December 1, 2016

Surviving Fintech for Traditional Wealth Management

The surge of niche technology firms in the financial services realm has provided substantial incentive for banks and wealth management firms to become more digitally savvy.

The growth in fintech is reshaping what the financial sector means to so many people. In all facets of the world’s financial future, traditional banking stalwarts should focus on keeping ahead of the curve if they want to succeed.

By many accounts, there are growing concerns among traditional banking and asset management firms that fintech technologies will be replacing their jobs in the near future, many of which have had little experience with technology in this new sector.

According to a recent CFA Institute survey that included nearly 4,000 global chartered financial analysts, only 14% of the respondents were “very familiar” with automated financial advice tools.

Familiarity with automated financial advice tools

Source: CFA Institute

And when asked if they felt their sectors would be impacted by fintech technology, 90% of those surveyed responded agreeably, with asset management leading at 54%.

Sector most affected by automated financial advice tools Source: CFA Institute

The challenges that traditional asset managment face center around the efficient customer experience, low management costs and financial advice that fintech provides – all while fintech startups avoid the stigma that Wall Street has acquired with regards to pushing back against increased fiduciary responsibilities brought upon by new regulations.

Effects on Investors and Consumers:

For most investors, advice and investment allocations of automated financial tools are relatively unsophisticated, so it’s expected that these services will be positive for all those in the mass affluent (67%) and high net worth (41%) areas. Automated financial advice tools, however, are not yet capable of making sophisticated and complex decisions to assist the ultra high earner, so this earning category is expected to be a bit more resistant to the fintech influx for the time being.

Other areas that the rise of automated financial services is likely to impact include:

  • Costs
  • Access to advice
  • Product choice
  • Quality of service
  • Fraud

Feedback from respondents suggested that the most positive outcomes as a result of the fintech boom center around cost (89%), access to advice (62%), and product choice (55%).

Risks and Opportunities in Automated Fintech Tools:

Like any new technology being introduced, there will always be concerns with regards to new risks that present themselves through the change process. For fintech in particular, the most concerning of those based on respondents surveyed specified potential flaws in the automated investment advice algorithms as their main concern (48%), followed by concerns over mis-selling (30%), and data protection (12%).

Biggest risk introduced from automated financial advice tools

Source: CFA Institute

While there are considerable perceived risks involved in the adoption of fintech as it currently stands, the driving forces changing this landscape are still in full force, including some exciting new entrants into the growing market. Robo-advisory firms such as Betterment and Wealthfront are largely being adopted by new investors, peer to peer / crowdfunded lending is growing at nearly the same pace, and blockchain is set to expand over the next few years with the likes of this technology still yet to be fully understood. The industry from the banking and consumer sides of financial services should expect significant changes over the next five years and traditional banking and wealth management sectors should be cognizant and diligent to adopt or work with these new technologies or else prepare to be uprooted by these new banking practices and market entries.

How Traditional Asset Management and Banking Adapt:

The growth in fintech is reshaping the financial sector across all facets of the industry. This includes everything from operations and marketing to regulations, and there are several driving forces that traditional banking should focus on if they want to attract and retain these markets of investors and banking customers.

These drivers include:

  • Big data, predictive analytics, and machine learning are driving more efficient operations and better understandings of customer behaviors
  • RegTech is emerging as a new entrant to systemize regulation requirements and could drive cost and litigation savings
  • Blockchain solves the double spending problems normally associated with traditional banking ledgers
  • Peer-to-peer and crowdfunding lending opens funding to markets unbefore tapped
  • Robo-Advising makes for more efficient investing at a lower cost and better customer experience for more investors than current traditional asset management allows

To be successful, traditional asset management companies will need to focus their efforts on optimizing their customer experience, product management, and marketing strategies to best adapt to the new generation of investors that are beginning to use these services elsewhere.

Fintech also covers a wide variety of disciplines, so efforts should be taken by way of hiring managers to understand and be adept at the growing requirements that banking and asset management will need to compete in this new technology driven environment.

Some key attributes that will be required for new digital platforms in this space will include education, risk and performance metrics derived and driven via analytics, account and customer relationship management functions, automated reporting, and forward driven market insights. If undertaken properly, these enhancements will encourage growth in these direct channels for both consumers and investment professionals looking to grow into this new economy.

In conclusion, the traditional banking and wealth management industry has an amazing opportunity to capitalize on this new segment of the world economy, but only if they’re willing to take advantage of this brief window before the market becomes too complex for them to catch up.

LATEST POSTS