Private Wealth Management Insights
Private Banking New Players
In the wake of rapid digitalization, new players are entering the financial industry. Private banks are increasingly facing competition from technology-savvy rivals.
One group of competitors includes online financial advisors and web-based wealth management firms that have been founded in the past three to five years. These startups, also called robo-advisors, include companies such as Wealthfront, Betterment, Personal Capital, FutureAdvisor, and Nutmeg. They typically offer investment advice and portfolio management at low cost, thereby demonstrating the potential for commoditization in this area.
The novelty of their approach is not the automation of the investment or portfolio management processes—this is already a reality in most banks. Their unique selling proposition is the fact that clients have direct access to these processes. Robo-advisors may well anticipate how portfolio management services will be provided in the future, namely as client-driven, efficient, and most of all, low cost services. Compared to the total of Assets Under Management (AUM), the market share of robo-advisors is still small. But their ability to attract investors as well as clients, particularly the younger generation, indicates that the demand for these services is real.
A second group of potential competitors are Internet giants such as Google, Amazon, and Facebook. Opinions diverge as to whether these companies would ever want to enter a highly regulated domain such as private banking. Yet, some have already made inroads into retail banking areas such as payments, savings, and prepaid credit cards. One of the dangerous characteristics of these giants, from a private banking perspective, is brand recognition. Whether they are search engines, retailers, or social networks, it's the brand that clients, including potential private banking clients, already know.
Even more worrying for wealth management and private banking firms is the fact that the Internet giants have raised clients' expectations regarding digital services: the giants are able to customize and personalize their services based on large amounts of user data and powerful data analytics. Imagine the appeal of highly personalized investment advice in private banking.
In addition, the giants' services are sophisticated and easy to use, reflecting the fact that digital channels and IT are the heart and soul of online companies. Imagine a regular news update on all the companies you are invested in, available at your fingertips. Low service fees are a further trademark of the giants, made possible by efficient online operations and the lack of maintenance-intensive legacy systems.
Internet giants may not take over the private banking business anytime soon, but they could draw clients away from banks by offering their own "front office" services.
Given these new rivals, private banks are well advised to learn from them. In particular, banks should change their mindsets regarding the following topics:
Role of technology: Digitalization has turned IT into a key factor for delivering client experience, but private banks have been slow to appoint executive officers with IT backgrounds. Unlike the robo-advisors and Internet giants, there is no one at the top of private banks who understands today's disruptive technologies.
Organization and culture: Flat hierarchies, informal communication, and an open mindset for new ideas are commonplace for robo-advisors and Internet giants. Private banks should consider how these companies cultivate talent, foster motivation, reward innovation, and drive agile development. They should also note how these companies team up world-class business experts with some of the best technology talent available.
Communication: Like the Internet giants, private banks should explore the capabilities of digital channels for personalized and frequent communication between client advisors and clients, client self-servicing, and client-to-client communication.
Innovation: Internet giants are not only quick to create new trends, they are also fast to respond to external stimuli and copy what others do. Private banks must improve their capability to detect and react to new developments.
Empowering the client: The success of robo-advisors suggests that clients want greater control over their assets and are interested in doing some background research by themselves. Private banks should empower their clients by providing tools for financial self-management and access to portfolio-specific background information.
Robo-advisors and Internet giants are attracting private banking clients and building relationships with them. If private banks want to survive, they have to learn from these companies how to improve client experience. In particular, private banks must cultivate techniques for data analytics in order to anticipate their clients' needs and to deliver automated, customer-specific services. To do that, they have to change their attitude toward IT as well as their management culture.