Personalization in a digital world

The ability to scale must become a given

Wealth industry trends are familiar to many of us: A growing mass affluent, digitalization, talent scarcity, impending generational wealth transfer – and meanwhile margin pressure, volatile markets, and relentless regulation. Every wealth firm needs to find its own way forward, its own purpose and sense of focus for its own specific market. But one thing that is often common is the need to be able to scale and grow easily when opportunities arise - without technical complexity and capacity constraints holding us all back. The reality is far from this.

The secret to being able to scale is apparently to invest in more tech. However, a study from BCG highlights that global Cost-Income ratios remain high across the wealth and asset management industry (~72% and ~74% respectively) and operational efficiency has in fact worsened over the last 5 years. Business units that are sub-scale are struggling to streamline. This is despite an increasing spend on system development and acquisition: the paper shows that ongoing technology costs have increased by an average of 7 percentage points; with significant increases in development and cloud spend in particular.

Read more in the BCG and FNZ global industry report: “Scalable Tech and Operations in Wealth and Asset Management”.

Meanwhile pressure on margins across the value-chain, from client facing advisory and distribution, through to execution, fund management and custody, is unrelenting. In particular, the back-end administrative processes of execution, books and records and custody are seeing fee compression. FNZ’s own data shows how wealth platform fees have decreased by approximately 10bps in recent years (Exhibit 1).

Exhibit 1: Wealth platform asset servicing fees have reduced by approximately 10bps

Is it really possible to scale quickly and deliver a personalized, differentiated service?

The ability to hold two seemingly opposite views simultaneously is an often-cited challenge of leadership. Delivering a custom service model that is highly standardized is just such a challenge. However, many firms have transformed their operational model in recent years and risen to this challenge:

• Aviva (UK) has scaled to over a million D2C, advised and workplace clients across UK and Asia, all served via one standardized platform.

• Vanguard (UK) scaled to serve over 400,000 retail investors, with a range of personalized wealth solutions, in less than 5 years – on one platform.

• abrdn (UK) serves around 400,000 mainly advised investors, with a range of targeted wealth solutions – but running on one standardized platform.

So, what makes you different?

To make our lives easier, let’s start with what doesn’t make a difference to investors. So-called hygiene factors: elements that will dissatisfy an investor if they don’t work but won’t get them excited enough to choose you over your competitor.

First, the big one: asset custody. To be sure, for many investors, especially those domiciled in developing markets or investing in higher risk vehicles, a safe-haven during times of turbulence is extremely important – as recent events have demonstrated. But generally, in the highly regulated markets, there are many secure depositary options open to investors.

The rest of the administrative processes do not fair better: execution, reconciliation, transfers, payments, accounts, corporate actions, risk management, compliance, and so on. Frequently described as utility services, here there is probably little chance to shine - except by being the cheapest discount broker on the block.

Now the trickier part, what will motivate clients to come to you? Clearly there is no easy answer, as every firm must find their own magic ingredients. But there are some observations in the market that can guide us:

Personalized Hybrid-Customer and Advisor Experiences

A top-notch, slick, customer and advisory experience is frequently seen as the winning formula. Well-honed brand elements, simple onboarding and advisory tools integrated seamlessly across the wealth platform. The idea is to deliver that wow-factor and ‘sticky’ service directly to client mobile apps - wherever they are – and enabling easy hybrid-advisory when needed.  Companies such as Generali, Vanguard and abrdn have all reinvented their investor and advisor experiences over recent years, often consolidating a wide range of direct-to-client, advised and workplace platforms into easy-to-use investment apps and portals.

Personalized Investment Strategies tailored to Investor Goals and Values

Investment solutions that match my goals, risk profile and values: Discretionarily managed ‘model’ portfolios, lifetime strategies and automated direct indexing, in a range of guises, are becoming the de rigueur of delivering personalized investment services at massive scale. For example, Quilter (UK) has scaled to serve over 25,000 advisers and 500,000 investors with a range or discretionary managed in-house and third-party model portfolio solutions. YieldX, a US platform, provides the ability to deliver customized direct-indexed yield-focused portfolios, at scale, using Automation and AI.

Personalized Content and Education

Transparent insight, guidance and education are increasingly important as a solution for financial literacy. Analytics, interactive visuals, and other educational elements support investors in making informed choices in line with their own specific goals and values. Aviva’s ESG profiler, for example, allows investors to understand the ESG profile or their portfolio – combining analytics, reports and educational content into one digital experience. Or the US-based app, Addition, which provides financial wellness for company employees with education and guidance for their financial decisions.

Personalized to Investor Lifestyles

Perhaps the next step in personalization is building your wealth solution directly into every-day activities of your investor’s lives (so called embedded wealth), whether it be saving via the shopping experience, investing with a local community, or joining an investment campaign. API gateway companies like DriveWealth and Tapico are helping to connect investor apps, such as Tuplipshare’s share activism or StepLadder’s home saving, into investor ecosystems.

Exhibit 2: Drawing the line: Where to differentiate?

There are of course many factors that can be considered above or below this imaginary “line of differentiation” that wealth managers consider (exhibit 2). Custom fee structures or very low costs can be a point of differentiation – or are these hygiene factors? To what extent are equity voting rights important to your clients? Have reports and analytics become a generic standard, or is there an opportunity to show-off your technical prowess?

How are wealth managers transforming their business and scaling up?

Many wealth managers are moving to platform-based models of operation, where many of the non-differentiating components of their operation are run by a third-party who have the scale to invest in the latest technology to support efficiency and innovation. This allows the management team of the firm to focus their attention on their client’s business. The question then becomes which technology to let go, and to what extent can a platform support your “personalization” needs.

BCG break down the key elements of the technology into six layers (Exhibit 3). At the bottom are the foundational cloud and core technology layers and at the top are the business process and client facing technologies. The implication is that personalization becomes more critical only at the very top layers, the lower levels are fundamentally commoditized.

Exhibit 3: From foundational to customer facing

However, while outsourcing technology is an important element, staff costs are often the largest component of the operational expenses. Moreover, it’s the interplay between cutting-edge automation technology and expert skillsets that is key to achieving real efficiency. The biggest impact on operational economics is coming from platforms that combine both technology, operations staff, and infrastructure together into a comprehensive service. Real cases have indicated that platforms that combine technology, operations and infrastructure can achieve savings in the range of 25-30% – and sometimes more (see the global industry report from BCG and FNZ).

Nevertheless, while cost economics are important to get on the right footing, they are often not the main strategic driver. The business outcomes are much broader:

• Ability to quickly change the business model

• Deliver faster time-to-market

• Putting the foundations in place for rapid revenue growth

• Enhancing security and data management

• Achieving regulatory compliant operations

• Refocusing the management team on client business

• Reducing the need for high-risk capex investments

Traditional business process outsourcing for wealth and asset manager operations have often focused on just one dimension – such as moving staff offshore. This has often proven very complex to manage and there have been major pitfalls. Staff-cost arbitrage in particular has come under significant criticism. In the end, the original objectives of delivering personalized, differentiated wealth services can be lost during the transformation process.   

FNZ provides a full-service, end-to-end platform - an approach which combines people, infrastructure and applications together to ensure synergies and efficiencies can actually be delivered. Moreover, staff management strategies are dealt with using a close, collaborative partnership, to ensure that the individual complexities of the wealth or asset manager are catered for throughout the transformation.

Read more in the BCG and FNZ global industry report: “Scalable Tech and Operations in Wealth and Asset Management”.