Family Wealth Report looks at the advantages and drawbacks of newer wealth management models and the pressure on incumbent firms to innovate.

The “digital revolution” has presented as many challenges as it has opportunities for the financial services sector, relating to the technical, financial, human capital and cultural aspects of technological innovation. 

A recent paper by TABB Group reinforces the notion that disruptive innovation is indeed permeating more of the financial services spectrum – although we are still in the early stages of what is the industry's most transformational period to date of the Modern Era.

With the first wave of digital evolution having started with retail-orientated banking services, phase two is underway at the more institutional level, and notably in the investment advisory and wealth management sectors.

The emergence in recent years of new entrants in the shape of Wealthfront, Betterment and Motif Investing – to name just three – is one obvious strand of this trend.

But a critical challenge in this transformation is “the need for incumbents to innovate along with digital-era upstarts while also right-sizing their often-bloated cost structures,” TABB’s paper, entitled The Digital Advisor: Successful Transformation for a New Era, said.

Speaking to Family Wealth Report, its author, Paul Rowady - a TABB principal and director of data and analytics research - noted that the digital revolution is “compressing timelines” in terms of how quickly incumbent players need to respond to advancements in technology, as well as how they approach doing so.

In fact, Rowady worries that many are addressing competitive threats on a feature-by-feature basis, which – while welcome and necessary at times – he warned will “only get them so far.”

They instead need to be able to view their entire portfolio services in one picture and migrate that holistically, although the degree of transformation required here is a huge hurdle: while incumbents' systems were developed and “cobbled” together over time, newer entrants have been able to build on a blank slate, leveraging cutting-edge tools and software that “talk to each other” and are cheaper to buy.

There is also the issue of many players focusing first on realigning cost structures before devoting time to consider how they may invest in ways to modernize their offerings, when these aspects should be addressed in parallel, according to TABB.

With the above said, both newer entrants and more established players have their own relative strengths and weaknesses, and the paper assures that there are certainly ways for pre-digital institutions to get ahead of – or at least keep up with – this second wave of technological disruption.

Moreover, it highlighted that “many clients will be slow to abandon long-trusted brands in favor of being at the bleeding edges of mobility, convenience and efficiency, especially when it comes to their investment portfolio.” 

Incumbents versus start-ups

The paper acknowledges that newer entrants tend to have the upper hand in areas such as agility for handling data, creativity in analytics and a consistency of look, feel and delivery.

But they are still really only attacking the industry in terms of “pin pricks,” Rowady said, offering a less diverse spectrum of financial products and services than their bigger, well-known counterparts.

“So the incumbents are not necessarily at risk...of a broad cross-section of their service offerings being attacked in the digital age,” Rowady added. “The exception being that some of the new entrants are large organizations like Walmart or Google – firms with strong technical capabilities and a lot of cash, and therefore with substantial balance sheets from which to launch and leverage broader capabilities.”

And, on the other hand, some of the key assets that incumbents have include brand recognition, richness and history of data, and client volume. Being able to monitor and analyze client behavior to uncover emerging preferences is going to be an advantage for those firms that have a diverse client base with a deep history, Rowady said.

However, in order to leverage this and compete more effectively, they need to first realize the value and richness of their data, and then be more creative with it.

Outlook

There is “so much innovation yet to be exposed,” according to Rowady. “This is a theme and a series of evolutionary trends that we'll be able to watch and observe through numerous narratives over a long period of time.”

But he believes that the sheer magnitude and pace of innovation may prevent some incumbent players from being able to develop all the capabilities they require – and holistically – themselves, something that was more achievable in the past.

“Finding partners who have the credentials in terms of data and analytics for the more sophisticated, complex client whose needs are increasingly global and require a higher level of service offering than the average retail investor is one way they can combat disruption,” Rowady said.

And at a time of heightened M&A activity in not just the financial services sector at large but particularly in the wealth management space, it is unsurprising that further consolidation may be on the cards.

“The chances are that, in some cases, leading digital disruptors will be absorbed by the incumbents, there will be takeover or partnership candidates, etc., whether directly with the wealth managers or with the larger platform companies that serve them,” Rowady said.