Quarter of leading wealth managers spend more than $50 million per year on innovation projects
Wealth management firms are making progress on innovation, but in many cases the focus is still on small and incremental change rather than daring to dream big.
Projects addressing deep, disruptive and strategic change do not get enough funding although wealth managers agree to their importance for the future. This is a main result of the report, Innovation for Wealth Management 2018–How Digital Leaders are Winning the Game, for which the Swiss research company MyPrivateBanking, surveyed of 43 executives and innovation leaders at the leading global wealth management and private banking institutions.
“Innovation is clearly a hot topic for wealth managers, but they do not put their money where their mouth is. Many innovation projects exhibit too much inward focus and relied too strongly on small, incremental change. What we saw was a distinct lack of innovation projects that tackle disruptive themes like automated advice and blockchain. Outdated technology and budgeting are now among of the biggest roadblocks to innovation,” said Steffen Binder, Research Director of MyPrivateBanking.
Main findings from MyPrivateBanking’s analysis can be summarised in the following points:
span style="font-size: small;">Too much internal focus
Innovation is still too internally focused, although MyPrivateBanking finds this to be changing gradually, with greater attention given to hiring innovators and exploring joint partnerships. While the “acquisition of a start-up company” ranked lowest as a factor for innovation, “strong, innovation-friendly leadership” made it to the first rank.
span style="font-size: small;">Disruptive tech gets too little funding
Innovation leaders understand the importance of new technologies like blockchain and artificial intelligence, but this is rarely reflected in budgets. For instance, blockchain technology received zero mentions when innovators were asked about the top three technologies where they spend most for new projects, although half of the respondents listed this tech as „very important“. Only 20 per cent of respondents mention robo advice as a top budgeting concern.
span style="font-size: small;">Outdated tech and small budgets are biggest barriers to innovation
Apart from outdated technology infrastructure (mentioned by more than 60 per cent of respondents), inadequate budgets (54 per cent of mentions) were the greatest hurdle to innovation among the firms in MyPrivateBanking’s survey.
In MyPrivateBanking’s view the survey results reveal how important an area innovation has become in the wealth management industry. Even more, the researchers also uncovered encouraging trends, which indicate that the wealth management field is taking digital transformation seriously:
span style="font-size: small;">Significant amounts of money resources are deployed
In order to develop and implement new digital initiatives, 43 per cent of the surveyed wealth management institutions spend more than USD 20 m. More than a quarter spend USD 50m or above. Further growth of these resources in the coming years seems a safe bet, according to our findings. 63 per cent of our respondents will see their innovation budget grow between 5 per cent and 20 per cent in 2018.
span style="font-size: small;">Automated advice and robo investing will grow significantly
Respondents estimated that the share of transactions completed via so-called robo-advisors will increase from 3 per cent to 15 per cent over the next five years. Almost two thirds of the wealth managers expect an acquisition in the area of robo advice within the next 18 months. This confirms our finding that a move toward cooperation rather than disruption of established industry players is the new trend.
span style="font-size: small;">Artificial intelligence is a major topic of debate
On average, the respondents think that AI will have a strong impact for investment decisions and portfolio allocation (4.1 out of 5 in importance rating) as well as for client risk assessment (3.9). Whereas client communication seems only of moderate importance for AI (3.2).
The report identifies a flood of different innovation approaches and initiatives at leading wealth management institutions and banks. They range from innovation labs, incubators, accelerators, competitions, and hackathons to more traditional types like conferences and cooperation with academic institutions.
“The breath of initiatives and the significant amount of money deployed for innovation speak to an innovation-focused future. However, depth of innovation is just as important as breadth and it appears that there is something of a herd mentality, which drives banks to adopt these initiatives in scores. But to make innovation happen at large and sometimes cumbersome organisations, more is needed than flashy announcements with superficial follow-up,” said Binder.
In order to meet these challenges and profit from the deep industry changes, MyPrivateBanking’s analysts recommend making the following strategies (among others) a priority on every wealth management firm’s agenda:
span style="font-size: small;">Differentiate disruptive innovation from incremental, organic innovation projects
Disruptive innovation is the type that has the potential to destroy your business if you do not find the right response in time, while incremental innovation is key to a long-term strategy.
span style="font-size: small;">Wealth managers should focus at least 30-50 per cent of their innovation investment budget on disruptive projects
As incremental innovation gets rolling, the resources required diminish over time. This frees up resources to focus on big projects.
span style="font-size: small;">Don’t make enemies when you can make friends
Among third party innovators MyPrivateBanking sees a trend toward B2B solutions that are intended to work with established institutions rather than disrupt them. Taking advantage of such an opportunity can jumpstart innovation.
span style="font-size: small;">Plan for failure
Failure is a key part of innovation—big, disruptive projects are almost always the result of a chain of failures. However, failure provides key learning opportunities. Therefore, wealth managers should allow teams room to fail and incorporate this into innovation planning.