Innovation might not come naturally to big banks, but leading players are realising that partnering with start-ups is often the best way to help the wealth management industry evolve.
There is a growing belief in the wealth management industry that innovation cannot come from banks; it must come from start-ups and ‘non-traditional’ players that bring in novel, digital ways of working for both advisers and clients.
“I see the gap between traditional private banks, wealth managers and tech-driven wealth advisers and platforms widening again,” says Urs Bolt, a Zurich-based, former senior private banker with both UBS and Credit Suisse, now advising wealthy families and financial services firms on digital strategies.
Mr Bolt’s views are backed by industry research. Nearly 90 per cent of asset and wealth management firms surveyed by consultancy PwC in mid 2023 believed ‘disruptive technologies’ — including AI, big data and blockchain — will boost portfolio returns. But despite widespread adoption of these technologies, investment houses are finding the journey a hazardous one.
The latest digital technologies, especially generative AI, are giving smaller wealth advisers an edge when offering personalised wealth advice, without the need to spend much time and resources for infrastructure projects.
PwC predicts assets managed by robo-advisers will nudge the $6tn barrier by 2027, more than doubling the $2.5tn total from 2022. But it is the digital-first models and direct investment platforms, typically catering to younger investors, that are doing most of the running, says PwC.
Some banks are joining the digital frontrunners, Mr Bolt says, drawing attention to developments within generative AI and ChatGPT from LGT and Pictet. The latter, he says, deployed a ChatGPT solution for 5,000 employees within a year of the technology emerging. “This demonstrates it can be done in the shortest possible time frame,” asserts Mr Bolt. But these are exceptions to the staid status quo.
“The bureaucratic structures of large firms [struggle] to react to technology shocks quickly,” he says, adding that even though banks have fallen well behind, this gap will eventually close again.
“Wealth managers and banks are not capable of being digitally innovative,” says Sigrid Unseld, a Zurich-based ‘data architect’ and founder of Scilla Consulting, also previously employed by both Credit Suisse and UBS.
“Generally, their focus is on business, not on digital innovation. Their internal IT departments often lack the necessary skills for digital innovation,” says Ms Unseld, who believes it is essential for banks to collaborate with external players, including start-ups, to speed up innovation by using expertise and agility of tech talent from outside the banking world.
Purely digital banks such as Swissquote, unburdened by physical branches, have more incentive to invest in digital innovation, she believes. Ms Unseld also points to big tech companies venturing into financial services, such as Google, Amazon and Apple.
“With their technological resources and customer data, they can disrupt traditional banking and wealth management models,” she says. “Their expertise in data analytics and AI makes them strong players in digital innovation.”
Institutional mentors
But not all new-look wealth managers are taking their lead from big tech mentors. Indeed, some are turning back to more traditional models of inspiration.
“AI is obviously a real buzzword right now. But if you look at some of the top hedge fund managers, with their massive computers, they’ve been using AI for years,” says Stuart Cash, founder of the Y Tree wealth tech platform, aimed at high net worth individuals and wealthy families. He cites the example of James Simons, a mathematician turned Cold War codebreaker, who founded systematic trading house Renaissance Technologies in New York, running $130bn.
“Also, if you look at stochastic, probability-weighted asset allocations, where you work out the right currency, risk level, liquidity and cash view, if you’re an endowment like Harvard or Yale, that’s what you do,” says Mr Cash, a lawyer by training, who became a senior investment banker and partner with Goldman Sachs, before starting his own firm.
“These ideas from endowments and sovereign wealth funds are very different to the wealth management world, and we should be looking to these institutions for real innovation, as they deliver superior returns from sophisticated processes. That’s what we’re also using for our clients.”
A major challenge for wealth managers, he believes, has been analysing clients’ aggregated data to determine flows. “One of the key investments we have made here is in data infrastructure that enables us to understand exactly what’s going on across our client’s portfolio,” says Mr Cash, who runs his 135-strong firm from an upstairs office just off London’s Tottenham Court Road. His staff, including members of his 45-strong team of client advisers saunter in and out of his office dressed casually, contrasting with the more conservative atmosphere of large banks based in Canary Wharf.
“We see ourselves as the Central Intelligence Agency for money in life,” he says, with barely a hint of a smile. “Because we can see thousands of portfolios, this enables us to understand both the costs and the risks. One of the biggest problems for a consumer, whether you’re wealthy or not, is the difficulty of knowing whether you’re getting a good service from your wealth manager.”
