The stakes couldn’t be higher as wealth managers retool their offerings and operations. William Rouse, Director UK & Europe, Contemi Solutions, highlights the most dangerous technology traps firms might fall prey to as they formulate their digital strategies.

We are living through exceptional times. It is amazing how something so small, invisible to the human eye, has turned our world upside down, most probably never to be the same again. And many of the forced changes we have had to make have created a focus on the role of technology. Never before has the gap between being able to access the right technology or not been so explicit. This is evident from children’s online learning and track and trace systems, through to companies’ business as usual processing and business contingency plans. And the digital genie that has allowed us to continue with our lives – albeit in altered form - has grown too big to get back in the lamp, even if we wanted it to.

At Contemi, we were able to help our customers immediately with our existing digital solutions for client communication, but we have also taken some time to analyze the impact of the pandemic on them and the industry as a whole in order to ensure our product strategy is in line with the challenges of the next 12 to 18 months. Here are some of the technology traps we see wealth managers potentially falling into in the near term. 

Trap #1: Doing nothing  
In a world that is in a state of constant flux, it would be easy to decide to do nothing, to sit tight until the future is better known. Some might see this as a sensibly risk-averse approach, but to do this is to deny that the world has changed and will not be returning to the pre-2020 norms.

The initial challenge of doing nothing is to continue providing “business as usual” services and processing. Many financial institutions have had to maintain large teams of employees within offices, since access to essential applications have been based on physical location: the office. This Achilles heel was also built into business continuity plans; access to these applications would be provided via a secondary physical location if the primary premises were unavailable. This emphasis on access dependent on physical location must change in favor of more flexible remote access if businesses are to future-proof their operations.

Additionally, the new social reality - staying at home and distancing - has created a paradigm shift in how we navigate the world, and relationships, in every area of life. Buying anything has largely been driven online and the trend toward digital in personal and commercial banking has seen a significant acceleration. These online habits created over the last 12 months are unlikely to be forgotten or reversed any time soon, if ever.

Hindsight is a wonderful thing, but now that the historical view is clear it is important to at least do something to rectify the shortcomings of the past. Reducing our reliance on the physical world, especially for system access, must be a priority in the short term. But the companies which have gained the most (or lost the least) during this period have been those which had already embraced the digital world or adapted to it quickly. This trend is likely to continue and wealth management will not be immune. So, to do nothing will mean at best “slowly” falling behind the competition that embraces the new digital norm, or at worst, falling behind and into irrelevance very rapidly indeed.

Trap #2: Doing something, but not the right thing 
So, it has been decided to spend some money on technology - but how will it be spent? To do something is easy; doing the right thing requires far deeper thought.

It would be easy to look at yesterday’s problem as today’s priority. But solving yesterday’s problem is largely about rectifying operational deficiencies, with a possible side-effect of reducing some costs. Getting rid of your physical platform access limitations needs to be addressed. It might future-proof business continuity planning and possibly improve margins, but it will not grow your business.

And it will come at a price. Applications with legacy access technology are likely to be core systems. These are expensive to replace, hence why they are still in place? So, if you are going to invest significant money, you are going to want it to support your business strategy. Or, since the future is digital, will you want to take the opportunity to build a true digital strategy, redesigning the whole of your business around the new abilities and benefits that only digital can bring?

Once you have decided your strategic approach comes the crucial question, will you build or buy? The pros and cons of each option have been well debated over the years. Recently, the trend has been toward buy, in recognition that software houses are probably better at developing software solutions than wealth managers, and that the cost of development can be shared across many companies. 

To a certain extent the sector’s digitization drive has reopened the debate. If digital is a strategic issue, “good” will look very different for different firms. Therefore, the technology needs to be bespoke, reducing the advantages of a buy strategy - or does it?

We would argue that wealth managers do not have to become quasi-technology firms to get precisely the set-up they need. Today, any “solution” worthy of the name should be highly configurable. Choose the right application and you will be able to implement a highly bespoke, yet fully supported, digital strategy using generic, commercially available tools.

Trap #3: Focusing solely on cost
The margin pressures wealth managers have been experiencing for years are unlikely to ease, especially with disruptors continuing to pile in. It would be tempting to focus on costs as a means to maintain profitability, since doing the same, just delivering it more cheaply through better technology, appears a low-risk strategy. In reality, however, this is a short-term fix. It assumes that revenues only increase or decrease in line with market movements (and therefore assets under management), so that lower-cost/higher-margin makes for a healthier business.

This rather short-sighted approach ignores the fact that the competitive landscape is changing, and that future revenues will be influenced more by the number of new clients and the broad value of the assets that you attract. Attracting new assets, especially of the younger variety, will invariably necessitate an online offering for front-office activities, if not a full digital strategy.

Trap #4: Failing to recognize that the client is changing too  
Traditional industry thinking has been that wealth takes time to be accumulated and therefore is largely concentrated in the hands of those who have had a long time to accumulate it, meaning the older generations. It was assumed that these older generations are more interested in a physical relationship than digital delivery.

That might have been true in the past but many of the generations who worked in the pre-computer world have embraced technology in their retirement. These have been joined by newer, more tech-savvy “younger older" generations, or those who have inherited the wealth from the Baby Boomers. The whole process has been further accelerated by the pandemic, its restrictions on physical relationships and the increased incidence of inheritance. This trend is only going to continue.

The turnover in the concentrated Baby Boomer wealth will bring with it some additional challenges. It is a reasonably common theory that you are most likely to lose a client through death than poor performance and the wealth is likely to be inherited by more than one individual, incrementally increasing the efforts needed to retain the AUM, whilst reducing the value of individual mandates with implications on the cost of servicing.

Where the obvious answer to the demands of a younger, more tech-savvy client base is better online front-office or digital products, reduced mandate values will likely require these to be delivered at a lower cost. Helping firms square this circle – of implementing better technology, more quickly, and yet at minimal cost – is where we want to step in. 

Urgent imperatives
Without doubt, the world has changed, but these changes have only highlighted existing deficiencies in technology, not created new ones. The panoply of reasons why wealth managers simply must digitize have not fundamentally changed; the imperative has just become much more urgent. Wealth managers have already brought forward their investments and we expect to see even more doing so in the next year – as they surely must. The new digital world is full of opportunity for those who embrace it, and probably full of misery for those who do not.

Visit www.contemi.com to learn more, or email info@contemi.com

This is a chapter from the 2021 edition of Technology Traps Wealth Managers Must Avoid. Click here to download your free copy.