Digital Disrupters in wealth management

Ben Elvidge

There are very few consumer industries that have not been disrupted by new market entrants utilising digital business models. From travel booking to clothing purchases, from movie rentals to grocery shopping, new firms, with new business and operating models have displaced industry stalwarts.

As traditional wealth managers have been occupied with the increased burden of regulation, the need to reduce high cost to income ratios and to exit certain markets and segments, a number of disruptors have been gaining client assets and building their brand.

Increasingly we are being asked “which of these firms should we be worried about, who will launch in the UK next and what really is their underlying operating model?” To help answer these questions we undertook a benchmarking exercise of new market entrants in retail wealth management.

Alpha has undertaken detailed analysis of a number of these new market entrants to understand the common successful attributes, challenges faced by new entrants into the direct market and some potential responses for those considering entering this market.

Categorising the Disruptors

Based on shared product and service attributes we have categorised the disruptors into five groups:

  1. Online DFMs provide algorithm driven portfolio management, with low minimum investment requirements
  2. Product Specialists focus on offering only one product or one type of product, ranging from those focused on retirement planning to alternative investments
  3. Social Disruptors enable self-directed investors to utilise a community of other users to support investment decision making
  4. Stockbrokers incorporate social capabilities and advanced UIs are utilised to compete in a well-established market
  5. Aggregators link several accounts and provide a single view of a user’s financial situation

Disruptors may focus on one of these attributes or combine several of them into their proposition e.g. SigFig.

How Disruptors Differ

In reviewing the marketing and sales materials of the disruptors, a number of unifying themes became apparent. In all cases the simplicity of their websites (their primary distribution channel) meant these messages were articulated very clearly for a client base that might be investing for the first time.

There are however, 4 key themes that differentiate disruptors:

  1. Low cost / transparency
  2. Investment automation
  3. Simplicity
  4. Focus on millennials

Challenges Facing Disruptors

The disruptors face the same issues that any new market entrant does but also some of the legacy issues faced by traditional wealth managers. The majority of these new firms are yet to have existed through anything other than a rising market, something that will only be tested when we see the next major market correction.

Again, there are 4 key challenges:

  1. Brand and trust
  2. Regulatory Status
  3. Legacy products
  4. Bear market performance

Responding to Disruptors

The impact on some business models from these disruptors will be less than on others. Clearly, there is a large cohort of investors who still have face to face advice and a full service offering. However, all firms can learn from and adopt components of the digital solutions, which these firms have introduced to the industry.

  1. Client segmentation
  2. Determine if you are going to compete with these disruptors or not – a half-hearted ‘direct to client’ portal will not be competitive
  3. Create a product and service for a defined client segment, if you do choose to compete, not just an ‘online platform’ to capture all client segments
  4. Technology Architecture
  5. Embrace the technology employed by leading disruptors, an integrated marketing and distribution architecture is core
  6. Employ an integrated channel strategy is key to a transformed digital client experience
  7. Ensure these technologies integrate with face to face and telephone advice
  8. Operating models
  9. Replicate the innovative, low cost and often outsourced operating models that enable disruptors to reduce fees and increase profitability
  10. Education
  11. Articulate the value of your service to your clients, if it is full service ensure they understand the   importance of access to planning, tax advice and more innovative/customised financial products
Ben Elvidge