Banking fightback
But traditional banks are fighting back, with leaders recognising they need to change how they relate to both clients and staff. “A culture is needed that promotes innovation and this must come from top management,” says Sandra Daub, head of business development at Swiss software developer Noumena Digital. “Top management must recognise innovation as an opportunity and establish a corresponding culture. Ideally, there should also be innovation centres within the company, that act as evangelists and work with start-ups in a targeted manner to drive forward the advent of the digital age in wealth management.”
Recent innovation has accelerated, Ms Daub believes, though we are yet to see many of the projects flowering from the bank’s nurseries. “I have seen some initiatives with generative AI that helps RMs get an overview of customer situations within a very short time,” she reveals.
The AI uses internal data — from emails, the CRM platform and investment research — and supplements this with public data. “Most of these systems have not yet been rolled out, but the approach is promising,” says Ms Daub.
AI’s golden age
At BNP Paribas Wealth Management, digital transformation has been a strategic priority since 2017, when the firm launched its client experience programme, co-designing digital features with clients, before deploying them progressively across various distribution channels.
This was no easy task, admits Mariam Rassai, Paris-based chief digital and data officer at the French bank. “We had to develop new skills, new ways of working,” she remembers, recalling significant challenges she faced. “This was a huge transformation for the organisation, and it is right to underline that this also a cultural transformation.”
Unlike leaders at many other banks, who prefer to develop technology internally, Ms Rassai, with her engineering background, was quick to recognise the need to work with more innovative start-ups.
“Our strategy is not necessarily to develop everything ourselves, and we leverage technology provided by best-in-class fintechs,” says Ms Rassai. “We rather see ourselves as an orchestrator, designing a global client journey, offering a cutting edge experience and relying on various partners.”
Recent partnerships between banks and tech firms include that of RBC Wealth Management and AI specialist Tifin in the US. This gives the bank’s advisers access to AI-powered ‘Insights’ that allow them to observe patterns of client behaviour, to identify those who might have money in motion after a significant client event.
Wealth management has just “entered the golden age of applying AI to help deliver better personalised advice and more relevant investment products to more people,” says Tifin founder & CEO Vinay Nair. “This is an area where we are seeing increased interest from our strategic partners, [who are] among the largest financial services firms on the planet.”
He believes banks’ “desire to stay ahead of the winds of change” is often struck down by brutal talent constraints, lack of in-house expertise and organisational inertia.
In addition, commentators identify a tendency for banks to use AI and digitalisation to save costs, rather than improving the experience for clients.
Major roadblocks
“Most innovation inside banks is generally creating operational efficiencies, instead of delivering a better, more personalised client experience,” says April Rudin, New York-based founder of The Rudin Group, a marketing strategy consultancy for wealth managers. “Most firms are not engaging with clients, or prospects, to learn where the gaps might be or how to exceed a client’s service expectations in the same way as luxury brands do. This is a huge miss and could be a giant win to engage with clients of all types and generations.”
There are several major roadblocks to digital innovation, deliberately constructed by wealth management firms, says Doug Fritz, co-founder of US wealth tech consultants F2 Strategy. Many have, instead, prioritised “non-digital” areas of innovation.
“Advisers want to be in the room when clients have questions, are viewing data or complex concepts are being presented,” he says. “These wealth firms believe client fees are largely generated by their expertise and guidance, not by digital interactions. Self-service is still considered a more mass affluent and cookie-cutter experience, which high net worth wealth advisory firms want to differentiate away from.”
Even when his consultancy has helped banks roll out digital experiences for clients, take-up is lower than expected. “Across our client base, we’re seeing web-based client portals with adoption — measured by clients who log in — that is below 50 per cent and subsequent engagement numbers in the one-to-two times a month level,” he says.
The problem is not with the technological architecture of the service, but the content which banks post on these channels, believes Mr Fritz. Most contemporary client portals, he relates, simply mimic the previous quarterly or monthly paper reports which clients were sent, detailing returns, value of investments, benchmarks and asset allocations.
“In traditional advisory relationships, none of this information is either actionable or relevant to a client’s life,” he says. “Furthermore, we have spent the better part of two decades teaching investors not to pay attention to market fluctuations and that market timing is risky. In other words, we’ve taught clients to ignore all the content, data and materials that we are currently pushing to their computers and phones.”
