At a time when robo-advisors are standing tall and luring wealthy clients, particularly in North America, private banks need to up their ante to remain relevant and attractive to customers. Bank innovation consulting expert, JP Nicols, talks to Meghna Mukerjee about the dominant fintech trends in the US, and explains why being innovative is not optional anymore
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Between Silicon Valley and Wall Street, North America has all the ingredients to lead the innovative fintech evolutions taking place across the banking sector – particularly in wealth management.
It has taken a while for the wealth management sector globally to truly embrace innovation. It is still early days. Fintech is increasingly being hailed as a crucial revenue generator and innovation a key customer loyalty driver for private banks. How are wealth managers in the US currently harnessing technology and innovation to their advantage?
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By GlobalDataCRM (finally) coming of age
Bank innovation consulting expert, JP Nicols, says it is a typical pattern of innovation adoption to start as cost-to-serve and move its way up the value chain.
In the advisor-centric, wealth management space, a key trend currently seems to be the investment in better customer relationship management (CRM) systems. This is something the majority of card providers and retail banks have already deployed and benefitted from.
"It’s funny to say that, in 2016, CRM is a hot trend in wealth management, but it is. Most firms have not really fully invested in sophisticated CRM programmes.
"They’ve had contact management systems, but picking up all of the signals from our clients and prospects and feeding them into a true CRM is something that a lot of firms are spending on right now," says Nicols.
Robo-advisors’ successful run
The majority of robo-advisors are headquartered in North America, and they continue to be interesting alternatives for the wealthy in the region.
Even though several wealth managers are still brushing them off as a passing fad, Nicols says automated asset allocation algorithms are forecasted to strengthen their foothold.
"We saw it first hit the self-managed wealth space, but we are starting to see forward looking mainline firms acquiring robo-advisory technology – such as BlackRock buying FutureAdvisor or Fidelity buying LearnVest.
"Change will take time. Think about firms that have so much invested in human capital. It’s difficult to say ‘we’re going to discard that and put algorithms in their place’, but in the long run that’s absolutely the trend," says Nicols.
According to Nicols, there are reasons for high net worth individuals (HNWIs) to find value in automated advisory services. "Many advisors hold out a part of their value proposition as ‘I’m going to insulate you from your own emotions – your greed and fear’. But if that is the argument, isn’t an algorithm a much better way of ensuring that?
"The next generation of wealth is mainly coming from technology related companies. Two to three generations ago, money management was different. The wealthy do not really want to sit in walnut coloured offices, wearing ties," he says.
Robo-advisors could also appeal to higher-end family offices that hire investment managers with different themes and strategies to best serve their clients.
"That is a performance driven decision and if the right robo-advisors are producing the right results, why will family offices not choose them?" asks Nicols.
Leaders, learners and laggards
Nicols points out private banks can be divided into three groups – leaders, learners and laggards.
"It’s a power curve and wealth management is still in extremely early stages of innovation adoption," he says.
"A small number of leaders are embracing all forms of innovation and are looking for new ways to generate revenue and experimenting with new things. These companies will reap the benefit in the long run.
"There is a long tail of laggards. They will hear about technology innovations 20 years from now and continue to say "this is not for us"."
The group in the middle – the learners – is likely to grow most robustly, says Nicols.
"They are the ones who know they need to do something, they are trying things here and there and are open to experimenting. Once you try something, you begin to realise that there are lots of different ideas out there that you should be testing at least.
"It’s easy to ignore change saying ‘my clients don’t want this’, but clients do want technology. Many firms are moving to at least equip their advisors with tablets, which is important. Even a few years ago, wealth managers didn’t think their 60-year-old millionaire clients were interested in technology but the customer would show up to meetings and ask ‘why am I still looking at paper statements?’," he says.
With increased transparency being the new reality of the regulatory ecosystem in private banking, Nicols says harnessing technology to be more tax efficient is a big driver for wealth managers.
Cyber security is also imperative and top-of-mind for private banks. "Security, like compliance, is table stakes. You cannot deploy any solution – no matter how innovative – if it’s not compliant and secure.
"The bad news about security is that its definition changes daily. New holes pop up and what was secure yesterday may not be secure tomorrow, so firms must be vigilant," he says.
Innovation is not optional
Innovation is usually defined as putting valuable ideas into action. There has been a vague understanding, however, of what innovation in private banking actually means for the industry. Nicols says innovation needs to be helping private banks drive new revenue and remove big costs, which is "needed".
"The wealth space is still heavily driven by extremely expensive people. With the rise of technology and artificial intelligence, the annual $300,000 jobs are probably in danger," he says.
"At the end of the day, our customers tell us what they like and don’t like. But in this day and age, to reach and sustain a level of financial leadership, innovation is not optional. You have to be finding new ways to move forward," he adds.
Even though there are several lenders in North America who have been technology focussed and innovative, true groundbreaking innovation in fintech is currently taking place in Asia, says Nicols, as the region doesn’t have strong legacy issues to break away from.
"For private banks that are embracing change and technology in the US, it is highly correlated with size as larger organisations have the resources to look into the future and create their own features," says Nicols.
