Beyond Automated Advice - PwC
Beyondautomated adviceHow FinTech is shapingasset & wealth managementGlobal FinTech Survey 201660%The majority of assetand wealth managersfear losing part of theirbusiness to FinTechcompanies34%Yet many still do notengage whatsoever withthese new entrantspwc.com/fintechreport
2 PwC Beyond automated advice: How FinTech is shaping asset & wealth managementTitleContentsKey messagesHistory can repeat itself3Too lax about the FinTech disruption4Not yet ready to address changing needs5Focusing on data analytics and automation6The FinTech mind-set is still in its infancy8Conclusion 9AppendixParticipant profiles10DeNovo 10Summary of the FinTech-related trends11Contacts 12The main FinTech-relatedconcern of asset and wealthmanagers (61%) is pressure onmarginsBut many incumbents (17%)underestimate the disruptivepotential of new entrants,believing they pose no riskAsset and wealth managerswho do engage with FinTech(69%) expect to see their costsreduced from doing soAsset and wealth managerslag behind other financialindustries in their onlineoffering – only 31% have amobile applicationOver a third of asset andwealth managers (34%)do not engage with FinTechcompanies at all
3 PwC Beyond automated advice: How FinTech is shaping asset & wealth managementHistory can repeat itselfAsset and wealth managers should watch FinTechcompanies closely and adopt a responsive digital strategy.Otherwise, they face losing part of their business to newentrants.After leading the way with technology in the 1980s, asset andwealth managers (AWMs) have become dismissive of technologyinnovations and disruptions to their industry. During the emergenceof online brokerages, wire houses gave the upstarts pejorativetitles, such as “discount brokers”, holding the belief that these newbusiness models would fail to take off, and the risk they posed tobusinesses was low.In reality, these new competitors commoditised trade execution,significantly dropping the price that companies can charge pertrade. Eventually, they introduced new pricing models by splittingadvice from transactions – full service brokers started to charge on afee per assset under management (AuM) basis versus fees per trade.History could repeat itself again with the ongoing disruptioncaused by FinTech companies. Much like online brokerages, “roboadvisors” have been disparaged as less valuable than humanprofessional wealth advisors, and so far have been focusing mainlyon low balance accounts. But the innovations under the umbrellaof “robo-advisors” are becoming more sophisticated and, thus,enable advisors to service higher net worth accounts. In fact,Figure 1: Highlights from the PwC Global FinTech Survey 201660%The majority of asset and wealth managers fears thatpart of their business is at risk to FinTech companies.45%.but less than a half puts FinTech at the heart of its strategy31%Less than one in three industry players offer a mobile application.34%.and a staggering 34% do not deal with FinTechs at allSource: PwC Global FinTech Survey 2016“robo-advisors” create an opportunity for asset managers to target the mass affluent who are looking forcheaper alternatives to receive advice on how to manage their assets.Participants in PwC’s global FinTech survey view asset and wealth management (AWM) as the thirdmost likely field to be disrupted (35%), while 60% of asset and wealth managers think that at least partof their business is at risk to FinTech – lower than most other financial sectors.By being too complacent, investing mainly in self-serving automation and ignoring the imminenttechnological revolution, asset and wealth managers might lose touch with their core clients.Additionally, they might miss the opportunity, already tapped by FinTechs, to win the mass affluentmarket. Keeping abreast with how FinTech is reshaping the industry seems like the most reasonable wayforward.
