Asset and wealth management companies generate revenue from the capital markets – their performance therefore is a good indicator of the state of the economy. With the economic stress induced by the COVID-19 outbreak and subsequent lockdowns the world over, asset and wealth managers faced significant disruptions in March-April 2020. Although the markets seem to have recovered now, but some of the underlying challenges of economic uncertainty and pandemic induced social distancing norms are driving more and more advisors to explore the adoption of digital technologies.
Demand Drivers for Digitalization
Financial advisors, whether working for financial institutions or as independent registered investment advisors, have to handle a significant amount of paperwork starting from customer KYC documents to reporting investments and portfolio performance. However, with the COVID-19 outbreak restricting people to their homes, the shift to digital has become more pronounced than before. Digital channel onboarding and mobile e-statements have reduced the challenges associated with compliance, as have self-service apps and video platforms improved customer experience. But, perhaps the most important digital-led change the asset and wealth management business has witnessed is the growing adoption of platforms with integrated analytics and AI tools for faster and more accurate portfolio development.
One of the key drivers for this change is the increasing demand for better portfolio performance. The pandemic has hurt people’s income and interest rates are also at near zero levels. As a result, customers are exploring less-volatile portfolios with better returns. Recognizing this shift in preferences, the US Department of Labor came up with a proposal in June 2020 that would make it difficult for investment firms and pension administrators to sacrifice returns for investing in Environmental, Social and Governance (ESG) oriented investments. This is expected to accelerate the shift toward new investment portfolios, including alternative assets.
In the post-pandemic marketplace, less than optimal performance of fund managers will lead to customers’ dissatisfaction. Continuous fund outflow from active mutual funds to passive ETFs is an indicator of the current risk averse mindset. For wealth managers, this indicates opportunities to gain customers’ trust by aligning with their financial goals and risk appetites.
Changing Industry Dynamics – Technology to Redesign Services
There is an increasing need for technology platforms that can help customize portfolios, irrespective of size, faster and better. A recent survey indicates that only 21% of advisors say their platform is ‘completely integrated’ with features such as single sign-on and data syncing, and just about 9% actively use AI tools. This is a clear indicator of the need for introducing advanced technology platforms in this space. Currently, there are some 47 wealth management platforms and many of them are expanding capabilities– including key platforms like Envestnet MoneyGuidePro and Fidelity eMoney. Traditional asset management and investment research companies are investing big into this market, thereby increasing competition. Invesco acquired RedBlack in December 2019, Morningstar acquired PlanPlus Global in March 2020 and Franklin Templeton acquired AdvisorEngine in May 2020. In digital wealth advisory, firms have the opportunity to win deals not only from independent advisors, but also large financial institutions – a case in point is Invesco’s partnership with Citi.
Integrated AI and automation enable faster portfolio development aligned with customers’ expectations. In addition, model portfolios significantly automate the effort of portfolio building, while enabling advisors to choose their stocks. It is a growing market with more than 400 model portfolios. Asset management companies can leverage their investment capabilities to provide a wide variety of model portfolios to advisors.
Real-time risk modeling for quick alignment with model portfolios is also in demand. Invesco’s Intelliflo allows advisors to map customers based on their risk attitude and investment goals. Its partnership with Sparrows Capital brings evidence based investing - integrating past and current data to quickly assess risk in model portfolios.
Asset and wealth management firms can therefore leverage technologies to classify customers into micro-segments, align their investments with relevant model portfolios, assess portfolio risks in real-time and make changes in line with customer goals.
Technology partnerships can catalyze the transformation for asset and wealth management companies, enabling them to improve the functionalities of their digital wealth platforms. The increased use of AI and analytics for both customer and market data assessment and automation tools to streamline advisor activities will be key in delivering a differentiated customer experience. With redesigned digital wealth management platforms and integrated AI and analytics tools, asset and wealth management firms can build stronger advisor relationships, personalize offerings, and fulfill the purpose of becoming the trusted advisor in their customers’ financial journey.