The digitalisation of the financial services industry has brought with it a level of sophistication that is unprecedented. Innovation in transaction-based banking and customer-oriented banking have caused rapid advancements in digital banking, payment systems and more. One particular sector that is evolving less rapidly, however, is wealth management - where traditionally, human interaction and relationships are paramount, has only moved towards robo-advisors and more recently, hybrid advisory. Granted, hybrid advisory becomes necessary when wealth management may at times be too complex and contextual to be left strictly within the constraints of pre-determined algorithms and parameters. While the benefits and drawbacks of hybrid advisory has been a topic of much deliberation, not much has been discussed on the potential challenges for hybrid advisory adoption.
According to a report by Ernst & Young entitled ‘Advice goes virtual’, the market share of digital wealth firms is just 0.01% of the industry. However, research has found that potential uptake for hybrid advisory solutions is at 50%, significantly higher than that of those managed solely by a human or robo-advisor.
Thus, the opportunity and potential is evident - what wealth management firms need to do now in order to rise above competitors is to understand the current challenges for adoption and subsequently match them with appropriate solutions.
The current challenges for implementation of hybrid advisory are:
- Limited resources and capital allocation
As with any new technology, implementing a hybrid system incurs high resource costs, and the re-allocation of capital and resources may chip into other existing investments of the core business.
One way to reduce such costs is by establishing strategic partnerships, instead of starting from scratch. Some key questions that should be asked include:
“How does this investment align with our firm strategy, and how should we prioritise it against other initiatives?”
“What is the cost of outsourcing or partnering with a digital technology provider?”
Successful partnerships can be the solution that helps integrate the efficiencies of technology with the personal touch of human advisors to facilitate improved service to clients.
- Regulatory compliance
Similar to the regulatory compliance challenges of MiFID II, the adoption of hybrid advisory will place companies under stricter regulatory scrutiny. Hybrid advisory allows companies to reach a global clientele; however, they are required to comply with the existing regulations of the countries in which they provide their services to. For example, amongst European countries, the UK requires FCA authorisation, France requires AMF registration and Luxembourg requires CSSF authorisation and supervision. FATCA and other regulations generally governing the funds industry (UCITS, AIFMD directives and more) will also have to be complied to.
The automation aspect of hybrid advisory has also led to a discussion paper on the topic by the joint committee of the three European Supervisory Authorities (ESMA) - European Banking Authority (EBA), European Insurance & Occupational Pensions Authority (EIOPA) and European Securities & Markets Authority (ESMA). This arose from lack of clarity, as financial automation is not explicitly defined in the banking, securities or the insurance sector.
- Pace of innovation
Adopting hybrid advisory will most likely call for the replacement of legacy systems, which requires complex and critical investment decisions. Many traditional firms are still holding on to legacy systems that are irrelevant, costly and difficult to use. Andy Haldane, chief economist at The Bank of England, estimates that 70-80% of IT costs are channelled towards maintaining and operating legacy systems.
Perhaps firms should first consider whether they are equipped with the right competencies and internal processes to deliver the intended level of service - and whether the new software or solution can be integrated with their current legacy platform. If the answer to any of these considerations is ‘no’, then perhaps it is time to transition away from the present legacy system.
- Pressure to reduce prices
Automation of certain wealth management activities within portfolio management and financial guidance have significantly pushed the prices of advice down. This is partly because investors also expect to pay less as the service is partially-robotic, with lesser personalisation from human advisors.
With lower price points, firms must adapt by developing new pricing strategies through re-positioning their value proposition. Firms also need to take into consideration the fact that automation brings with it increased efficiencies, which may change their existing cost structures.
Despite these challenges, wealth management firms should not be deterred as missing the digital wave would be costly. The trend is pointing towards the growing digital expectations of the wealthy, and although digital adoption is generally lagging within the sector, emerging opportunities are accessible and can be exploited for advancements.
Furthermore, in order to successfully implement hybrid advisory, firms need to be able to serve client markets across multiple segments and subsequently understand the different set of preferences and expectations of the next generation of clients. At Crealogix, we have identified five successful approaches that provide an overview of how digital asset management will look in the future:
Banks need to start by firstly investigating if their internal processes and product structures are ready and resilient. With the rapid technological advancements within the wealth management landscape, one thing remains certain :
Hybrid advisory will continue to evolve globally, constantly requiring industry players to adapt their business models in order to meet the future developments in the wealth management sector.