A new report from the World Economic Forum and Deloitte confirmed what many advisors, technology vendors and industry analysts have long insisted: it is established wealth management firms, not startups, best positioned to capitalize on disruptive technology.
Robo advisors have proven to be an effective tool for customer engagement, but they’ve also proven to be relatively inexpensive and easy to replicate. By offering their own robos, firms increase customer stickiness while also avoiding the high client-acquisition costs that plague startups.
But the future is far from certain. Robos have set a new standard for the kind of personalized digital experience clients expect from financial services, and business-to-business fintechs—the so-called wealthtech companies—continue to automate more middle- and back-office workflows, forcing firms to find new ways to differentiate.
“Fintechs have changed the pace of innovation and reshaped customer expectations across the financial-services ecosystem, laying the foundation for future disruption in the industry,” said Rob Galaski, coauthor of the report and regional leader for financial services in the Americas at Deloitte Canada. “The success of fintechs in changing the basis of competition, as well as the increasing pace of technology, means that incumbents have the potential to improve rapidly—but also face rapid disruption going forward.”
The report details a number of new uncertainties that will shape the future of the wealth management industry. With robo advice becoming table stakes, how will firms differentiate their offerings? Will the trend toward low-cost investments continue, or will clients be willing to pay more for “guaranteed outcomes”? Will product manufacturing be characterized by more or less scale, and will manufacturers use robo technology to move upstream and disrupt distributors?
And how will all of these trends affect the role of human advisors? The WEF says the answers to these questions paint three diverging pictures of the future of the industry.
1. Certainty-Based Offerings
In this scenario, retail investors have even less access to traditional pensions than they do now, making them a more attractive market segment than institutional clients. Combined with the growth in self-employment and the “gig economy,” fewer people are certain about retirement.
As a result, customers would be willing to pay a little more for retirement products that have predefined or guaranteed outcomes. Institutions and manufacturers would have to be comfortable taking on some risk, but improvements in analytics and risk management could provide more granular insights into the liabilities associated with the products. This scenario would also depend on regulators breaking down the barriers between insurance and wealth management.
2. Advice as a Differentiator
If clients, especially millennials, do end up flocking to robo advisors, advisors would find it increasingly difficult to differentiate their offerings. To capture market share, firms would have to invest in adding more sophisticated services to their robo to cover multiple asset categories—cash-flow management, loan repayments, insurance and more. As a result, the robo would be the primary point of interaction between the client and the financial institution.
This would require robo advisors to become much more sophisticated than they are currently, and data sharing between multiple facets of the financial system would have to improve. But this scenario would shift power away from asset managers toward distributors who control the client relationship. Advisors would spend less of their time on process execution, and more on human factors such as decision-making and advice.
3. Quality Externalization
If investor demand for low-cost advice and products accelerates, average revenue will continue to decline, and firms will need to find new ways to lower operating costs. This would accelerate the B2B wealthtech market, but it would mean both small and large wealth management firms have access to the same capabilities. According to the report, this erodes the benefits of scale except for the very largest of firms that can affored to invest in differentiated technology.
The result would be an industry bifurcating into smaller firms aggressively pursuing niche clients, while giant firms serve the mass market with superior products and technology experiences.
The report says there are early signs for each of these scenarios, but there are too many uncertainties to tell which way it would fall. But if firms want to remain relevant, they need to invest in differentiating themselves from their competition.
The good news for advisors is that no matter how things shake out, the WEF believes human advisors will still be crucial, especially for high-net-worth investors. Robos won’t replace humans, as the industry feared a few years ago. Instead, the role of advisors will continue to shift away from product selection and toward client engagement, emotional intelligence and decision support.
The WEF launched its Disruptive Innovation in Financial Services project at its 2014 annual meeting in Davos, when the industry was still navigating the aftershocks of the global financial crisis, and the fintech wave was just rising. The results of the project were published Tuesday in a 197-page report that covers, in addition to the investment and wealth management industry, the impact of fintech on digital banking, payments, insurance, lending, market infrastructure and equity crowdfunding.