Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 119

The upside of fintech for wealth managers

Fintech has captured the imagination of many financial services firms looking to leverage differentiating technology to accelerate their innovation. Nowhere is that more true than within the wealth and asset management sector.

Increasingly, financial services organisations are becoming technology services providers. While fintechs are seen by many as disruptive to traditional financial services businesses, in reality they present great opportunities for savvy organisations.

The early impact of fintech has already been felt by the banking sector, where traditionally large value chains and highly visible, commoditised products made it ripe for disruption. Bitcoin was an early mover and progress has also been relentless in peer-to-peer lending, with a range of new market offerings launched. Banks have found themselves on the back foot, forced to adapt to compete with new challengers.

There are clear lessons here for the wealth and asset management industry. Looking at how disruption has driven new cost models and customer experience in the banking sector can help create a framework for wealth managers’ adoption strategies. One message in particular stands out: disrupt yourself and do it now.

Why now?

Wealth and asset managers have so far enjoyed a level of insulation from fintech disruption. This has been the result of two key factors. Firstly, wealth and asset managers operate in a highly regulated, formal market. By its nature, this environment makes it hard for start-ups to get a foothold. Secondly, the nature of wealth and asset management products means they are not something that a typical consumer uses on a daily basis. Asset management operates differently from a cash or credit transaction. This level of complexity has made it difficult for start-ups to target the core factory of a wealth management firm. But, while these factors have provided a degree of security to date, there is no doubt that the value chain for the wealth and asset management industry is under threat.

Traditional and emergent fintechs

Traditional fintechs are large, established technology companies. They have built up industry knowledge over time, understand start-up principles and have the existing technology and a well-funded community of developers to support their aspirations.

The major upside with these large companies is their high visibility. There are opportunities here for wealth and asset management firms to form strategic partnerships that ensure they will be at the forefront of the wave of technology adoption these large players are driving.

The second type of fintechs are innovative firms with specific intermediation strategies. These are the disrupters with the ability to put elements of the traditional wealth management value chain under immediate threat. While it is unlikely these start-ups will steal core business in the short term due to the barriers mentioned earlier, the opportunities are immense and there is likely to be some consolidation in the market.

Low cost transaction platforms

As regulators apply continued pressure on increasing fee transparency across the industry, organisations with higher operating costs will become less attractive to consumers. The winners will be wealth managers who are adaptable, agile and have low cost models. These platforms are highly disruptive as the fee models are low and simple to understand. Most consumers want to maximise returns without passing income to the asset manager. In some overseas markets, new entrants have changed the revenue structure to leverage the inherent value in consumer data, rather than the trading fee. Under this model, they are able to employ aggressive advertising campaigns and upsell to other revenue-driving products.

If fintechs can cause a degree of intermediation in the value chain which reduces cost, then adopting a business model which uses the same or similar delivery models could be the strategic shift needed for an early adopter to change the game.

Transactional versus relationships

Fintech providers target two different types of client. The first is the transactional client, who is often defined by a fee for service arrangement. This type of client benefits from innovative technologies in self-service advice, payment processing and automated account management. The second type of client is relationship-based. They seek an ongoing personal relationship with their planner. Fintech can be used to enhance this relationship via integrated multi-channel communication, single customer view and ongoing risk mitigation.

Consumer experience and data analytics are key

The level of service consumers expect from their wealth and asset management providers is changing. Some new entrants in markets such as New Zealand are already capitalising on this, using real-time video chat and digitalised documentation to engage with their customers on hosted platforms. This solution is scalable and offers immense back-office opportunity, the capacity to reduce storage costs and paper use, restructure the organisation and bring increased efficiencies to the wealth management business model. It also has the added advantage of providing an immediate improvement in customer experience.

Other start-ups are experimenting with the use of social media insights to provide predictive analytics. Done well, this can provide the ability to determine emerging market sentiment and identify which stocks are going to become buy or sell opportunities ahead of the traditional stock market. It can allow for new types of risk management strategies and profiles to be defined, enabling wealth managers to respond to market sentiment and redress and balance the investment mix in their portfolio before anyone else. In a highly competitive market, adopting a solution like this could help attract new customers by maximising returns and improving the investment profile.

