Fintech on Friday: Using technology to open up new revenue streams

Technology is creating new markets for wealth managers and allowing participation in others which were previously considered unprofitable

The potential benefits of engaging with technology in the wealth management world are no different from any other industry. 

These are:

1. Reduced cost

2. Increased control

3. Increased revenue 

While in wealth management technology is being used to good effect in the first two areas, it is in the third where we believe technology can facilitate a ‘Blue Ocean Shift’ for both existing and new players. We are in an exciting time where rather than help incumbents win a fight for share of an existing market, technology is enabling the creation of new markets altogether and participation in ones previously considered unprofitable.

Areas where we see real opportunities are:

Holistic View – Where clients have multiple banking or investment management relationships, there are always challenges in easily obtaining a single view of all their assets. One consequence is that they cannot see the true risk or performance across their entire financial estate. At the ultra high net worth (UHNW) end of the spectrum where clients often demand a quasi-institutional service, this challenge would typically be dealt with by a family office at significant ongoing cost. Historically, below this wealth level (but nevertheless a space where clients are multi-banked), the prohibitive costs of consolidation services have made it difficult to get the elusive ‘single view’.

Open banking has facilitated data consolidation for payment accounts. Extending the principles to investment assets could be game changing for the wealth management industry. Facilitating the seemingly basic but nonetheless fundamental elements of holistic wealth management, namely a single view of assets and therefore an ability to understand the true risk and performance across all holdings, ‘open investment’ would allow participants that do not have fiduciary responsibility (and ad valorem charging) for assets to ‘advise’ on a holistic basis.

Risk Profiling – Surely, the starting point for any wealth management service must be a good understanding of the client. While the majority of existing tools and processes may satisfy the regulators, they do not provide a rich enough view of the client and are often based on a level of subjectivity. Tools are required that enable wealth managers to properly understand and combine risk tolerance, risk capacity, financial composure, knowledge and experience to synthesise a far more accurate risk profile – which can then easily be kept up to date and is free from subjective bias. Whether you agree with the theory behind them or not, dynamic asset allocation strategies have been around for many years. Why is it that one of the key inputs to the strategy – the client’s risk profile – cannot be dynamically adjusted? One of the historic reasons for this was the difficulty in capturing high quality data  which is the thread key to weaving the client’s risk profile. As technology has eased capturing it and as we in financial services start to learn from other industries, we are starting to see exciting new technologies where established behavioural finance theory is combined with gamification and use of richer data sets to improve insight into the client’s true risk profile.

Better Curation – HNWs and UHNWs paying for advisory services are often dissatisfied with the frequency and quality of investment ideas they are being presented with. Liquid market ideas are often stale by the time they have been presented to the client. Good opportunities in illiquid assets, particularly ‘direct private investment’, are problematic to source and carry out due diligence on. Technology is now available to ‘transmit’ both liquid and illiquid opportunities much more efficiently. When wealth managers combine this capability with augmented intelligence, machine learning and a better understanding of their client’s risk profile they will be able to quickly source, curate and stream opportunities to suitable clients in a compliant way. Undoubtedly, significant challenges still remain in both operational and investment due diligence.

However, we are definitely operating in an environment where technology is evolving for interested parties to be able to see ‘new and interesting’ deal flow and not only create diversification opportunities but also provide businesses with the much needed capital that they require.

We could soon be living in a world where an unbiased third party using gamification to create an engaging experience could risk profile you quickly, using a far broader data set and methodology that eliminates subjective bias. That third party – with your permission – could then ingest near-real time data across your entire financial estate and provide you with an independent view of how well your managers are doing and propose adjustments to optimise across your consolidated portfolios in line with a more accurate understanding of your financial personality. Wouldn’t that upset some of the incumbents?

Sharmil Patwa is managing director at Opus Una Financial Services Consulting and was a judge for PWM’s Wealth Tech Awards 2019