Wealth managers need to grasp the digital challenge - or risk irrelevance
CAPGEMINI'S latest wealth report sounds a stark warning to incumbents in the wealth management industry: High net worth individuals could potentially move as much as US$12 trillion in assets to a "BigTech'' firm - that is, data-driven giants such as Amazon, Google and Alibaba which are not traditionally in wealth management.
Its survey found that globally, about 37.5 per cent of HNWIs would consider allocating between 11 and 50 per cent of their wealth to a BigTech firm. The proportion for Asia-Pacific is even more startling - nearly 61 per cent of the region's wealthy would consider moving 11 to 50 per cent of their assets to a BigTech firm. This comes on the heels of findings that client satisfaction with their wealth managers was just lukewarm, despite two years of robust returns. What's more, satisfaction with banks' hybrid models, which combine digital capabilities with human advice, actually dropped by five percentage points.
To be sure there are formidable entry barriers into wealth management. Regulation, compliance, platform infrastructure, privacy and security are just a few. Incumbents in the industry may be sceptical, but to be complacent would be a mistake. As Capgemini points out, BigTech's strengths include their sheer technological capability, efficiency, and a rich trove of insights into users of their existing services. Capital, in any case, is not an issue. The top three cash-rich companies in the US at end-2017 are Apple, Microsoft and Alphabet/ Google. Already, BigTech firms have ventured into financial services such as payments through digital wallets and e-lending. Earlier this year Amazon, Berkshire Hathaway and JP Morgan announced a partnership to penetrate the US healthcare market, causing insurance and healthcare stocks in the US to drop.
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BigTech firms' progress in China give weight to Capgemini's expectation that the first moves into wealth management will be in Asia. Alibaba, for instance, has tentacles in a myriad of financial services. Alipay is expected to extend some US$1 trillion in loans to small and medium enterprises over the next three years. Its affiliate and wealth management arm, Ant Financial, claims 622 million users and assets under management of US$345 billion, of which around US$1.5 billion reportedly sits in Yu'e Bao, the world's largest money market fund. Tencent is also to be reckoned with. Last year it invested US$360 million into a 5 per cent stake in CICC International Capital Corp, China's oldest investment bank. More recently, it secured a license to sell mutual funds to WeChat's one billion users, significantly expanding beyond serving as a platform for fund firms.
Traditional private banks often cite their belief that wealthy clients want the human touch. That is surely so, but they also want sophisticated digital capabilities which may require an infrastructure overhaul in the billions of dollars with little to show in terms of returns in the first few years. There lies the rub. The pace of technological advancement is blistering and clients' expectations are high. Capital expenditure into a future-ready digital infrastructure is key, but banks also have to a strike a balance between the need to show efficiency and a return on assets, and the unrelenting pressure to compete. There is of course the avenue of a partnership or joint venture with a BigTech firm which can provide the tech infrastructure. These are new frontiers for wealth managers. A sophisticated digital platform is fast becoming a basic requirement for younger clients. Wealth managers who fail to get their act together in this respect risk irrelevance.
