Ten priorities for digital transformation in the wealth management industry, especially in the wake of the Covid-19 pandemic

Nitin’s introduction:

Digital transformation in wealth management has been an important theme for a long time but the industry has been relatively slow in adopting digital technologies. The wealth management industry has been dealing with challenges in the form of changing business models, disintermediation and disruption from fintechs, increasing client expectations, revenue pressures due to zero commissions and alternate fee models. Wealth management was front and centre of the volatility in the aftermath of the Covid-19 pandemic. The disruption caused by the pandemic has further accentuated the VUCA environment, and the need and push for digitization have become more and more important.

I have both observed and participated in the digital transformation that has been happening in this industry over the past decade, initially helping drive strategy and transformation for Fidelity’s international business. Over the last three years, at Incedo, I have been working with some of the leading players across the wealth management industry value chain.

Ten priorities for digital transformation in the wealth management industry, especially in the wake of the Covid-19 pandemic:

1. Advisor enablement is key – The financial advisory industry has been rapidly pivoting from a transaction-led model to a more relationship-based model. The financial advisor is expected to provide holistic goal-based financial planning to his clients, and here the role of technology in delivering tools and capabilities becomes paramount. Digitization has been at the forefront of the evolution of the advice-centric model for the industry. Client expectations are increasing; customers expect more personalized services and specialized advice tailored to their goals and life events. Financial advisors are therefore demanding tools and insights to offer hyper-personalization, get a 360-degree view of the client and efficiently service them at scale. The advisors want a unified experience and functionalities such as account aggregation, client portal, online document storage, CRM and client servicing tools. The role of digital tools has become more important in the wake of the Covid-19 pandemic, so wealth management firms should double down on their investments here.
2. Improving scale through seamless processing and omni- channel servicing – Wealth managers want to focus more of their time on delivering value for their clients, and a lot of attention has been paid to digitizing time-consuming and error- prone activities. Digitizing activities such as account opening, account transitioning, document delivery and e-signatures has helped in reducing errors and NIGOs (not in good order), and in improving the operational scale for wealth managers. During the pandemic, adoption of these technologies received a tremendous boost, with both clients and advisors calling for straight-through processing using workflow-based digital tools. At the same time, due to the volatility and uncertainty in the markets, the need for investment information and client servicing increased dramatically. The investments made by wealth management firms to provide an omni-channel experience to their advisors and clients via multiple channels really paid off, helping the firms service their respective stakeholders effectively.
3. Digital collaboration has helped manage fears of disruption – Wealth management has traditionally been an extremely high- touch industry, with in-person servicing expectations. But during the pandemic, the tools and technologies available for digital collaboration have really helped the industry manage its fear of disruption and put its clients at ease. We expect these digital collaboration channels to further evolve via integration with tools such as financial planning and CRM. Wealth managers who fail to adopt such technologies stand to lose their clients to their more digitally savvy counterparts.
4. AI/ML usage will increase in tandem with data availability – AI/ML in wealth management is gradually shifting from drawing boards to practical usage, but use cases are still limited. Robo-advisory continues to be the most notable use of AI/ML, and firms have rolled out these tools to advisors to attract a newer generation of investors. Lately, firms have also started to use AI/ ML in other areas, such as in tracking and modelling events for lead management and to ensure that more quality leads are converted. Some wealth management firms are also using OCR and character recognition techniques to improve the speed and accuracy of unstructured data ingestion.
   The buy-side firms have for long used AI/ML for algorithmic trading using proprietary quant models, but its use in long-term financial planning is still limited. As the data ecosystem becomes more mature and the ability to consume and interpret alternate unstructured data increases, usage of AI/ML will broaden. In the future, AI/ML usage will further expand to use cases such as the ‘next best’ action, chatbots, stock analytics, ranking (already underway), price prediction and generation of the alpha. It will greatly complement the work of wealth managers in scaling and improving their client servicing and investment decision making.
