Hyper-personalisation and the implications for wealth management
When companies adopt the right new technologies for their business, many exciting opportunities are presented, and new benefits surfaced. Whether this is improving the productivity and happiness of staff who are freed from repetitive manual work, allowing managers to sleep better knowing their operations are compliant, or discovering new possibilities to get ahead of the competition and offer a better service to their clients; the list goes on and it can be a win-win for all stakeholders.
We have written about our view on the core components of the wealth stack and how we think the more modern and modular architectures of the future will look.
This post will focus on one of the key benefits that come from having a flexible architecture and data flows in the back office — the ability for firms to offer their clients hyper-personalised wealth management at a reasonable cost.
Hyper-personalisation: it’s not just happening in wealth management
Before going into detail about the use cases in wealth management, it is important to note that the concept of delivering a bespoke and personalised experience to a client is not new. Any great salesperson or account manager will know their conversion rates and relationships improve the better they know the person they are dealing with. For the person on the other side of the table, how awesome is it when a service provider seems to immediately understand what you are looking for and helps you quickly find the product or help you need!
The enterprise use cases for hyper-personalisation follow the trend in direct to consumer and advertising businesses who have already seen their models turned on head in the wake of data driven targeted advertising and product customisation (more on this here and here from Bain; here from GlobalWebIndex; here from the FT re the impact on traditional advertising; or here from McKinsey).
Even in heavily regulated industries such as medicine, there are companies which allow you to test your health traits and DNA at home giving you access to highly personalised information that was previously unheard of.
With software used in financial markets, our area of focus at Illuminate, this trend is emerging in several areas:
- In trading… targeted IOIs and axes can be automatically shown to clients based on patterns in their trading history…
- In sales… CRMs are getting smarter and smarter offering suggested prompts for engagement…
- In credit… there are a host of firms training algorithms on actual behaviour and transaction histories to create unique credit scores…
- In asset management… machine learning solutions can predict which accounts are most likely to churn, giving relationship managers insights to help retain business…
This is by no means an exhaustive list as the potential use cases are innumerable across the whole of the trade life-cycle. What is constant is the competitive advantage that early adopter firms can achieve by using these technologies to better understand and serve clients.
What are some of the use cases in wealth management?
While this all sounds like a no-brainer, traditional wealth management businesses have been slow to respond and, to date, most of the change has come via the B2C start-ups. This is changing. As both the back-office providers and new infrastructure providers open out and allow data sharing, traditional wealth managers can start responding to client demands for a better service across the life-cycle. We are still a long way from the future state of the industry, but the direction of the market leading firms is clear. These are the main areas where we see the most opportunity in the near term:
- Bespoke risk profiles: Most fintech early adopters will have gone through the 5–10 question risk tolerance onboarding from a B2C provider. Invariably you end up in one of 5 or so buckets ‘risk’. Given the emergence of behavioural science and finance, is this really all there is? Using personal trading history and sentiment analysis, the industry can more intelligently capture more subtle hints that show what a person’s true risk appetite is. Borrowing an age-old adage… it’s what you do not what you say that matters.
- Individual portfolio construction: If there are more than 5 buckets for risk, it follows that there should be more than 5 model portfolios available. The challenge is that operationally most firms are not set up to cope with this and, given the high cost of maintenance, can only offer personalised portfolios to their ultra-high-net-worth clients.
- ESG and social preferences: There is a lot of media attention on ‘ESG’ and ethical investing (report from KPMG here), but the industry is still nascent, and the solutions offered have much further to mature. This topic merits another full post in itself but, in summary, we believe the direction of travel is towards clients defining their personal preferences and having securities included or excluded from their portfolios based on this.
- Personalised reporting: Markets move daily, and major life events can significantly change your financial goals overnight. The current static quarterly reports generated by the asset administrators show you a summary of your holding positions and (if you are lucky) a clear breakdown of fees as required by the regulator. They are not reconciled in real time or user friendly and do not tell you what you really want to know in relation to your goals.
- Content delivery: Think here of the same kind of targeted advertising models powering the delivery of content on your portfolio… where you only get emails and see articles relevant to you at the time when it’s at the front of your mind.
- Holistic client view: Would you recommend that a client who works in tech is overweight tech stocks? Or that someone who already owns a house only invest in real estate? Balanced risk is no longer something that should exist in a single portfolio, it should encompass all facets of a person’s life.
Again — to reiterate — this is by no means an exhaustive list of the ways in which new technologies can be used to give firms a competitive advantage by offering their clients a hyper-personalised experience at a lower cost. As more nimble technology architectures are adopted which enable these kinds of services, we expect the list to continue to expand.
What should be stressed is the positive compounding impact these solutions can have. As a result we think that channel partnerships and distribution will be a key factor in determining which new start-ups are successful, and which aren’t.
What are the solutions that can power this future hyper-personalised state?
The billion(trillion?)-dollar question…. If we are right and this is indeed the direction the industry is heading, there is a lot of heavy lifting that needs to be done so that the underlying infrastructure can support this kind of bespoke coverage.
These are some of the building blocks we believe will be necessary to support firms on this journey. Not all these components are the responsibility of the wealth managers. Platform, network, custody and execution providers will also need to modernise their systems to offer a better service to the wealth managers and remain competitive.
We’ve met with numerous exciting companies who are pushing the boundaries across these buckets and beginning to be adopted by the industry.
If you are young company with a solution you think we should know about, or an industry participant who wants to exchange notes on the landscape view then I would be happy to meet up and discuss!
