I spoke last week about digital disruption in general, and came to the conclusion that if the industry responds as it needs to, then the opportunity is for a positive sum output.
This week I want to reflect on the topic of disintermediation, given that from my discussions with wealth executives around the world, it comes out as the #1 fear of those with traditional business models, and the primary excuse for why most firms are behind the customer demand curve.
The situation is that a number of new, online wealth managers are emerging to fill the so-called advice gap, servicing investors who are unwilling to pay for financial advice but do not have experience to go it alone. There is a belief that these low-cost online wealth managers are starting to poach customers from traditional wealth managers and private banks, who are attributing a portion of their portfolio to the new breed.
This is definitely a trend that will continue, and one only has to look at client trends to see this. Whether your source is the many research reports out there or discussions with advisors and firm executives, the consensus is that the demand for digital contact is high across all age groups (and often highest among younger HNWIs).
At a simple level, I see three main forms of online wealth managers. The first is the online channel of a larger traditional wealth management firm. The second comes in the form of the online-only brokerages, such as Fidelity or E-Trade, who have advanced self-directed trading platforms but with no (or very limited) advisory capability, though they do provide tools such as research, charting, and portfolio analysis to aid investor decision-making. The third model is the newer entrants, sometimes called ‘roboadvisors’, where simple client profiling and algorithms are used to construct portfolios to maximize return for a given level of risk, all through a slick and easy-to-use online-only interface.
The first and second models have been around for several years depending on the region, and in the case of the second model, was the first shot across the bow of the traditional wealth managers. The third model is far newer, but continues this disruptive trend. While the current focus is on the mass market rather than the private banking world, as trends converge (wealth transfer to tech-savvy younger HNWIs, fee transparency making all HNW clients question what they are paying for, among others), it is quite likely that these newer entrants will significantly disrupt traditional firms’ business models. (NOTE: I will be covering so-called roboadvisors in more detail in a future post).
The main question now becomes, ‘What will the competitive ecosystem look like in the next 5-10 years’? The jury is still out on this one, but it is clear that traditional firms will need to adapt, either by moving into higher-end wealth services to differentiate, or by building, partnering with, or acquiring their own automated platforms to serve the self-directed client.
The key is that firms need to overcome their fear of disintermediation of the traditional advisor. By being proactive they can manage the change. Being reactive will be too late.