Innovations in Wealth Management Technology Awards 2014

Harmen Overdijk has been a private banker for the best part of 14 years, working for Meespierson, Fortis and latterly EFG as head of investments in Asia. In August, he and his former colleagues decided to set up their own wealth management business in Hong Kong, calling it Caidao Wealth. It is a partnership with private equity firm Caidao Capital.

“We just recognized that more and more clients are looking for entrepreneurial solutions rather than standard private-banking solutions. Going to your banker for stock ideas and execution is the same now as it was in the 1920s. Other industries have changed and yet banks seem unwilling to open their eyes to that,” says Overdijk.

His firm offers access to asset classes that many traditional firms do not, as well as having partners in technology that allow for portfolio overviews and tailored news feeds, using an application from DragonWealth.

Clients tend to be loyal to their private banks, usually because they have more of a one-to-one relationship than lower down the wealth spectrum in retail banking, but innovation, or the lack thereof, is leading many to consider moving.

Overdijk says: “We were overwhelmed when we started our own company. We expected some clients would join us, but it has turned out that all our clients are keen to join us. We underestimated the fact that a lot of our clients are entrepreneurs and so our company is appealing to them.”

Indeed much of the move to new players like Caidao is being driven simply by changes in demographics. There are 31 billionaires under 40 in the world, according to Forbes, and wealth is ending up in younger and younger hands due to the expansion in young entrepreneurs and the handover of wealth from the baby-boomer generation.

The Future Wealth report by Scorpio Partnership, SEI and NPG Wealth Management released earlier this year showed 92% of high net-worth individuals use digital solutions to inform their wealth-management decisions. Younger generations see these digital solutions as replacements to the traditional private banker. Those under 40 regard their private banker’s experience as far less important than those respondents over 60. And the 40-and-below set also find it considerably more important to be able to customize their portfolios online than do the over-60s.

In January the World Economic Forum launched a project to look at innovation in financial services. It has highlighted two key forces at play in wealth management: automation and client empowerment, says Jesse McWaters, project manager in financial services at the WEF. Technology-supported automation has been one of the doors that has let in firms such as Nutmeg in the UK, FutureAdvisor or Betterment in the US. All three automate areas such as consolidating accounts and assets and either advising on allocation or products or managing the clients’ portfolio on a discretionary basis. By automating parts of the wealth-management process, such firms have enabled clients who are often overlooked by financial advisers to move into the wealth management market. They are growing fast.

“Automation allows for these businesses to be scaled up very easily, unlike with financial advisers who can take on only so many clients,” says McWaters.

After asset allocation to passive funds, what can be automated next? Surely much more. And also where will these firms choose to go in terms of developing deeper relationships with their end users? Will they be a threat to the private banks? Automation in these guises is putting tremendous pressure on financial advisers and the 1% plus that they charge.

“For the incumbents, it is a challenging moment as they have to decide whether to go the automation route now, which may end up cannibalizing their existing market share,” says McWaters.

Automation is also occurring on the institutional side, which is more palatable to financial institutions. FundApps in London, for example, automates the management of regulatory disclosure and disclosure for investment funds. The due diligence process is also being automated by the likes of DueDil.

“These firms can help existing companies do more with less,” says McWaters.

Empowerment is the buzzword of this change. It can induce cringing from the cynical, but it means that clients want to be in the know. They want transparency. They want to have research to make their own decisions. They want access to asset classes that their banks do not give them. They want to know what their portfolio is doing at all times and how much they are paying for the services they are getting. That these are considered novel demands seems absurd given the vast availability of information and price comparisons that the internet now provides in nearly all consumer sectors – bar finance.

McWaters says London seems to be spearheading the move to empowerment: investors can access many asset classes through new entrants such as crowdfunders or peer-to-peer lenders. Next year owners of ISAs in the UK may be able to include a component of peer-to-peer investment in both loans and equities, within their allocations.

“Also investors can now access algorithmic tools that five to six years ago would have been accessible only to professional traders,” says McWaters. The result is that high net-worth clients will start to look to their own private banks and wonder why they are not offering such tools.

Some banks are amenable to taking feedback from their clients and acting upon it. Those such as La Caixa Bank, Citi, Morgan Stanley, BNP Paribas, Société Générale, Goldman Sachs, Santander and Danske Bank all work with client feedback in their innovation processes. It’s critical that wealth managers take note of the feedback.

Santie Heydenrych, a high-net-worth individual, introduced her wealth manager, Meyado Private Wealth Management, to DragonWealth, which provides a plug in app to show clients their portfolio, what their peers are investing in, and to allow them to make and receive recommendations. Her bank ended up becoming a client of DragonWealth.

“As an investor we have loyalty to our relationship managers,” says Heydenrych. “We walk a long road with them. It’s not necessarily that we want to leave them. The issue is that wealth managers are really reactive. Proactive engagement from a wealth manager does not exist. When your portfolio takes a nosedive, then they contact you about changing it. So anything that can make that relationship more interactive, instead of retroactive is what I, as a client, am looking for. I can talk any time and want to share information and ideas with my relationship manager.”

It might be a little counterintuitive at first, but it seems that while clients are thriving on automation, what they really want is more interaction, not less. That requires a new way of thinking from bankers.

Automation of reports, plug-in technology that provides clients with research and ability to make their own decisions means their rapport with their relationship manager is freed up for other things.

The question is, such as what? Pushing ideas no longer works. Clients don’t want to be sold the bond of the day, and even if there is a product specifically relevant to them, they should have enough information and peer reviews for it to warrant little chatter. If not about products, asset allocation or reporting, what role will the relationship manager play.

“It’s a core question,” says McWaters. “What is the value of the relationship to the individual? Is it simply someone who you can trust and who can hold your hand and make sure you don’t behave irrationally?”

Overdijk says one of the biggest flaws within banks is the lack of new ideas to answer questions such as these. Even in technology, he says, it is not that the banks are lacking in expertise, but rather that they lack in creativity. “A bank like HSBC employs 17,000 IT staff – that is more than Microsoft, yet they don’t deliver apps to their clients. There is just too much bureaucracy and not enough young people with bright ideas who can move fast.”

As Jack Ma, founder of Alibaba, reportedly said of himself on his firm’s roadshow in September – he’s not competing with the incumbents, he’s competing with five guys in a garage who will come up with the new idea. And the five guys in a garage are increasing in number as technology lowers start-up costs. “Starting your own financial company is so much easier now thanks to cloud-based solutions,” says Overdijk. “You can buy top-quality software in our field and use it and pay for it as a small company. Integrated reporting is also something that is very cost-effective to provide now thanks to technology.”

Rebecca Lynn is a co-founder and general partner at Canvas Venture Fund. She sits on the board of Lending Club and led FutureAdvisor’s Series B funding. She says banks are often just too conservative: “One of the top competitive advantages right now is being able to execute. If you can listen to the customer, make decisions, provide solutions and move forward then you will win. Banks can be too slow.”

She says partnerships will be the way forward for many banks, but Overdijk says that is hard for some banks to swallow given the huge numbers of IT staff they already employ. He says that many banks hide behind security as a reason to not venture into partnerships. “That’s a misnomer. These apps and cloud-based apps have a higher security than a bank’s own.”

McWaters says in wealth management, non-banks are already getting an edge – particularly in lending. “Non-bank lenders like peer-to-peer lenders can just move much more quickly.” He says that speed alone might even be much more important than the efficiencies that come from cutting out the middleman and directly connecting buyers and sellers.