4 PwC Beyond automated advice: How FinTech is shaping asset & wealth management“The organisation is not quite sure what to make ofFinTech yet”CEO/Board at a global asset manager1Too lax about the FinTech disruptionEven though many believe that asset and wealth managers will bedisrupted by FinTech, industry players hold the belief that they areimmune to the disturbance potential of new entrants.Banking and payments industries offer palpable examples of FinTechs changingthe financial sector by offering new solution that are visibly disturbingtraditional players. AWMs are next in line to experience the game-changingimpact that start-ups have on the financial industry.This should be an eye-opener, but AWMs underestimate the threat. Thehighest proportion of AWM respondents (17%), compared to other industryrespondents, believe FinTechs pose no risk whatsoever to their industry (figure2).When asked about any type of threat, AWMs were the least concerned. Thesurveyed industry players believe FinTech will have only a limited impact ontheir businesses with 61% of respondents expecting an increased pressure onmargins, followed by concerns around data privacy (51%) and loss of marketshare (50%).Figure 2: What percentage of your business is at risk of being lost to standalone FinTechcompanies within 5 years?50%40%30%20%10%0%1% - 20%21% - 40%Asset & wealth managers41% - 60%BanksSource: PwC Global FinTech Survey 201661% - 80%81% - 100%Fund transfer & payments institutionsDo not knowInsurance companiesNo risk
5 PwC Beyond automated advice: How FinTech is shaping asset & wealth management2Not yet ready to address changing needsThe growing popularisation of mobile accessto diverse services is reshaping marketexpectations regarding asset and wealthmanagement. FinTech is impacting clientrelationships, and the industry must adapt tothis new ecosystem.AWM customers increasingly use applications andthey are pushing to go mobile. Instead of followingthe wave of digitalisation, asset and wealth managersoverestimate existing digital offerings; frequently theyoffer little more than a website, believing this shouldsuffice to address their customers’ expectations.AWMs lag behind other financial sectors in thedevelopment of mobile applications: only 31% of AWMsalready have one, and just 14% are currently developingone (figure 3). Notwithstanding, while currently themajority of respondents (58%) contend that not morethan 20% of their clients use their mobile applications,78% believe that over the next five years, more than40% will be using one at least once a month to accessAWM services.Figure 3: Do you already offer or plan to develop a mobile app?100%80%9%60%40%36%22%81%14%Already have oneCurrently developing41%39%Fund transfer &payments institutionsInsurancecompanies20%0%BanksSource: PwC Global FinTech Survey 201631%Asset & Wealthmanagers
6 PwC Beyond automated advice: How FinTech is shaping asset & wealth management“We want to be customer-centric, but we don't knowhow and where to start”Head of IT/Digital/Tech at an asian asset management company3Focusing on data analytics and automationA vast majority (90%) of the asset and wealthmanagers we surveyed found data analytics to be a“very important” or “important” trend. Being able tocapture, transform and analyse data is now integralto asset managers’ ability to compete (figure 5). Dataanalytics also helps manage risks and compliance,and improve trading efficiency.Increased sophistication of data analyticsMachine learning technology is transformingrisk management by enabling computers toidentify patterns in market behaviour and analysetransactions almost in real time. This, in turn, isreducing the asymmetry of information betweensmall and large financial institutions and investors.Alternative data pools are also increasing AWMs’usage of accurate predictive analysis supportedby innovative data and opinion mining, imageryanalytics, machine learning and artificial intelligencetechniques.Figure 4: Trends in the asset and wealth management industry ranked by importance and likelihood to respond to themMore1 Increased sophistication of data analytics to better identify and quantify risk2Automation of asset allocation and how weatlh is managed3 Shift from technology-enabled human relationships to digital experiences with humansupport413Level of ImportanceWhile sceptical, asset and wealth managersare investing in new technologies. Theirinterest is focused on data analytics andautomation of asset allocation.6710 911Application of leading technology to enable investments in new markets5 Omnichannel interaction and distributon models help standardise customer experienceacross all points of contact26 Increasing number of service offerings that enable innovation to get to market and scalefaster5 47 Rise of alternative distribution and marketing channels for awareness and lead generation8 Design and distribution of new products and services for traditionally unprofitable customers8912Innovation in brokerage services enabling better invetsment decision support10 Rise of end user-created custom invetsment solutions11 Increased use of community intelligence networks to enable better invetsment decisions12 BlockchainLessLessMoreSource: PwC Global FinTech Survey 2016, asset & wealth managementsurvey participantsThe trends in the upper right quadrant of the chart reflect those thatAWMs are prioritising in their sector. A bubble chart benchmarksthe trends according to three indicators. The vertical axis of thegraph displays the level of importance. On the horizontal axis, thelikelihood to respond to these trends (e.g. allocate resources, invest)is given, and the size of the bubbles is proportional to the number ofrelated FinTech companies associated with the trend.