5. Operations transformation – While many client-facing initiatives get attention in conversations on digital transformation, digitization has been having a massive impact on improving operations. Many wealth management firms grapple with the inefficiencies introduced by their legacy platforms and the workarounds and customizations built for supporting their business. The dilemma faced by technology leaders is whether to build focused point automation or whether to go in for a bigger transformation. The success of any operations transformation initiative requires the firms to also redesign their legacy processes to cut down inefficient and non-value adding activities. Without a parallel effort to apply digital design principles, the results of any transformation can be underwhelming
6. Central role of data – Data is the anchor and will play a central role in the execution of all of the initiatives above, whether it is providing more high-touch services, operational transformation to increase scale, or using AI/ML to drive client servicing and investment decisions. Harnessing data, especially in the digital world, to derive insights for clients, advisors and other stakeholders and offer them personalized services, will remain a key priority for wealth managers. This becomes even more important as business models evolve, regulatory pressure continues to increase, and sources and volume of data explode. Dealing with data growth, ensuring data quality and integrity, harmonizing disparate data sources and putting good data governance practices in place should be the top priorities for wealth management firms. This will ensure that their data lakes do not turn to data swamps and are able to generate actionable insights for decision-makers.
7. Cloud adoption – A majority of the wealth management firms is already on its cloud adoption journey. This was primarily driven by the desire for flexibility, scalability, resilience, and for reducing infrastructure complexity. As the firms modernize their technology stack, many new tools are getting built and deployed on the cloud directly. The pandemic did not impact the firms’ cloud strategy, but given how the industry was able to effectively deal with increased trading, volatility and application usage, it served as a good validation of the resiliency and scalability offered by cloud.
8. Cybersecurity in the remote working environment – The wealth management industry is among the most regulated industries, one subject to frequent audits and reporting. Due to the nature of the clients and investment data the firms deal with, cybersecurity has been inherently built into the DNA of most large wealth management firms. However, the Covid-19 pandemic has presented its unique set of challenges, with most of the staff moving to remote working. The industry now requires to invest in additional security initiatives and has to conduct more regular internal audits to ensure that data security is not compromised.
9. Impact of fintechs and fear of disruption from FAANGs – Fintechs have played an important role in expanding the technology choices available to advisors and wealth management firms. Tools introduced by the fintechs have also helped push the digital agenda forward, leading to refinement of the usability and interactive aspects of the tools available to advisors. The industry is also witnessing overlapping of services offered by various players in the wealth management value chain. This is a result of wealth management firms seeking to capture greater customer wallet share and to see industry consolidation.
   We see broker-dealers increasingly focusing on expanding their RIA (registered investment advisor) channels. Schwab and Vanguard have started offering automated planning and advisory solutions. Morgan Stanley and Goldman Sachs made a push for the retail pie with their takeover of E-Trade and United Capital, respectively. Similarly, Empower, a retirement record keeper, will start offering financial planning services with its acquisition of Personal Capital. I see, as a continuation of this trend, bigtech firms like Facebook, Apple, Amazon and Google making forays into wealth management in the future. Adoption of digital technologies and harnessing data as the central theme for driving such initiatives will stand the incumbents in good stead against such competition. In the end, all competition and new ideas lead to evolution of the industry and its service models. New players challenging the status quo will only help the industry move forward.
10. Remote working will be the new normal – Most of the functions of wealth management firms have been able to transition seamlessly to remote environments, and productivity in most cases has gone up from previous levels. I expect remote working to continue even after the pandemic subsides. In-person office visits might be limited to requirements such as joint ideation.

Nitin’s conclusion:

Overall, the wealth management industry has been able to adapt very well to the Covid disruption. Digital transformation was a trend already underway in the wealth management space, and the pandemic simply gave a push to the implementation efforts and adoption of such initiatives. The success of digital transformation is as much a factor of successful technology implementation as it is of orienting the organization towards a digital mindset. How wealth management firms shape their organizational culture will determine the success or failure of their transformation initiatives.