Mega-algorithms are coming

The rise of the robo-advisor is imminent, with pilots already running in Australia. Robo-advisors have the potential to impact the industry’s entire investment and scaled advice model, by turning the handling of consumer-managed portfolios into a computer-driven process. Considering how the use of robo-advisor models could change the way the wealth and asset manager advisory workforce is managed going into the next few years, wealth managers will need to deal with this level of change. Otherwise they may find their customers choosing the reliability and predictability robo-advisors can bring to their financial planning needs at a fraction of the cost, and switching to a competitor.

The way forward

Fintech will change wealth and asset management behaviour, and soon. The current regulatory framework provides some level of insulation, but the industry is not immune from market disruption. Preparing for the change requires new ways of thinking and a strategy, plus an operating model to support it. By taking a global view of what is happening in other markets and across the broader financial services sector, Australian wealth and asset managers can position themselves to capitalise on the opportunities fintech presents.

 

Anita Kimber is an advisory partner in EY’s Oceania Financial Services Office.

The views expressed in this article are the views of the author, not Ernst & Young. The article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.

 

RELATED ARTICLES

Results of roboadvice survey

What are all these fintech startups actually doing?

Other articles on ‘wealth disruption’

banner

Most viewed in recent weeks

Three steps to planning your spending in retirement

What happens when a superannuation expert sets up his own retirement portfolio using decades of knowledge? He finds he can afford much more investment risk in his portfolio than conventional thinking suggests.

Five stock recoveries not hanging on COVID predictions

The focus on predicting the recovery from the pandemic is the wrong emphasis. Better to identify great companies benefitting from market changes over a three- to five-year horizon with or without COVID.

Peak to peak, which LIC managers performed during COVID?

A comprehensive review of dozens of LICs shows how they performed in the crucial 'peak to peak' of COVID. This 14 months tested the mettle and strategies of a sector often under fire, with many strong results.

Finding sustainable dividend stocks on the ASX

There is a small universe of companies on the ASX which are reliable dividend payers over five years, are fairly valued and are classified as ‘negligible’ or ‘low’ on both ESG risk and carbon risk.

Blink and you missed a seismic shift in these stocks

Blink and it happened. If announcements in this sector were made by a producer of iron ore, gas, copper or some new tech, the news would have been splashed across the front pages. Have we witnessed a major change?

How inflation impacts different types of investments

A comprehensive study of the impact of inflation on returns from different assets over the past 120 years. The high returns in recent years are due to low inflation and falling rates but this ‘sweet spot’ is ending.

Latest Updates

Shares

Platinum’s four guiding investment principles

Buying mispriced stocks is often uncomfortable when companies are outside the spotlight and markets are driven by emotions. And it's inescapable that the price paid ultimately determines the end result.

Interviews

Andrew Lockhart on corporate loans as an income alternative

Loans to corporates were the traditional domain of banks, but as investors look for income alternatives to term deposits, funds have combined hundreds of loans into a single structure to create a diversified investment.

Retirement

10 things I learned in my faux-retirement

Pre-retirees should ‘trial run’ their retirements. All those things you want to do - play golf, time with the family, a hobby, write a book - might not be so appealing in reality, but you might discover other benefits.

Retirement

Achieving a sufficient retirement income portfolio

Retirees require a reliable income stream to replace the wages they received when they were working and should focus on the dollar income generated over time rather than the headline yield percentage.

'Wealth of Experience' podcast and ASA webinar on ETFs v LICs

Peter reveals some top stock picks with an emphasis on long-term assets like Sydney Airport, Graham discusses spending in retirement and valuing assets, the key to Amazon, guest Andrew Lockhart and plenty more.

Strategy

Lucy Turnbull’s three lessons on leadership and successful careers

From promoting women to boost culture to taking opportunities as they arise, Lucy Turnbull AO says markets should not drive decision-making and leaders must live and breathe the company's mission and values.

Economy

Are concerns about inflation inflated?

While REITs and some value stocks are considered 'inflation-sensitive' assets, the data provide little support that they are good inflation hedges, and energy stocks and commodities are too volatile. So what works?

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.