Lufax, BCG Report: Collaborative Smart Transformation to Help Break the Zero-Sum Game in Wealth Management

The rapid advancement of smart technologies, such as artificial intelligence (AI), big data analytics, cloud computing, and blockchain, compounded with the changing demographics in the existing and potential customer base of wealth management services, makes a compelling case for both wealth managers and regulators to embrace the increasingly available and progressively sophisticated financial technology (FinTech) solutions, according to a new report commissioned by Lufax and authored by Boston Consulting Group (BCG). The report, titled Global Digital Wealth Management Report 2019-2020: Unlock New Future with Smart Transformation, is being released today.

Smart Technologies Can Help Unleash up to 50% Profit Margin Expansion

Whereas 2018 saw the growth rate of the global wealth management market falling to a record low in 50 years, the advent of AI is here just in time to arrest the downward momentum. Instead of fighting for diminishing return in a saturated, zero-sum game, wealth managers will do well to avail themselves of AI and other smart technologies to help render the business of serving the mass affluent a fresh and scalable source of growth. The report forecasts a 25-50% increase in assets under management (AUM), a 15-30% growth in revenue, and a 25-50% expansion in profit margin in the coming decade, thanks to the contribution of this rising customer subsegment. According to the report, while the mass affluent customer base currently accounts for 17% of the total AUM, it represents an outsized 27% of all revenue and shows extraordinary promise. The report argues that the democratizing power of smart technologies, such as AI, will help make financial services more inclusive and affordable, allowing mass affluent, and in time, mass market customers to be treated with the services previously only enjoyed by high-net-worth and ultra high-net-worth individuals.

Partnership and Collaboration Becomes the New Norm

Sedate financial institutions and FinTech companies are increasingly recognizing the relative strengths of one another, as well as the ample opportunities for cross-pollination. Traditional wealth managers possess the institutional competence of risk management and financial expertise, they often find themselves hampered by the way they are set up when it comes to innovation and digital transformation; FinTech companies face the reverse problem where their technological prowess does not translate automatically into financial strength and regulatory certifications. This yin-and-yang-esque symmetry makes collaboration a mutually beneficial proposition, wherein the hitherto incumbents and disrupters transform into one another’s facilitators and enablers. “FinTech still only accounts for 5-6% of the entire financial market, and is poised for sizable growth from unmet needs,” said Greg Gibb, Lufax chief executive officer. “Financial institutions as well as FinTech companies will benefit from striving to become less siloed and seeking closer co-operation.”

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Smart Technologies Allow Regulators to Play a More Active Role

Regulators have traditionally been behind the curve when it comes to innovations in the finance sector. However, the report argues that smart technologies have so swiftly matured in a plethora of applications that it is no longer tenable not to embrace them. Regulatory technology (RegTech) solutions have emerged to allow for regulation tracking and risk monitoring, giving more transparency to compliance and KYC, and more safeguards for anti-money laundering and against operational issues; fully digitized processes keep better records and leave less room for errors. Regulators are advised to stay current to the development of FinTech, and assume an active role in their application. One way of doing it, suggests the report, is to create a regulatory sandbox to foster, curate, and test out innovation. The report also calls for the promulgation of a robust set of regulations for the digital wealth management sector that both empowers wealth managers to seek innovation and steers such development toward healthy and sustainable growth.

Tech-Enabled Leapfrogging in the Making

The relatively short institutional memory of wealth managers in many parts of Asia, combined with the comparatively lacking sophistication of the customers, makes intelligent wealth management services a very attractive and valuable solution. The report suggests that smart technologies like AI can facilitate better service personalization, improve investor education, and assist in risk management. Just as the low penetration of credit cards allowed mobile payment to take off in China, the report anticipates that digital wealth management in many parts of Asia will bypass the stage of widespread human advisory services and leapfrog to inclusive, AI-enabled advisory services that extend coverage to the mass affluent and even the mass market.

Smart Technologies Give Wealth Managers the Chance to Design a Better Customer Journey

The report asserts that smart technologies can help accelerate product innovation and deliver more nuanced services that better address the needs and preferences of customers. The customer base of wealth management is becoming ever more tech-savvy. Millennials and digital natives are accustomed to the convenience and personalized services afforded by mobile apps, and have come to expect the same from wealth managers. The report urges wealth managers to rethink their customer engagement models, commit to incorporating data analytics, and design anew a holistic yet individualized customer journey. “The advent of smart technologies has provided incumbents and FinTechs an opportunity to come together,” said Yan Tan, a Shanghai-based BCG partner and coauthor of the report. “Though collaboration, not only will they be able to tap a larger customer base, but also transform customer services from one that is reactive to one that is proactive, cultivate more seamless interactions, and deliver a more positive and gratifying experience to the benefit of everyone involved.”

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Tech-Enabled Healthier Investments and Better Risk Management through Investor Education

Whereas customers in Asia are generally more savvy than those in the West when it comes to mobile phones, they are often not as financially sophisticated as their western counterparts. Investor education is therefore not only necessary for compliance, but also imperative in helping customers better understand risks and be informed of the health of their investments. The key to individualized investor education is through understanding them better and addressing their sources of stress. Many investors in Asia lack a proper understanding of the risk-return tradeoff due to the reliance on the implicit guarantee. Deterred by abstract wealth management, finance, and risk concepts, as well as the tediousness of related topics when they already face immense “middle class anxiety”, most non-professional investors lack a basic financial knowledge and understanding of investment products. Simply leaving to the salesforce to compete for investors’ interest and attention, disentangle the incomprehension of jargons, and address the difficulty in correctly understanding risks and benefits is far from enough. Smart technologies, the report explains, can help democratize wealth management through data-driven investor education, and alleviate some of the pressure by helping investors transition from a return-based investment strategy to one that is goal-based, while nudging them to extend investment horizons, so they are less perturbed by short-term volatilities.

The Challenges and Opportunities Ahead

As smart technologies become more ubiquitous, the report cautions wealth managers to honor consent and acquire authorization when collecting or sharing customer data, build a better defense against data and credential theft using technologies such as cloud computing and blockchain, and improve their overall regulatory posture. The report also discusses problems such as how to regulate robo-advisors, how to minimize algorithmic bias and avoid AI black box, as well as how to combat tech-generated fraud in the age of deepfakes. A lot of the success FinTech achieved in Asia was thanks to the unique combination of first world technology and emerging market growth. Despite the challenges ahead, the report foresees that this proven combination will open up more opportunities and deliver more dividends.

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