7 PwC Beyond automated advice: How FinTech is shaping asset & wealth managementAutomation of asset allocation: “robo-advisors”New accelerated online platforms and applicationsimprove the retail customer experience by providingbespoke but affordable services to help investors settheir investment goals, choose the right product orservice and manage their investment portfolios.A secondary by-product of automated customeranalysis is a lower cost of customer onboarding,conversion and funding. This creates a challenge forAWMs who have struggled for years to figure outhow to create profitable relationships with clients inpossession of fewer total assets. Some AWMs, as wellas retail banks and insurers, have already reactedby acquiring such platforms or by building up theirautomated advisory solutions.Digital experience with human supportThe innovations under the umbrella of “roboadvisors” are becoming more sophisticated, and manystart-ups are pivoting to enable a digital experience.Advisors create the stickiness, but the digitalexperience and the technology become the enablerto provide an omni-channel experience with theright amount of professional support. This can havea large impact on the economics of the industry astechnology can reduce the friction causing highattrition rates and putting the market share ofincumbents at risk.Those who are ready to embrace the FinTechdisruption could go a step further and become firstmovers in incorporating broader and multi-sourcedata sets and forming a more holistic view of thecustomers. In particular, AWMs could becomedata custodians as they are already deemed highlytrustworthy data collectors. By leveraging theentrusted data, they could offer comprehensivesolutions that address client needs based on life goalsand expectations1.While defending and improving the core elementsof their operations through automation andsophisticated analysis, AWMs have also noted theemergence of alternative business models andtechnologies. These have, for the time being, a lowerpropensity to elicit a response, although this mightsoon change.Alternative business modelsInnovative business models, such as marketplacesand investor networks, are changing the wayinvestments are made, e.g. crowdsourcing platformsare encouraging users to benefit from the collectivewisdom of the communities they nurture. Usersexchange insights, information, and even investmentalgorithms to leverage collective investingintelligence.Likewise, communities of investors are emerging asnew social networks. They provide user-generatedfinancial content and tend to improve interactionsand facilitate investment decisions. These innovativebusiness models aim to create value throughconnections among a variety of a platform’s users:investors, financial advisors and asset managers.PwC, Sink or Swim: Why wealth management can’t afford to miss the digitalwave, 2016.1Blockchain, a disruptive potential in AWMWhen viewed as a Distributed Ledger Technology(DLT), the blockchain could have a profound effecton post-trade settlement through streamlining,mutualising and cutting costs of the process. By usingthe DLT, the need for reconciliation of proprietarydatabases is eliminated. Also, embedding businesslogic in the code of a smart contract could impactthe AWM value chain in terms of augmenting,streamlining or possibly completely reinventingcurrent processes.Other projects aim at reinventing how money ismanaged and allocated. For example, the use of the socalled Distributed Autonomous Organisations (DAO)is being explored. This, if properly implemented,could lead to decentralised and autonomousinvestment vehicles that operate through theblockchain technology and smart contracts.
8 PwC Beyond automated advice: How FinTech is shaping asset & wealth management“Given the volume of FinTech companies, thebig challenge is sorting through them to find anappropriate fit”Head of Innovation at a global asset manager4The FinTech mind-set is still in its infancyIncumbent asset and wealth managers and emergingFinTech players need to work together to “win” in thisnew paradigm. In order to do this, traditional playershave to be more open towards engaging with the newentrants.Figure 5: What challenges did/do you face in dealing with FinTech companies and vice versa?FinTechsIT securityFinTech-oriented AWMs agree that technologically advancedsolutions bring substantial opportunities. Cost reduction is thenumber one gain expected from FinTech (69% of respondents).Differentiation (60%) and additional revenues (43%) are alsohigh on incumbents’ lists. Forward thinking AWMs will be ableto find the right mix of technology and personal touch for agiven customer segment and take the advantage of creatingthe kind of client experience that customers receive from theirother, financial and non-financial, service providers.However, over a third of AWMs (34% versus 25% for the globalfinancial sector) does not deal with FinTech companies at all.Those who do only rarely engage in joint partnerships withnew entrants (20% versus 32%), and they are not particularlykeen to acquire FinTechs (10% versus 9%).From FinTechs’ perspective, there is a need to overcomecultural and organisational differences should both partieschoose to work together in the future. For asset and wealthmanagers, the most solemn concern is IT security (figure 5).Incumbent assets & wealth managersRegulatory uncertaintyDifferences in business modelsDifferences in management &cultureDifferences in operationalprocessesDifferences in knowledge/skillsRequired financial invetsmentsIT compatibilityOther70%60%50%40%30%20%10%0%0%Top 3 challengesSource: PwC Global FinTech Survey 201610%20%30%40%50%60%70%
