The financial services industry has consistently digitised itself over the past two decades – it is over 15 years since newcomer online-only banks Egg, Cahoot and Smile were in fierce competition to capture market share. Online banking is now the norm, as is online sourcing of general insurance and loan deals. However, some sectors such as wealth management have moved at a slower pace when it comes to getting on-board with FinTech services.
A number of factors are at play here. Firstly, wealth management services have traditionally been based on personal relationships where knowledge of the client's individual circumstances is key. Secondly, the regulatory environment places an onus on the adviser identifying their customers' particular investment needs, financial position and level of understanding; not an easy process to replicate online. Thirdly, the commercial proposition is different to other sectors and the fees have tended to make sense in the context of larger portfolios – taking us back to the inclination towards personal relationships.
There are signs that this could change rapidly over the next decade with online 'robo-adviser' platforms such as Nutmeg already gaining ground. The opportunity for growth stems from a variety of macro and technological factors. In favour at the macro level is that emerging wealth, or 'millennials' as they are known, have grown up in a digital age and instinctively look for mobile solutions to the services they need. Society is increasingly aware of rising life expectancy while savings interest rates remain low. This has the potential to trigger demand for investment solutions from those who might not historically have regarded themselves as wealthy enough to justify a personal adviser.
Technology is also playing its role; the ability of fund managers to capture and process data across a growing range of investment classes and sectors has seen the rise of cheaper, passive funds, such as ETFs, that track particular market performance. The emergence of lower cost products offers timely support for the delivery of more commoditised online advisory services where competitive pricing is a major factor. The more 'intelligent' these trackers get, the harder it will be for more expensive, actively managed funds to distinguish themselves in terms of performance.
Time will tell whether these FinTech services will give rise to their share of regulatory mishap and for now the UK's regulators remain broadly supportive of innovation, particularly where it aims to reduce exclusion from financial services. However, while practical initiatives such as the FCA's Innovation Hub aimed at helping start-ups are positive, the FCA tends to apply a media neutral approach to their rules and online firms need to comply with the same rules as physical services. While this is perhaps inevitable, there is growing political will to ensure that the regulatory regime is proportionate. HM Treasury recently (3 August 2015) initiated a Financial Advice Market Review with the objective of exploring opportunities presented by technology to provide cost effective, efficient and user friendly advice, among other things.
What is certain is that along with the opportunities that new technologies will bring, it will also bring new risks. The most obvious risk is that greater automation and reduced human contact results in consumers being invested into unsuitable asset classes. However, the medium itself creates new risks as well: the ease with which volatility can be tracked daily through an App may test the nerves of long term investors in a way that an annual report does not. Technology could also serve to attract some investors away from an advised service: the growing cleverness of online predictive and comparative tools and the accessibility of trading platforms may attract some into DIY mode; unthinkable a few years ago.
A particular challenge of using technology in the delivery of wealth management services is that this tends to lead to greater automation, in turn placing a greater responsibility on the customer to understand what they are consuming. Websites will do their best to educate on the investment options and attendant risks, but a non-personal interface means it is up to the investor to navigate through tools and questions alone until they reach a buying decision. This is where firms and the regulator will need to be scrupulous in reviewing innovative services through the eyes of the consumer.
For all this, it is far too early to predict that technology will cause the demise of face-to-face services or management based on personal relationships. A strong personal wealth management service can deliver access to non-mainstream institutional asset classes that offer the opportunity for outperformance, tax planning and a truly fiduciary service. Certainly, given the refreshed sense of competition that FinTech brings, it is not difficult to see a sharper delineation in target customer segments going forward, with businesses having to think carefully about what their customers need and want, hopefully to the benefit of all.
Jonathan Rogers, Partner at Taylor Wessing LLP