History is littered with examples of established companies that failed to anticipate or respond to new disruptive business models.
Kodak failed to respond to the emergence of digital photography, Blockbuster’s business model fell apart when movie streaming companies like Netflix emerged, HMV lost its customer base when the likes of Apple iTunes and Spotify took over the music distribution business, and bookstores globally have been decimated by Amazon’s rapid growth to global dominance.
While the demise or disappearance of these established brands represented a big loss to shareholders and employees, in each case consumers have hugely benefited from better service and more choice, all delivered at a lower cost.
The wealth management industry is at the early stages of a similar wave of disruption, driven by a combination of powerful forces colliding:
- People are living longer and having fewer children. This is a demographic time bomb that will force all of us to provide for our own retirement rather than rely on the government.
- Changes in consumer behaviour driven by the mass adoption of technology. Think how technology has changed the way you shop, order a taxi or even book the accommodation for your next city break.
- A secular shift away from actively managed mutual funds to less-costly exchange-traded funds (ETFs) and index trackers as many fund managers have consistently failed to beat their benchmarks.
- Changing regulation, particularly around proposals to increase competition and fee transparency in the wealth management industry.
There have been plenty of improvements in the way that financial services are delivered to consumers over the past 20 years, including the emergence of online stockbrokers, fund supermarkets and comparison sites. These developments have put some downward pressure on fees, but the cost to the consumer of traditional wealth management has stubbornly remained somewhere north of 2 per cent a year.
When we think about industry disrupters, we often think of startups. But in the wealth management industry, many of the startups have stalled.
It’s very hard to build a foothold in the sector due to the high costs of starting up, acquiring customers and building a brand, and the regulatory scrutiny that’s correctly placed on all companies working in the financial services industry.
There’s another factor that acts as a barrier to entry to the sector. Perhaps the most important factor any investor looks at when making an investment decision is trust.
Trust means a trusted brand and financial strength, so that investors can be confident that their money will be well looked after until retirement. Trust also means that asset allocation decisions are being made by someone with a strong pedigree and long track record. Brands matter, and it takes a long time to build a trusted brand.
This means that the organisations that are best positioned to disrupt the wealth management industry are incumbents or those in adjacent markets that have established brands and large, established client bases, that are technologically nimble and that have a culture of embracing change.
The changes ahead
So what do we expect a trusted innovator in the wealth management industry to do to drive change and improve consumer choice?
As we’ve said, the cost of investing for the consumer has remained relatively stable for decades. But the creation of the ETF has made it possible for individual investors to buy the market via simple, low cost “shares-like” index funds. You can now invest into an Isa or pension, for example, using low-cost ETFs as a diversified building block.
Another innovation is the ability to be fully invested via partial shares. If you had £500 to invest and wanted to purchase five ETFs in equal weightings then if each was £100 you could simply buy one of each and your money would be fully invested.
Now suppose you have the same criteria but wanted to invest £800. You would still have one share of each ETF but £300 left in cash. With real inflation eroding the value of your cash year after year this is a poor consumer outcome. With partial shares, every pound can be put to work, even smaller monthly contributions, thus removing any cash drag on performance.
Then there’s instant access. Traditionally, investors have had to tie their investments up for long time periods or lose the valuable tax benefits. But the government is now reducing the tax-free lifetime pension allowance and at the same time increasing the size and flexibility of the Isa vehicle. In essence, it is encouraging you to self-provision for your retirement and to not rely on the state, and the Isa seems to be the government’s savings instrument of choice.
And now we have the flexible Isa, where cash can be taken out to fund short-term needs and replaced before the end of the tax year without losing any of the tax-free benefits or allowances. This allows people to invest in a more flexible way (provided there is instant access and no hidden entry or exit fees).
And instant access means moving online in a world where more and more everyday transactions are done in a fully automated way. A recent survey of private investors in the UK revealed that 83 per cent of investors could be persuaded to switch online and 39 per cent of those surveyed are unaware of the existence of automated investment services, implying a significant opportunity for product growth.
History has shown us that the winners have been the firms who have embraced the entrepreneurial transformation required or even disrupt themselves. To survive in today’s dynamic business environment, organisations need to be more opportunity-based rather than resource constrained.