Fighting Off Barbarians at the Wealth Management Gates

AUG 6, 2015
3:07pm ET

Wealth management firms are facing much greater competition than ever before from fintech startups and non-traditional players. These new competitors all have a few things in common. Most notably, they are all using new technologies to improve the customer experience and provide greater convenience and value, but at a much lower cost compared to the traditional wealth management players.

This can be both exciting and terrifying, as incumbent firms will need to adapt to compete with these new entrants while they still own the customer’s assets, or risk losing customers to lower-cost startups and non-traditional players. By recognizing what these new entrants are doing right, traditional wealth management firms can implement many of the same concepts to not only compete, but even thrive.

There are four key strategies wealth management firms can adapt to help them compete with the newer players, and increase assets under management by scaling the business at a much lower cost than they can today.

  • Cellphones and wearable devices are getting more traffic than branches and advisors

One of the most prevalent traits the new entrants have in common is that they are leveraging consumer’s use of mobile phones and wearable devices to replace branches and advisors – meaning UX/UI are replacing staffed customer service.

In the past, firms had to spend time and money hiring and training the right people to serve their clients. Now that more customers are using mobile channels and adopting products offered by new competitors who lead with a mobile-first attitude, incumbent firms need to focus more on hiring the right designers and user experience experts to compete with the newer fintech entrants.  Designing mobile tools with the user experience in mind first, focusing on the customer journey through the mobile channel, and offering a delightful customer experience in the digital tools and channels is the only way to remain part of a consumer’s digital life going forward. 

However, providing sophisticated and convenient mobile tools for customers is just table stakes today. To stay relevant, wealth management firms must focus on how they can add value to a client’s daily and monthly financial activities and decisions, because we know these are the decisions that set clients up for long-term success. This will be even truer as wearable technologies and other new devices start to play a bigger role in consumers’ digital banking activities.

For example, wealth management firms could offer mobile applications that track their client’s daily spending activities at the point of sale, and link those purchases to the client’s monthly budget and long-term retirement goals.  If the client stretches to buy an expensive TV, the tool could demonstrate how buying that TV today disrupts their monthly budget and jeopardizes their long-term goals, or it could offer recommendations how to hunker down next month to get back on track. Leveraging mobile tools to be part of a client’s daily financial activity – not just a once-a-year portfolio review – will ensure advisors are continually offering advice that keeps clients loyal to the firm.

  • Big data has a role in delivering advice

Historically, we saw mainframes and computers replace and automate many of the transactional and paper-based tasks in the wealth management industry, making advisors much more productive as they computerized the back office.  Today, big data, artificial intelligence and advanced algorithms are being used to provide advice to consumers, essentially computerizing the front office. Low-cost fintech firms are leveraging these capabilities to provide advice and support at a fraction of the cost of traditional, advisor-centric firms. This is especially true for new entrants targeting the underserved, younger, and emerging geographies of the market.

For the vast majority of the market, their current needs are much simpler and do not justify paying for a full-time advisor.  Not only that, but an advisor’s time is too valuable to focus on this segment of the market. Wealth management advisors can start by building hybrid approaches to their client base, leveraging advanced robo advisors, artificial intelligence and other technology platforms to gain and serve this segment of the market at minimal cost and effort, freeing up an advisor’s time to provide more advice and attention to their top clients. 

  • Access to virtual advice expands reach and bridges digital and physical interactions

While digital savvy clients prefer digital channels and tools for advice, many clients still want access to an advisor, even if only part of the time or during certain life events. It’s simply not profitable or scalable for firms to have advisors available in all offices at all times to serve this market, but they can make advisors available virtually through video collaboration. By leveraging video, centrally-located advisors can meet with clients anywhere, at any time; and wealth management firms can cost-effectively scale their business. Not only can advisors meet with clients outside of their zip code, with video advisors can now also prospect and serve new clients in remote locations, allowing them to grow their patch.  As the office becomes less important in meeting clients, firms can reduce office space and costs.

The virtual advisor model builds goodwill and trust with clients, as advisors become the customer’s lifeline when the need arises. This helps wealth management firms maintain higher retention rates in today’s highly-competitive digital age, where customers can shift assets between firms with a few mouse clicks.  The virtual advisor model can also be used as a ‘farm league’ and start relationships with clients using digital wealth management technologies. As the clients accumulate wealth and assets over time, they can “graduate” into an advisor-led model down the road. By developing this relationship with clients, firms will be able to ensure they can graduate clients within their firm, and not have customers leave for a firm down the street.

Finally, as wealth transfers happen, many younger clients may demand to use new digital platforms to handle the majority of their wealth management needs, and only rarely choose to meet with advisors in-person. By bridging the digital and physical interactions, traditional wealth management firms are leveraging a key differentiator over technology-only firms, which is that they have well-trained and certified advisors who add a personal touch to digital technology and can meet clients’ needs when they need it.

  • Razor-thin cost structures have changed the game

The final aspect that all the new fintech players seem to have in common is the ability to provide their services at the fraction of the cost of traditional wealth management firms. The new entrants appear to be operating on razor-thin cost structures. Firms like Betterment may have $2 billion in assets under management today and a growth rate of more than 100% year-over-year, but amazingly they are able do this with less than 100 people and cloud-based IT infrastructure. Where traditional firms may expect 1-3% fees on assets under management, Betterment can offer its services at a flat 0.15% rate! 

Traditional wealth management firms must start cutting their internal costs and consolidate, automate and modernize their IT infrastructure and applications today so they can operate more nimbly and on a thinner cost structure. Otherwise, they may not be able to compete at the lower fee structures, should a price war develop.

Given how fees in the industry have already come down as customers became more price-sensitive, opting for lower cost ETFs over mutual funds with higher fees and commission-based advisor structures, a price war certainly could happen. Firms should anticipate this and start preparing now. 

Bottom line, the newer fintech entrants are here to stay and will only grow over time. As traditional wealth management firms face a barrage of new competitors pounding at their gates, they must begin to adopt many of the innovations, technologies and business models these new startups and non-traditional players have pioneered. If they do not evolve, they will be squeezed out of the younger and emerging market segments that are price sensitive and are the future source of growth. They will also be left out of the fast-growing digital and transformational business models that are being driven by the growth in mobile, wearable, and big data technologies. 

However, if traditional wealth management firms adopt these four key strategies and make them their own, they can not only compete against these new firms, but even thrive. If done successfully, the traditional players can leverage their core strengths and expertise – primarily their people, existing clients and assets under management – and combine them with the newer digital tools to provide the market with a hybrid model that gives new and existing customers the best of both worlds.

Steven Ridder is a practice advisor in Cisco’s Americas business transformation group. Leni Selvaggio is a global industry solutions manager at Cisco.

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Source: Fighting Off Barbarians at the Wealth Management Gates

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