Digital entrants such as Nutmeg and Wealthfront have entered into the wealth management industry. What risk do they pose?
Over the past few years, digital entrants such as Nutmeg and Wealthfront have entered into the wealth management industry. What risk do they pose to a service aimed at the world’s wealthy? John Schaffer comments
The private banking and wealth management industry is continually being squeezed by ever more strict regulatory requirements and unfavourable press coverage. The industry has not had a significant uptake of digital channels in contrast to most other service based industries in the modern world.
In general, the vast majority of private banks’ business models are concentrated on traditional face to face meetings. It has meant that servicing the high net worth (HNW) and mass affluent segment has become un-profitable. Some of the larger players in the private banking industry are now concentrating exclusively on the ultra high net worth (UHNW) segment.
Citi private bank, for example, will only service clients with a minimum of $10m in investable assets.
So where do the rich – but not mega rich – go for investment advise?
Robo – advise from the likes of Nutmeg and Wealthfront, allows clients to engage in an automated investment service, thus negating the need for costly personal interactions that require offices for meetings and the time of relationship managers.
However, what these robo-advise services do not account for are the wider issues that surround wealth, such as succession planning and philanthropy.
The automated service may not service all of the areas that the traditional private banks can offer, but for many clients, a digital solution will suffice perfectly well.
Tracey Reddings, head of UK private wealth management at J.P. Morgan Private bank, spoke at the PBI London 2015 conference in June and commented that although the robo-advise industry was worth a sizeable $20bn, it was still rather modest in size in comparison to the “mammoth” size of the £17bn business of the traditional wealth management and private banking market.
However, Reddings conceded that the industry must be cautious to the treat of digital disruption and should not be “complacent”.
Perhaps the private banking industry is secure now, but digital disruption can only become more of an issue for the industry as the next generation of wealthy individuals become the new target audience.
A report from Capgemini and RBC, World Wealth Report 2014, found that 50% of HNWIs under 40 would leave their wealth manager if there was no way to engage digitally.
Seemingly the younger generation would much rather engage via a digital medium rather than having face to face contact. This is clearly an issue, even in the private banking industry where clients are making such significant financial decisions.