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The Convergence of High Tech and High Touch in Wealth Management

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I wrote a piece for the popular fintech blog netbanker yesterday on how high tech and high touch are converging in wealth management, and what I will be watching for in that convergence zone next week at Finovate Fall 2012 in New York.

In the article, I mentioned that most of the notable traction to date has been in the payments space. One might not think that this “dumb pipe” portion of banks’ business models– moving dollars and data from Point A to Point B– would provide such fertile ground for disruptive innovation, but consider the impact and potential of players such as Finovate alums Dwolla and Simple, as well as Square, PayPal, and others.

I also noted in the article that innovative specialty lenders and crowdsourcing platforms are breaching what had long been banks’ deepest moat–  the ability to monetize their balance sheets. Most simply defined, banks’ primary function is to be a financial intermediary. Besides moving money from one place to the other, they hold excess capital when it is not needed for investment, and lend it out when it is; providing liquidity to all sorts of macro and micro markets along the way.

Oligopolists acting like oligopolists

Even though there are over 7,000 banks (plus a similar number of credit unions) in the U.S. alone, the industry has long operated as an oligopoly. For the most part, it continues to act that way despite disruptive threats from all around. After all, their primary product is the ultimate undifferentiated commodity, money. Bank A’s money isn’t better designed, sturdier or more portable than Bank B’s.

Parenthetically, oligopolists acting like oligopolists has a lot to do with the reason most consumers hold banks in just slightly higher esteem than they do the U.S. Congress. Banks integrated vertically and horizontally, they bought weaker competitors, they raised prices, they made up new fees, they cut costs and maximized profits for shareholders with scant regard to other stakeholders, like, you know, their customers.

Predictably, smart players from outside the industry have visions for better ways of doing business.

As frightening as any of these threats should be to any entrenched bankers who are paying attention, the ongoing march of innovation should be scaring them right out of their moire suspenders. Innovators are moving beyond solving the algorithmic problems of the industry and beginning to tackle more dynamic and heuristic areas, such as wealth management.

I continue to reference a recent American Banker article cited a KPMG survey that said 9 out of 10 banks were considering a major overhaul of their strategy, and that 40% said that wealth management was essential to growing revenue in the future.

Wealth management is an attractive business, and if done right, the business can also be a key differentiator, but it requires the ability to develop, manage and leverage intellectual capital beyond the commodity that is the bulk of many banks’ current business models.

Not all will be able to make the leap.

Related articles

Banker Jones and the Last Crusade: Is Wealth Management the New Holy Grail?

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In my June 6 post 9 of 10 Banks Are Mulling an Overhaul I linked to the American Banker article that cited the findings from a KPMG study that also said:

“Forty percent of the respondents said that asset and wealth management would be essential to expand revenue over the next few years.”

But another article in the same issue of  American Banker (Missed Opportunities Abound in the Bank Channel) reported from the Prudential Wealth Management Leaders Forum in New York, which I also attended:

“…banks haven’t exploited the opportunity too well. From 2009 to 2010 banks’ and insurance broker-dealers’ assets under management shrank to $600 billion, less than 5% of the $14.5 trillion wealth management market. Meanwhile, discount brokers grew to $2.5 trillion, cornering 19% of the market. Also growing in that time were registered investment advisors, which command 13% of the market, and private banks and trust firms, which command 8%.”

Buried in papers

Is Wealth Management the New Holy Grail?

Bankers seem to be acting like Indiana Jones in his Last Crusade (…well, last until he sought the Kingdom of the Crystal Skull, but that’s another post… OK, probably not.) in their pursuit of the Holy Grail and its promise of immortality.

A flat (and further flattening) yield curve, low loan demand and regulatory pressures on fee income and capital needs are causing bankers to seek new avenues for growth. (See also Is Bank Merger Mania Imminent?)

It’s easy to be attracted to the net overall growth of the affluent, high net worth and ultra high net worth segments and the impending transfer of $41 trillion in wealth from the baby boomers to younger generations.

But as the American Banker article points out, there is a huge gulf between “opportunity” and “success”. Over the past thirty years, a ‘build it and they will come’ strategy worked at some level for nearly everyone. Those days are long gone and they won’t be coming back.

No Easy Fix

Firms that want to gain market share from others will need to deliver true value to clients.

At the same Prudential Wealth Management Leaders Forum, Wallace Blankenbaker of the VIP Forum described the key drivers to loyalty– serve, tailor and teach. Clients want firms that are easy to do business with, firms that look out for their best interests and firms that can help them make better decisions.

If firms fail to deliver on those key drivers, funds will continue to flow from them to competitors that can deliver.

Wealth management isn’t the Holy Grail. It’s a specific set of services designed to solve the unique issues and meet the unique goals of a specific set of clients.

As I have said before, Don’t repaint the walls when you need to fix a cracked foundation.

“You must choose, but choose wisely. For as the true Grail will bring you life, the false Grail will take it from you.”

-The Templar Knight guarding the Holy Grail in Indiana Jones and the Last Crusade