Wealth managers will be faced with numerous challenges over the coming years. Some of these challenges are home-made. But most of them are due to changing customer needs (seeking advice rather than buying products) and perceived value for money. Transparency as well as customer interaction will be key to success. In addition, environmental externalities, like regulatory requirements and a changing macroeconomic environment, will have a significant impact on profitability. Technology, both incremental as well as disruptive, will play a key role to cope with competitive externalities. Wealth managers should prioritize the challenges they face and address them as opportunities rather than threats.
I am regularly asked the questions what I believe will be the key challenges wealth managers in Switzerland will be faced with. To answer that question, it is important to distinguish between two categories of challenges, that is,
- challenges related to changing customer demands (shown in green in Figure 1) and
- challenges related to changing environmental externalities (shown in blue in Figure 1).
When listening to private banking and asset management executives and senior managers, their focus is mainly on environmental challenges. Foremost on their list come regulatory requirements. One managing director of a major private bank told me that they have to cope with more than 40’000 new individual regulations per year. Next on their list come macroeconomic challenges, like a strong Swiss franc and a weakening global economies, including Asian markets. Decreasing profit margins are explained amongst others by negative competitive externalities, like missing market access. Technology is seen as a challenge, although the descriptions of the perceived threats are blurry. Block chain and bitcoins are the two most prominent buzzwords stated in that context. In addition, replacing outdated core system platforms are seen as a challenge. When talking about challenges related to customer demands, their main focus is on omni-channel requirements. To my surprise, limited to no challenges are seen in changing customer needs and perceived value of the services received.
My view of the world
In Figure 1 I illustrate, for each of the two categories, customer demands and environmental externalities, the five most crucial challenges according to my personal (and subjective) perception.
Customer demand challenges
I am convinced that the biggest challenges that lie ahead of the wealth management industry are not stemming from environmental externalities, but from changing customer needs, incurred pains and expected gains, and their expectations how they should be addressed. In addition, transparency will lead to an increased sensitivity of value for money.
The five key customer demand challenges, according to me, are:
- Solutions / advice versus products / sales – Customers will tend more and more towards seeking out for holistic solutions to their financial problems rather than shopping for specific products. The trend will be towards advice seeking rather than product buying. Wealth managers need to redefine their advisory business model, including its pricing model. You may find some ideas in Fee based advice: Winning formula or passing fad?
- Interaction channels – Customers will want to use the communication channel most appropriate for their specific communication needs. They expect a seamless integration, also called omni-channel strategy, of their holistic interaction. For example, customers will be looking for investment advice by video chat, expect the proposed trades to be available in their e-banking account for execution, require trade confirmation by e-mail, and want to talk to support via phone to resolve any pending issues. Wealth managers need to manage the customer relation end-to-end.
- Perceived value for money – Customers will become more price-sensitive. Although selling wealth management solutions will still be based on trust, customers will increasingly relate prices to the perceived value they receive. Customers will no longer be willing to pay premium prices for commodity services. Wealth managers need to align their pricing model with the clients’ perception of value. They need to put themselves in the shoes if the customer and find out what customers do value. Done the right way, this can lead to higher revenues. You may find some ideas in What wealth managers can learn from mobile phone operators about pricing models, which I would be more than happy to discuss with you.
- Price sensitivity – Customers will become more and more price-sensitive with respect to commodity services, like custody or Lombard loans. Internet and available data will support this sensitivity. Wealth managers need to focus their business model on those services where they can differentiate themselves from competitors otherwise than through price (unless their business model is that of a discounter).
- Transparency and comparability –Customers will increasingly scrutinize information received and validate it with competitive information available in the internet. Relationship managers will have to regain their customers’ trust over and over again. Wealth manager should see customers at arm’s length and focus on a partnership rather than a buyer-seller relationship.
The five key environmental demand challenges, according to me, are:
- Regulatory requirements – Most wealth managers look at regulatory requirements as burden. I am convinced that, with reasonable efforts, implementing regulatory requirements can be beneficial and offer competitive advantage. In an earlier insight called Turning client risk profiling into competitive advantage, I briefly illustrate such an opportunity. But this will require adjusting the wealth managers’ business model. And that means change – a thing that many managers are not very good at.
- Competitive externalities – The most important competitive externality that wealth managers will be faced with will be market access. Switzerland as a market is too small to realize full scale economies of scale. Wealth managers need to gain access to foreign markets. One way of doing so, is to ramp-up foreign subsidiaries with local licenses. But not every wealth manager is able / willing to do the necessary investments. Foreign market segmentation and focus will be key.
- Macroeconomic environment – Low interest rates and an adverse exchange rates will remain challenging for the foreseeable future. Better asset-liability management techniques will be required to immunize against possible macroeconomic changes, if and where seen opportune.
- Technological shifts – There exist two types of technology shifts, disruptive and incremental ones:
- On the disruptive side, I recognize four trends: 1) robo-advisers, 2) block chain technology and bitcoins, 3) near real-time payments, and 4) peer-to-peer lending. To me, none of these trends is a direct threat to most wealth manager’s business models as these trends still fail to address customer needs. For example, only a minority of investors will rely on robo-advice, as customers fail to entrust machines their assets. Similarly, block chain aims at making trust algorithmic, rather than heuristic, but still fails to do so (you still need to implicitly trust a majority of the ledger owners, the miners, as well as the block chain algorithm – which even scientists have a hard time doing). I recommend to follow these trends closely. I do not see value in a first-mover advantage from any of those trends.
- When assessing incremental technological shifts, there exist, to my mind two major challenges. The first challenge is replacing legacy core banking systems with open architecture modular systems. Changing the core banking system with be a tough decision, but the sooner it is taken (and implemented) the sooner wealth managers can benefit from it. The second technology challenge is, getting the customer interface to the wealth managers’ organization (people, processes, and systems) right. Omni-channel is the word of the day, although its definition is actually part of addressing the challenge. Using design thinking techniques and a customer centric stance will help design a successful customer interaction framework.
- Margin erosions – Wealth management’s business model is based on fixed costs and variable revenues. And, as any MBA and non-MBA knows, revenues = price volume. With sluggish markets, I do not expect volume to grow at the required pace. In addition, prices will be more and more under pressure (as described above). This means, cost managements will remain high on any wealth manager’s agenda. And this will increase the pressure on addressing the other challenges. Wealth managers should relate their costs to the value created and avoid linear cost cutting exercises. Value based cost optimization may help. More often than not, sustainable cost cutting initiatives will require changes in the business model
Numerous challenges to be addressed lie ahead. Some of them are more important and / or urgent to be addressed for some wealth managers than for others, depending on the specific business models implemented. To be successful wealth managers need to prioritize the challenges they face and address them as opportunities rather than threats. It is key to address these challenges at the strategic level, that is, by adapting the business model, rather than expect that they can be handled at the operational level.
If you’re interested in learning more or want to discuss potential opportunities for your business resulting from these challenges, please don’t hesitate to contact me!