In 2016, the impending DOL Fiduciary Rule, an influx of fintech acquisitions and partnerships, and speculation surrounding the U.S. presidential election made headlines in wealth management. As regulators and fintech innovation continue to shape the financial services industry, Capco anticipates that five major trends will direct wealth management in 2017.
The hot topic among the masses is also currently the hot topic within financial services: Donald Trump’s presidency. If the world has learned anything from Trump’s first few weeks in office, it is that he wants to make drastic changes. However, it must be noted that no financial services regulation in U.S. history has ever been repealed, and President Trump needs the political capital to make such changes; therefore, the most likely outcome of the new Republican administration is a softening of regulations like Dodd-Frank and the DOL Fiduciary Rule, and softening oversight and enforcement by the regulatory bodies in charge of monitoring financial institutions. Although these actions may create some benefits for financial institutions, they will also likely fuel macroeconomic turbulence and lengthen the period of uncertainty for the financial services industry.
The industry has begun moving towards adopting the hybrid digital advisor model, which combines the best aspects of traditional wealth management with the advantageous capabilities brought about by new digital advisor technologies. By reducing onboarding times, automating a large portion of paperwork and providing a user-friendly interface, the hybrid model improves the experience for both investor and advisor. This improved experience can help advisors to focus on building deeper relationships with clients. In addition, by taking advantage of digital technology, financial advisors can scale their business, adding clients without reducing customer service.
The greatest benefit of the hybrid model is its potential to cover all customer segments – mass market, mass affluent, high net worth and ultra-high net worth. With its digital platforms capabilities, advisors can offer three distinct models based on client need and maturity: direct to consumer, scalable advisor and high-touch advisor. We will talk in more detail about these different strategies in our next blog. A further benefit of the hybrid model is improving customer retention by adapting to meet the changing complexity of the customer base.
We have already seen a variety of partnerships between traditional wealth managers and digital advice firms as early movers incorporate investing algorithms within their existing businesses. In addition to more partnerships with digital advisors, 2017 should also witness fintech deals with startups that offer digital advantages in other areas, such as client onboarding, advisor-client collaboration and account aggregation. As consumers’ daily lives have become increasingly digital, they now seek advisors who can onboard them seamlessly and easily interact across various digital channels throughout the client-advisor relationship.
Traditional wealth managers who realize this potential capability have already decided that the way to succeed now and in the future is through a mix of building new technologies in-house as well as licensing, partnering or acquiring technologies that already exist.
There has been a remarkable amount of research regarding the development and eventual implementation of artificial intelligence (AI) and predictive analytics within financial services. These transformative technologies will allow wealth managers to improve their offerings by providing more customized products and content relevant to specific clients. In addition, predictive analytics can help mitigate the stress and confusion of acquiring new customers, a major pain point for wealth managers. We are only in the early stages of AI and predictive analytics, but 2017 is looking like the year when we see these technologies begin to affect the industry, with the early adopters gaining an edge on the competition.
Fintech was the latest buzzword in 2016, with over $60B invested in fintech companies around the world since 2010. Interestingly, this is about the same amount that U.S. banks and wealth managers spent on technology and digital transformation over the same period. As the fintech market continues to grow and gain market share, an interesting shift has begun to occur.
Nonfinancial services companies, such as Uber, Alibaba, Facebook and Tencent have recognized the opportunity and made plays to take market share away from banks and wealth managers. To place some perspective on the potential scale of disruption, Uber is now the largest payment network in the world, larger than PayPal and VISA. In addition, Uber, Alibaba and Tencent have all used deposits from their huge payments network to start investor funds; Uber then offered their drivers the opportunity to buy into the fund as part of their 401K. Alibaba’s mobile markets fund currently has $96B in assets, and when Tencent opened their fund in 2016, it took in $130B in deposits on its first day.
These companies have the potential to disrupt the financial services industry in a way smaller fintech companies were unable.
2017 will bring many changes – and a fair bit of uncertainty – that will shape the future of financial services in the U.S. and around the world. Banks and wealth managers face increased pressure to remain relevant, adapt to the trends and stay ahead of their traditional and nontraditional competition.
Tobias Henry is a Managing Principal within the Wealth Management practice at Capco, where his area of expertise lies within digital and mobile transformations to improve customer experience and boost profitability.
Damon Gatison is a highly competent and resourceful Principal Consultant at Capco. His 16 year’s of experience spans the financial services industry to include wealth and investment management, investment banking and business consulting.
The content and opinions posted on this blog and any corresponding comments are the personal opinions of the original authors, not those of Capco.