology and the willingness of users to use these new technologies has evolved significantly over the last 18 months. In that light, I don’t think of it so much as a disruption which can have negative connotations. It’s less of an unsettling disruption, and more of a ‘how do we adopt those principles that we really want in a way that works for our clients, our business, and at the right speed for the sector?’”
Greg Kyle-Langley, executive director, head of entrepreneurs proposition at Coutts, believes that the willingness to self-serve has also presented a stepchange in the industry. The launch of Coutts Invest in 2016 (to later become NatWest Investor), was initially intended for clients to support their ISA allowances and make small investments, however, Kyle-Langley explains that clients have become far more confident making substantial allocations through this purely digital portal – particularly during the pandemic.
This has been reinforced by a change in the industry which is working with clients through the provision of ‘guidance’ rather than ‘advice’. He notes that there are generally three levels of interaction wealth managers have with the client; execution only, full advice, and guidance, where clients might ask for what options are available to them in line with the amount and appetite they may have, before making the final investment decision themselves.
“I think there is a trend beginning where wealth managers using a platform provide comprehensive advice, it might be more expensive, it might be something we only do with our larger clients. But if you need it then it’s there. However, we can quite easily sit alongside you and walk through some of the options you can see on your screen, ensure that you understand everything, and you decide the investment option you prefer.”
Kyle-Langley believes this uptake in a self-service style of investment has emerged because of the rise of providers like Nutmeg, Moneybox and Moneyfarm. Coutts has found that these services present a new way to serve their clients and work towards addressing what’s known as the ‘advice gap’, where the cost of financial advice became prohibitively high.
“If you were investing smaller amounts of money, (in high-net-worth wealth management terms), it was challenging to get other forms of advice aside from the ‘execution only’ offering. It gave us the opportunity to design a way for clients to invest while allowing them to take that decision into their own hands with online education and without us covering the cost of providing the traditional full set of advice.”
Regulating a shifting industry
Mann observes that the UK is in a unique position given how forwardthinking the FCA tends to be when it comes to innovation and technology. Initiatives such as the FCA’s regulatory sandbox demonstrate that while regulation still tends to move more slowly than innovation, the regulator is working toward supporting developments.
“I think the UK fintech sector is, by and large, very aware of regulatory requirements, embracing those regulatory requirements, and also acknowledging the responsibility that comes with these new technologies,” states Mann.
“The sector tends to think, ‘we’ve got a very forward-thinking regulator, we’ve got regulation that we can work with, we’ve got an environment that encourages us to be innovative in the interests of consumers – let’s do it well so that the environment doesn’t change to become less welcoming of innovation’.”
Low notes that sustainability has proven to be a significant factor for wealth management, particularly in light of how technology is increasingly able to deliver ESG data that augments decision making in a discretionary portfolio, and how it can be used to better understand the specifics of the customers they’re trying to serve.
“I think a lot of fintechs which are innovating in the sustainability space are looking at how they can answer both the demands of the regulator alongside adding value to the end investor.”
Rather than specifically seeking out sustainable investment strategies, Kyle-Langley explains that Coutts clients tend to view ESG crafted products and investments as important, but they are also concerned about returns.
“We know that clients are passionate about ESG issues – particularly climate. We recently surveyed some clients and found 90%+ say that they are concerned about climate change, and have been making changes to their lifestyle as a result. But when it comes to investing, they naturally want to ensure they are getting good returns. Most are looking for a mutual benefit – doing well while doing good.”
“Thankfully we can show them quite clearly that responsible investing often leads to enhanced returns because of factors like stronger governance in businesses that run their operations with climate and society in mind. The client whose first words to us are ‘I’d like an ethical investment portfolio’ remain in the minority, but the investment industry is helping lead the way here so that clients can receive great returns while keeping ESG at the forefront.”
The situation is slightly different for retail investors according to Mann, who have now come to the realisation that you don’t need hundreds of thousands of pounds to begin investing. “Until recently, the term ‘wealth management’ meant that in order to manage wealth – you first had to have it. With the help of the younger generation, UK consumers are getting better at learning about investing, developing good financial habits and building a financial strategy.”
Mann furthers that part of this increased engagement with finances by retail investors is, for instance, due to the sheer cost of climbing on to the property ladder. The wider adoption of fintech products means that retail investors can manage their finances on their own terms and have a much broader range of providers to assist.
“I think this why we’ve seen a much faster adoption of socially responsible investing among retail investors; because there’s much greater demand, awareness, and tools available. Pension calculators, for example, mean people can have a clearer picture about how they need to be saving if they wish to retire at 55. If they need more assistance with how to achieve this goal, they then have the information and services available to seek out advice.”
Democratisation of investing
Changing demographics and the emergence of a strong retail market for investors means that digital access is no longer defined by age or wealth strata, and this is impacting the industry’s approach to delivering wealth management solutions.