9 PwC Beyond automated advice: How FinTech is shaping asset & wealth managementConclusionAWMs who want to win in the redesigned market must find theright mix of technological improvements coupled with an adequatepricing structure.Conversely, turning a blind eye to shifting market expectations and ignoring thequick and imminent rise of innovative products, services and business models canbe dangerous. Those who cling to business as usual, focusing on manual operations,pure investment management and siloed client data, should expect their marketshare to diminish at an increasing pace.But with threats properly addressed, AWMs who adopt a technology-focused strategyand incorporate FinTech solutions will visibly strengthen their market position. A vastmajority of AWMs view the impact of FinTech predominantly as the need to adapt tochanging customer needs, and half of the survey participants–more than in any otherfinancial sector–think new entrants can enhance interactions and help build trustedrelationships.Collaboration with FinTechs is crucial and will be the only way for the traditionalfirms to deliver technological solutions at the speed expected by the market. Newentrants create tangible opportunities for incumbents to improve their traditionalofferings. Going forward, traditional players need to prioritise these types ofinvestments.
10 PwC Beyond automated advice: How FinTech is shaping asset & wealth managementAppendixParticipant profilesThe 2016 PwC Global FinTech Survey gathered the views of 544 respondents from 46 countries, principally Chief Executive Officers (CEOs), Heads of Innovation,Chief Information Officers (CIOs) and top management involved in digital and technological transformation, distributed among five regions.The asset and wealth management-focused cut is based on the responses of 112 respondents from the asset and wealth management sector around the globe.Breakdown of asset and wealth management survey participantsby type of respondent1%CDO/Business Development1%by geographical location1%3%Head of ProductsCRO/Risk Manager8%Head of IT/Digital/TechCOO22%Head of Strategy7%Latin America15%6%by company headcountOther51%EuropeFewer than 1017%Between 10 and 50North America6%20%51%More than 250Africa12%CFO4%Head ofInnovation23%20%10%Director/Head of DepartmentCEO/BoardAsia22%Between 51 and 250
11 PwC Beyond automated advice: How FinTech is shaping asset & wealth managementSummary of the FinTech-related trendsWhat is DeNovo?DeNovo represents the next generation of strategy consulting – a newplatform powered by Strategy&, PwC’s strategy consulting team thatis focused on FinTech. The rapid emergence of disruptive technologiesand new business models requires a modern way of delivering strategicadvice when and where you need it. Whether you are in the boardroom or on a phone call with your CEO, DeNovo provides you withanswers in real-time. Relevant content and insights are delivered toyou via web, mobile and direct interaction with our team of om/denovoDeNovo’s Team is tracking emerging trends in FinTech to explain which start-ups, technologies, trends, and new market entrants are relevant to the asset andwealth management industry and more importantly, why. The trends highlighted below are a snapshot of the most relevant ones for the sector. For an updated view,please subscribe to the DeNovo platform.1.Technology to enable investments in newmarketsLeverage new technologies to gain competitive edge and accelerate growth in new and emerging markets.2.Automation of asset allocation and wealthmanagementAutomated advice solutions (e.g. “robo-advisors”) are changing the asset management landscape in many ways, including asset allocation.3.Products and services for traditionallyunprofitable customersAlternative distribution models and sophisticated risk quantifying techniques are helping insure previously unexplored/uninsured customer segments.4.Better identification and quantification of riskNew models and use of broader data sets are being used to more accurately analyse risk.5.Community intelligence networks leading tobetter investment decisionsThe use of technology and data from social networks in order to improve investment decisions.6.Innovation to get to market and scale fasterIncreased product offerings and/or synergies among existing products increases market differentiation and challenges traditional techniques, most notably in the investment banking industry.7.Innovation in brokerage services enablingbetter investment provide advanced decisionsupp
and investor networks, are changing the way investments are made, e.g. crowdsourcing platforms are encouraging users to benefit from the collective wisdom of the communities they nurture. Users exchange insights, information, and even investment
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