Fintech solutions step up to support wealth management sector

Wealth Adviser’s annual awards started some six years ago and looking back at our comments at the time, it is quite clear that little has changed in terms of the challenges facing the wealth industry.

Consolidation and realignment were the themes back in 2013 and that was driven by the struggle for many firms to realise a profit when margins were being consistently eaten away.

The same overall scenario remains largely true today but the white knights thundering over the hill to rescue the industry and those dwindling margins are it turns out very much digital, offering efficiencies through weapons and routes such as artificial intelligence and front to back integrated administrative systems that were only dreamed of six years ago.

EY’s 2018 wealth report found that the global volume of net investable assets of high net worth individuals will increase by around 25 per cent to almost USD70 trillion by 2021. And the digital revolution in wealth was supported by this study, with EY reporting that holistic wealth management will emerge as a new kind of digitalised business model. Holistic wealth managers are expected to gain a market share of 30 per cent by 2025, the firm says.

EY predicts, a little gloomily, that wealth managers with traditional business models will largely disappear from the market as a result.

Turning to the US, EY predicts that traditional wealth managers located in or operating out of the United States are likely to survive in the international offshore business thanks to increasingly favourable conditions. The service offering of wealth managers with an offshore business model, will, the firm says, increasingly mirror that of onshore wealth managers.

The digital revolution in wealth management is also being driven by the emergence of disruptive technologies, often hiding behind the fintech label. The IT department at the average wealth management firm has truly gained in power over those six years of our awards. Interviewed for this report, Ruth Handcock, the new CEO of Octopus Investments, comments that technological developments can be daunting for financial advisers, who often don’t have anyone in their firm for whom technology is their speciality.

Dolfin, also interviewed for this report, agrees that technology is key and is now offering its own technology underpinnings to other wealth advisers on a platform basis.

And what of the wealthy themselves? According to the 2019 Knight Frank wealth report, the wealthy clients of our wealth managers are increasingly fearful of recession. The report says that some people buy into the theory that a major economic downturn will occur every 10 years, which means that we are due one soon, having survived the Global Financial Crisis (GFC) in 2008 to 2009.

However, we might well be going into a new recessive situation in better shape than before as the gruelling nature of the GFC corrected many over inflated and swollen values.

The Knight Frank report also commented on the rise of groundswell movements such as the Gilets Jaunes and that high net worth investors might be scared away from what it calls leaderless populism and prefer to invest in locations that it refers to as ‘s’ for stability, such as Singapore, Scandinavia and Switzerland.

Brexit has continued to dominate uncertainty in the UK and the Knight Frank report also spots what it calls the new Vikings, the rise of a northern European coalition of nations, also known as the new Hanseatic League. This, they say, has emerged based on the logic that their combined voices will have more strength when negotiating with the largest EU states. 

2018 saw eight nations sign a document laying out their shared values and views, including a call for the EU to regain public trust. Knight Frank comments that a more prominent role on the diplomatic stage could draw investor attention to the economic strengths of the small but wealthy nations gathered along the North Sea and Baltic coastlines.

And of course, there is another rise, this time in millennial wealth with these so-called digital natives who request solutions to their wealth management through digital routes. This group wants an app and a phone friendly website that allows them to manage their money and make investment decisions on the go.

There is largely a clear divide between those who want digital solutions for their wealth and those who are still looking for a very personal service, but one trend that encompasses all high net worth investor groups is the demand for ESG, SRI and even Impact investing.

Millennials may have been at the front of the charge, particularly for green issues, but other age groups are strongly represented. 

ESG investing is growing significantly globally and according to the ‘ESG Data: Mainstream Consumption, Bigger Spending’ report, the responsible investment market reached USD30 trillion in AUM in 2018.

And one of the key drivers is that we now live in a time when investing with principles in one hand and a desire to achieve returns in the other, no longer causes a problem.

Ethical investing these days isn’t as much about avoiding investments in certain sectors, such as tobacco, alcohol and gambling, which, in the past has left investors with overly concentrated portfolios, but also about investing for greater impact.

Ethical investors benefit greatly from the G in ESG, governance, with companies that have good governance outperforming those who don’t.

French fund manager Amundi, Europe’s largest investment manager, recently published a study that revealed 2014 as a turning point for the positive impact of responsible investing on stock prices.

The firm reports that between 2010 and 2013, investing along environmental, social and governance (ESG) lines tended to penalise both passive and active investments, but it then became a source of outperformance between 2014 and 2017 in Europe and North America. 

The research found that ESG does not impact all stocks, but tends to impact best-in-class and worst-in-class assets. Buying the best-in-class (or 20 per cent best-ranked) stocks and selling the worst-in-class (or 20 per cent worst-ranked) stocks would have generated an annualised return of 6.6 per cent in Europe between 2014 and 2017, compared to -1.2 per cent in the earlier period. 

For North America, the figures would be 3.3 per cent and -2.7 per cent, respectively. Amundi said that the environmental factor in North America and the governance factor in the Eurozone performed the strongest, and from 2015 the social component improved significantly and has now been positively priced by the stock market. n

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Beverly Chandler
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