Low believes this is prompting wealth managers to look much more closely at the digital tools they use when interacting with customers. Gamification, for instance, means investors can carry out scenario testing on their portfolio and view a range of ideas on screen at any one time, allowing for better collaboration with their advisors.
“The way teams are going to collaborate is becoming very different. Online collaboration tools and the way these teams work, will inject a bit more innovative culture within wealth management institutions, how they think about kind of problem statements, how they think about the way they do business today, and how they want to do business in the future.”
Low adds that a number of organisations are also driving robo-advice services in efforts to improve automation and more effective storage and use of data.
For example, firms are attempting to build a more complete picture and record of their clients, to avoid having to ask them for the same information multiple times, as well as better serving them and their overall needs.
“A lot of the way technology is being used for core hygiene factors is also being pushed into their investment decisions. However, a lot of clients, still want that high-touch gloss at the end of the process to give them the comfort that their money is going into the right place. Looking at the likes of Nutmeg, or Vanguard at the other end of the spectrum – they’re launching various roboadvice tools and are proving to be very, very, popular.”
Importantly, Low elaborates, there is momentum building toward entering different communities to ensure that information, opportunities, and of course financial tools are available so that mass-democratisation of financial services is prioritised.
“A challenge for wealth managers is how they relate to different age groups and demographics. Typically, consumers buy from people they trust. Wealth managers are currently asking themselves; how do I relate to different customer types? How do I instil trust, and make sure our beliefs are actually aligned?”
On financial literacy, Low argues that financial education needs to be higher on the agenda. Firms are increasingly trying to act on this, and just by looking at the purpose and mantra of organisations’ websites he believes you can see this objective to educate beginning to come through.
“It’s around the goal of how to democratise financial services, how to embed yourself within society for good. There’s a wind of change coming, and organisations are desperate to position themselves in the heart of society – can only be a good thing.”
Kyle-Langley adds that increased public interest in investing throughout 2020, with the memestocks and rise of awareness of cryptocurrencies, has been interesting for wealth management.
Noting that while most large asset managers are not yet comfortable with holding crypto as part of their asset allocation, it is proving to be of significant interest for high-net-worth investors. Its volatility, the related security risks, and its “horrible carbon footprint” presents a clash for financial institutions, particularly during the onboarding stage where transparency around clients’ wealth which may have been built through crypto needs to be understood.
Overall, his impression is that the increased interest in investing should be positive for people who would previously have only considered cash savings, and had little insight to their finances. “Yes, things might be volatile, but as long as you’re investing over a longer period it does start to make sense. Cash is not this safe place to keep your money over time. An important element for all investors – retail and high-net-worth – is that the proliferation of these tools means that people are thinking in greater detail about their money. Through tools like Yolt and other API enabled aggregators, people have access to expenditure analysis like never before.”
“Understanding their expenditure makes people feel they have more control over their money and makes them feel more comfortable about the idea of planning, saving, and investing.”
The availability of these tools has also led to a better client experience. Rather than seeing spreadsheet after spreadsheet from wealth managers, the expectation that advice and information is more easily accessible has meant that managers are serving their clients much more digestible analysis on a 24/7 basis.
Learning from the innovators
With this type of consumer evolution comes the need to build and deploy innovative solutions. Traditional wealth managers are looking to the prowess of younger, agile, typically digital players as potential partners in order to remain competitive.
Fintech excels against traditional wealth managers in many aspects of the sector. The first differentiator, Kyle-Langley argues, is user experience. “Quality of their user experience is so important because most are only providing a digital offering. It therefore has to be stellar. It tends to feel slicker, it’s very focused on clear, narrow customer journeys in ways that are not really an option for the more traditional banks and wealth management firms.”
On top of this, he adds that the processes of fintechs just tend to work better: “Onboarding for instance, where it can take a number of days in a traditional bank, AML processes can be completed in just a few hours by these young players. They have a much more limited offering for customers, but it means that they can be hyper efficient.”
Low raises a similar point, citing legacy technology systems and the difficulty in overhauling technology due to sheer size and scale for incumbent institutions.
“Many digital banks and fintechs aren’t encumbered by that financial technology debt. They are also young, and were founded with a very clear purpose which they can instil in every element of their business offering.” Accenture itself runs FinTech Innovation Labs not only to try and support embryonic firms, but to target startups with the potential to assist Accenture’s clients now and in the future.
“Some organisations do this better than others, but increasingly larger wealth and asset managers are nurturing fintechs in a similar way to Accenture. There are a lot of fintechs working on solutions to address the industry’s biggest questions, and wealth managers are using those organisations and working alongside them to develop some of their propositions, and implement them in core parts of their organisation. I see more fintechs partnering with wealth managers, where a few years ago, it might have been considered too risky a move.”