Open Platform: Technology Drives Growth Opportunities

The US private wealth management industry has undergone several difficult years. Profit margins fell precipitously in the aftermath of the credit crisis, to as much as 75 percent below their 2007 peak. As assets under management (AUM) shrunk, clients moved into safer, low-margin products, and operating costs increased as clients demanded greater levels of service. While AUM started to recover in 2009, the industry witnessed a shift in market share across competitive segments, with wirehouses losing market share to independent brokerages and registered investment advisors (RIAs). A wirehouse is typically a full-service broker, offering research, investment advice and order execution services.

Large private wealth management (PWM) firms are being pressured on multiple fronts: staunching current net-asset outflows, combating the perception that they cannot provide the same level of service as independents, and working on rebuilding the trust that was undermined by the credit crisis.

In addition, the industry as a whole faces challenges brought about by shifting demographics in the wealthy population and by inter-generational wealth transfer. Over the next 10 years, PWM firms will experience dramatic change in the composition of their core client base as Generations X and Y start controlling a greater share of US net worth.

New generations are tech-savvy, less loyal to primary wealth management firms, and more autonomous in their investment decisions. As such, banks will have to adjust their offerings to appeal to this new generation’s sensibilities. Compounding these trends is the fact that the inter-generational wealth transfer process is often mismanaged, and only 38 percent of advisors retain more than 50 percent of the assets upon inter-generational wealth transfer.

Another challenge faced by PWM firms is tapping into opportunities offered by the mass-affluent segment. This market is becoming increasingly strategically important to them as it represents 33 million households with around $13 trillion, about 43 percent of the total investable assets in the US. Many of the mass affluents are young professionals and entrepreneurs currently in the wealth-accumulation phase of their lives, and many will move into the high-net-worth bracket in the future. The ability to identify the mass affluents likely to become high-net-worth individuals (HNWIs) early, and to service them efficiently during the entire length of their relationship with the bank, can result in higher client retention and a larger share of the wallet, and can generate significant value over the lifetime of these customers.

Growing Importance
Leveraging the latest technology is becoming increasingly important in light of the recent trends in private wealth management. There are three reasons behind it: the need to meet increased technology demands of future generations of HNWIs; the need to profitably service the mass-affluent segment; and the need to improve sagging profit margins by increasing operational efficiencies and advisor productivity.

Generations X and Y have different technology needs and expectations compared to Baby Boomers and seniors, and current offerings do not meet these expectations. Younger generations are significantly more tech-savvy than Baby Boomers and seniors, and want to use the latest technology to manage their finances.

They are 1.5 times more likely to trade online, and more than three times as likely to favor mobile access to accounts. They are comfortable with contemporary media and want to use modern methods of communication with their advisors, for example chat or streaming videos. In addition, younger HNWIs are more autonomous and want access to tools that allow them to exercise their autonomy while still benefiting from professional advice. Finally, they expect a level of transparency in running wealth management accounts similar to credit card, bank, and insurance accounts. Younger generations are more likely to prefer greater insight into how and why the advisor makes certain decisions, while all age segments overwhelmingly value better online tools explaining changes in portfolio profit and loss (P&L).

Technology is key to servicing the mass-affluent segment profitably. Low per-client revenues prohibit extending the traditional high-touch service model to this segment, but technology can help achieve the necessary economies of scale, while providing rich online experience to clients—i.e. through self-service applications, automated portfolio management tools, and webinars. Finally, profit margins can be improved by utilizing technology to increase operational efficiency and advisor productivity through automation, system integration, and innovative advisory tools.

The wealth management industry has been slow to embrace technological innovation. This is especially pronounced within the wirehouses, which are building state-of-the-art systems in their investment banking divisions, but are often relying on outdated systems to support their wealth management business.

Opportunities for improving PWM technology center on two channels: client-facing portals and advisor efficiency tools.

Next-generation client portals go beyond displaying basic portfolio information—they focus on client value and on making clients feel more connected to the firm and to their advisors. To allow for more autonomy, they implement features such as P&L monitoring tools and research reports, and order execution or portfolio alerts. They achieve greater transparency by providing detailed fee explanation and investment information. Furthermore, banks can capture cross-selling or up-selling opportunities and profitably serve mass affluents by utilizing customizable portals that offer targeted services based on clients’ ages, investment profiles and personal situations.

Building enhanced advisory tools is another way for PWM firms to become more competitive. Currently, up to one-third of an advisor’s day is spent on low-value activities that could be automated. This is low-hanging fruit for increasing advisor productivity and it can be addressed directly with technology. For example, smart search tools and non-traditional media such as videos allow advisors to consume and distribute research more efficiently, and robust and user-friendly knowledge management systems enable them to respond to client requests quickly and accurately. Similarly, the integration of customer relationship management (CRM) and portfolio management systems provides the whole client view and eliminates many inefficiencies of siloed systems that range from lost opportunities to increased operational costs. Finally, advisor productivity can be enhanced by tools that facilitate collaboration between advisors and various experts, ensuring that advisors can take full advantage of the expertise across the institution.

Increased competition and growing discontent with antiquated service models are causing erosion of market share for the PWM groups of universal banks. Competitors, such as independent brokerages, have been attracting clients with the promise of more personalized services.

Demographic trends, namely the growing importance of Generations X and Y segments, present banks with new challenges. Younger generations are less loyal to their primary wealth management firms, and are more tech-savvy and autonomous in their investment decisions. They want to do business with firms that cater to their needs, and most PWM firms currently do not.

In order to remain profitable and competitive, the private wealth groups of large universal banks can gain a competitive advantage by investing in technology that appeals to young HNW investors, empowers advisors, and allows banks to profitably serve the mass affluent segment.

Masha Filatova is a senior associate at Lab49, a New York-based financial serviced focused technology consultancy.

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