Increased regulation together with the challenges posed by digitalisation usually feature in debates or discussions about the future of the wealth management sector.
But an increased involvement by big technology companies such as Alibaba, Amazon, Apple, Baidu, Facebook, Microsoft and Tencent rarely gets a mention notwithstanding the disruptive effect these companies have had on other sectors of the economy.
This is all the more surprising given that big technology firms already possess many of attributes and core capabilities of wealth management firms, not least huge customer bases, almost unlimited volumes of data on consumer behaviour and preferences, and the algorithns and analytics to interrogate this.
Moreover as Figure 22 of Cagemini’s 2018 World Wealth Report helpfully illustrates the firms mentioned above have already started to move into the financial services sector.
Most of their activities appear to have focused on payments and payments systems. But some have started to dip their toes into the wealth management sector.
Alibaba has backed a wealth management firm. Amazon has partnered with UBS to allow people to ask Alexa, Amazon’s virtual assistant, financial questions. Apple and Baidu have created their own asset management firms, Braeburn Capital and Baidu Capital, while Google has commissioned research on entry options in the asset management sector. Tencent has received a licence to sell mutual funds.
This is all very small scale stuff. Nonetheless, a number of authorities quoted by Capgemini consider that this may be the very thin end of what could turn out to be a huge wedge.
“Apple was not in the music industry, Google was not in the mobile phone industry and Amazon was not in the groceries business - until they were,” Cagemini quotes Robert Kapito, the co-founder of BlackRock, as saying in April 2018.
“Amazon will embed itself in the fabric of the wealth management space unless the regulators intervene,” said Will Trout, the head of Celent’s global wealth management practice in January 2018.
“We started as a payments platform and expanded customer offerings with Paytm Payments Bank. Today with Paytm Money, we have taken the next logical step in the direction of wealth management”, said Vijay Shekhar Sharma, the chief executive of Paytm, also in January 2018.
Some senior executives active in the wealth management sector also share this view.
“Advisers have their head in the sand; they are in denial,” said Ric Edelman, the founder and executive chairman of Edelman Financial Services, in March 2018. “Many think this won’t affect them or their clients. I think most advisers are wrong. It’s inevitable that large technology companies like Amazon, Apple, Google and Microsoft [will] look to expand into other industries”.
Others are more equivocal.
“Clients will be curious and consider it, but they will ultimately decide based on the level of security and their resulting peace of mind with the proposition,” said an unnamed managing director of a “leading UK private bank” in May 2018.
“BigTechs are already offering payments services and can leverage their growing cloud in this space to cross-sell insurance and other products,” Capgemini quoted an anonymous head of investment services at a “European wealth management firm” as saying in April 2018. “However in the private banking space the human-centric model remains dominant and the current maturity of AI has a long way to go in order to rival it.”
“It will be naive to think that BigTechs will not enter the industry given that we hear that younger HNWIs are interested and the BigTechs are already looking to partner in other areas of financial services,” said an unnamed chief operating officer of a North American wealth management firm also in April 2018. “However security challenges will need to be overcome to use these firms’ offerings.”
Capgemini considers that it is not of case of “if” but “when” BigTech makes its move. Its research indicates considerable customer support for the notion of big technology firms as wealth management providers, notwithstanding the recent data security and confidentiality problems that have hit the sector.
Nonetheless this still poses questions about the precise nature of any BigTech involvement in the wealth management sector along with the market segments that will be targeted.
Capgemini has identified a consensus that Asia-Pacific will be the first region to experience a significant wealth management involvement by BigTech companies followed by North America and then Europe.
“From a client segment lens, there is a tendency to believe that BigTech will only be applicable to the affluent and US$1 million to US$5 million segment, rather than the more bespoke private banking segment that tends to begin from US$5 million.”
Turning to the nature of BigTech involvement Capgemini identifies 13 different models grouped in three self explanatory areas: “compete” (i.e. compete directly against established wealth management incumbents; “frenemies” (i.e. compete with wealth management firms in some elements of the value chain but collaborate in others); and “collaborate” (i.e partner with established wealth management firms in joint ventures etc. and/or provide “white label” products and services).
Weighing up the various options Capgemini suggests that BigTech is most likely to function as a “collaborator” or as a “frenemy” although it doesn’t entirely rule out direct competition.
“Within the Compete segment, the most likely and most disruptive scenario would be a merger between a BigTech firm and a non-traditional wealth management player such as a life insurer or an online broker,” it says. ”Such a model would be especially disruptive in the US where firms such as Vanguard and Schwab have been taking market share for several years.”
In the “Colaborate” segment Capgemini considers white labelling and selective partnerships as the most likely scenarios.
“Wealth management firms have a clear point of differentiation around investment expertise, value added services, and client intimacy. Where they lack compared to a BigTech is in client acquisition - which could be solved through a collaboration based on white-labelled distribution (especially relevant to asset managers) or through selective areas of partnership.”
Overall, however, Capgemini opts for the Frenemy approach as the most plausible mode of involvement.
“BigTechs are already competing with banks in the lucrative payments, loans, and insurance business lines, yet the jump in required capacity and resulting investment to enter wealth management may lead to a more both compete and collaborate model with wealth firms. Within this dynamic, the services player and the utility model are most likely given that banks often lack the ability to leverage broad and deep client data to hone propositions, as well as lacking internal process and systems efficiency.”
It notes, however, that there is little consensus from within the wealth management sector about the various models identified and elucidated.
This, together with inertia that sometimes seems to be a defining characteristic of the wealth management sector, suggest that whatever the outcome it will be BigTech firms that will make the running.