The Place de La Bourse in the genteel heart of Paris – a world away from the glass and concrete edifices of La Défense to the city’s north-western limits – represents the paradoxes at the heart of wealth management.
Its majestic centrepiece, the Palais Brongniart, dates back to the days of Napoleon Bonaparte, when it housed the French stock exchange. It stands for tradition, handshakes and face-to-face contacts. But many of the high finance symposiums held inside the palace today look at fintech, quantitative management and big data, the technologically-led trends transforming the global industry.
One recent summit, held under the auspices of the EDHEC Risk Institute, a leading French academic powerhouse, showcased this battle for the soul of the wealth management industry. Academics, private bankers, thought leaders, regulators and innovators gathered to discuss the key question yet to be resolved: what should be the role of technology in client acquisition and servicing, data analysis and portfolio management?
In order to be part of the fourth industrial revolution, the people-centric industry of wealth management must transform the production, customisation and distribution of retirement solutions, argued academics.
The extreme difficulty for banks in tackling this issue is backed by statistics. At PWM, we calculate that of the 150 global private banks we monitor closely for technological, business, customer-facing and portfolio management trends, less than one third have implemented a serious technological solution to the challenges encountered by their clients and relationship managers.
Many have only devised client-interfaces such as online forms, apps and screens allowing choices of services. But a handful have gone much further. The likes of DBS in Singapore have even strayed deep into the realms of big data and artificial intelligence.
Under the radar
But there is probably one technology-led sphere which is totally under-appreciated by the industry, which was highlighted at the summit. This is that of goals-driven wealth management (GDWM), the mainstay of US private bankers at Northern Trust. It allows wealth managers to use institutional tools, helping clients to prepare for key life events. These include buying properties, cars, educating children, retiring from work or self-employment and eventually handing over the assets to the next generation.
Length of investment terms, risk tolerances, prices, taxes, depreciation levels can all be plugged into a model by relationship managers. Optimal asset allocations can then be arrived at and modified to plan for specific goals.
While few private banks currently approach this topic seriously, it surely must become the wealth management paradigm for the future. It will still require human wealth managers to advise clients and shepherd them through the process, but it will put an algorithmic system at the centre of the asset allocation decision. There is no substitute for this and it will most likely steal the very soul of wealth management.
It is also likely that analysing big data, combined with behavioural science techniques, will help private banks predict the appetites and needs of wealthy individuals and families.
But when it comes to actually managing the portfolios and buying stocks and shares, the future is not so clear-cut. The fastest rising portfolio technique is currently the ‘quantamental’ approach, which combines human fundamental asset management techniques with quant, machine-led solutions. Some practitioners want to go further and ditch the human element to asset management altogether.
Déjà vu
There is nothing new about this and we have been here before. Let’s remember that plenty of quantitative asset managers collapsed during the 1990s when they failed to adapt to new economic concepts such as Europe’s exchange rate mechanism. Even long-regarded houses with established scientific ‘gurus’ either crashed or quietly disappeared.
Today, we are in a similar cycle, where trade wars, Brexit and other realignments can destroy the financial fabric predicted by the modellers, so these machine-only managers are best avoided.
Are private banks under threat from the big techs, the Facebooks, Googles, Alibabas and Tencents, who may begin managing their clients’ assets at a fraction of the price on a passive basis? Yes, most definitely. The banks and wealth managers who avoid this reality will disappear from view and must adapt accordingly.
Even more so, we live in a world where wealth managers will move into the realms currently occupied by e-commerce providers, health companies and logistics operators. Witness the successful efforts of Chinese insurer and wealth manager Ping-An, in taking algorithms derived from wealth management and adapting them to setting up online doctors’ surgeries and traffic flow systems. This exchange of information between different business sectors will become an important factor in the development of wealth management.
Around the corner from the Palais Brongniart, relationship managers at the private banking arm of BNP Paribas are settling into a new headquarters where their ‘pizza teams’ work late into the night, ordering takeaways as they finalise their new generation of apps. These include the recently mobilised ‘Leaders’ Connection’, bringing together entrepreneurial families who want to co-invest. Future instalments will measure impact of portfolios and further additions will ensure all stocks, bonds and funds owned by families have been ethically screened for social contribution and green dividends.
The battle for the hearts and minds of the next generation and for the soul of wealth management has yet to be fought and won. But the opening salvos have been fired.
Private banks have interesting weapons in their armouries. Some still need to be modernised for effectiveness. But at the moment, those that appear to be vital for future success appear to be GDWM tools, networking apps and screens for impact and ethics.
The private bank of the future will manage, introduce and evaluate, as well as working closely with the next generation. These disciplines require a raft of technological systems and an army of relationship managers, not just to operate them, but to take the output which they deliver and use this to help build a long-term relationship with families of the future
