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Technology Traps Wealth Managers Must Avoid: Overview From EY

Roopalee Dave and Hassan Suffyan

Ernst & Young LLP

23 March 2021

Smart acceleration of digitization  
Recent events have accelerated the new operating normal for the wealth management industry, with wealth managers recognizing the need for digital investment in order to unlock long-term growth. Underpinning that much of the opportunity is front-to-back digitization of the operating model, and its implications on the business model.

There is a continuous need to invest in new technologies and embed digital capabilities across the firm, to ensure compliance and the ability to future-proof delivery. This includes enabling cloud functionality and increasing the use of Software as a Service and application programming interface models. However, in the era of rising costs, it is important to avoid misconceptions that lead to costly mistakes, even while investment and activity scales up.

What are some of the common pitfalls in developing and implementing a digital strategy?

1.    What do clients want and how do they wish to engage?  
There has been a seismic shift in customer interaction and proliferation of “digital first” channels. The industry is progressing from traditional face-to-face contact, to websites and now to second generation technology and even third generation preferences . For clients, it is a holistic experience and for wealth managers it is not enough to simply digitize tasks, but also consider how clients and relationship managers are able to engage during these interactions to build trust.

The speed of change indicates how challenging it is for firms to predict future preferences accurately. The EY Global Wealth Management Research highlighted that mobile app usage was the primary channel for wealth activities in 2019 followed by website access and this is projected to shift to 46 per cent and 20 per cent respectively by 2022.  In comparison, face-to-face and phone calls accounted for 15 per cent and 12 per cent of usage in 2019, and are projected to drop to 12 per cent and 8 per cent respectively by 2022.

Wealth managers must match the capabilities they need with the appropriate channels for distribution. This can include adjusting to the customer and meeting them where they want to be met, rather than where it is traditional or convenient for the wealth manager. For example, technology app stores have grown in prominence, not because of the rising cost of distributing physical media, but because that model is best suited for the growing number of smartphone users.

Today, it is not enough to build a standalone browser functionality and mobile functionality. Instead, clients want to be able to use different devices, depending on their lifestyle and circumstances at that moment. For example, a client may want to message their relationship managers using a mobile device while traveling between meetings and continue the conversation at home using a laptop. These clients expect wealth managers to enable this omni-channel flexibility so that interactions in different channels are seamless and are combined into one set of customer experiences.

Introducing digital capabilities will require a fundamental change in how a wealth manager will service customers, and more importantly the end-to-end customer journey will need to be refreshed to ensure that there is no impact to the customer experience.

Depending on their operating model and scale, wealth managers have the opportunity to either leverage external vendor solutions or develop in-house digital front channels to compete in the market. The importance of front-office functionality has been accelerated by the recent pandemic, with wealth managers possessing these capabilities being better placed to retain existing clients, acquire new ones and deflect competition.

The world of client communications is broad, and focuses on texting, calls and video conferencing, but often it also comes bundled with niche functionalities such as co-browsing, document storage, and e-signatures that enhance the client experience. Wealth managers must ensure that the digital functionality chosen is sufficient to match their clients’ needs and expectations; nor are they “set and forget” assets but require continuous enhancement and alignment to their operating model and long-term digital strategy, without impacting business operations.

2.    It might be client first… but what about employees?  
In considering the client experience, wealth managers may want to be equally focused on the employee experience, given the impact on front office, along with the efficiency gains achieved from enabling functions of any digital/digitalization initiative.

The belief that only investing in “income-generating” teams rather than the full value-chain is a false economy. It ignores the productivity increase and cost reduction benefits that digitization can provide across the value chain and can create a cultural divide between client-facing teams and the rest of the organization. For example, digitizing the onboarding process will provide a better client experience. However, relationship managers and client service teams cannot continue to provide the same seamless digital experience if the middle office remains on manual processes. A further, often overlooked, risk of having an asymmetric focus on front office is that front office systems tend to require integration and multiple exchanges of data with middle and back office platforms, which, if implemented in isolation, can result in loss of efficiency and an accrual of technical debt over the medium to long term. 

Consideration needs to be given to what the service model looks like to support employees when issues with the digital products arise.

3.    Are data and architecture design based on the strategy?   
Data is required to deliver the seamless digital experience expected by a client, while regulations are increasingly penalizing firms which do not have appropriate data protections in place. Data also underpins the development of new Environmental, Social and Governance products, increasingly popular among clients but also demanding greater transparency on how such investments perform against ESG metrics. 

For the business, not having a data strategy affects direct revenue, such as an inability to derive value from firms’ data to deliver profitable business growth, or lack of access to timely and trusted data to facilitate effective business decision-making. 

Meanwhile, a fragmented data landscape is resulting in high operational expenditure and delays to transformation programs. Inadequate data governance can lead to persistent data quality issues and inaccurate reporting, while the costs of non-compliance alongside cyber threats and data ethics continue to rise.

Compared with other financial services organizations, wealth managers have traditionally lagged in technology/digital transformations.  For many wealth managers, data is seen as a necessary evil, and their enterprise architecture is often tightly coupled with making business change difficult without increasing technical debt through tactical solutions. 

However, for wealth managers to compete, their data and architecture needs to become a strength. There will be a need for a fundamental refresh in the technology roadmap and strategy, ensuring that core technology enablers such as data, integration, workflow, and infrastructure, are in place to release business benefits. Client needs and regulatory requirements will drive key design decisions such as on premises vs. cloud , adoption of API and SaaS models, and even multifactor authentication vs. single sign-on .

4.    If digital is the tool, should agile be the approach?   
Digital transformations typically lend themselves to agile delivery methods. Many will try to replicate agile projects as “purely” as possible based on methodology teachings. However, just as organizations are not identical, business transformations will vary depending on the situation. Agile is better thought of as a comprehensive collection of project management techniques, developed not to be used as a comprehensive collective, but rather selectively based on identified needs for the WM  and the transformation. 

It is important to contrast the use of agile with consideration of the output: the ability to achieve desired outcomes, but also whether there is sufficient productivity in the process, clarity around the objective and ultimately realization of the business case. 

5.     digital is not a panacea 
    Digital is one set of solutions that can support identified business needs, such as reducing certain administrative costs, or providing clients with expected experiences. It is not a fix-all: a digital transformation on a broken operating model will not address underlying issues impacting the business.
    Digital follows business strategy, rather than the reverse. Wealth managers need to identify and agree on a long-term vision and strategy for their organization and be willing to leverage digital as one set of tools in their toolbox, enabling them to reach that wider transformation.
    All wealth managers will not be using the same set of tools. Different business models will require different sets of digital solutions, even if they are part of the same organization.

For wealth managers on or embarking on a digital transformation journey, it would be helpful to take into account some of these additional considerations: 

•    Proper due diligence and assessment of vendor delivery capability: Rigorous assessment of delivery path for a chosen vendor is just as important as the features they can deliver. For example, how easily can you co-create your process universe and use cases with your chosen vendor? Or, alternatively, how close is the “out of the box” functionality to your desired end state?
•    Use proof of concepts as part of your request for proposal process to test the ability to deliver and identify any gaps in functionality and the desired customer/employee experience. 
•    Put the right oversight models in place: Most of the oversight is focused on when the solution reaches business-as-usual , but that can sometimes be too late. It is important to have oversight of end-to-end transformation alongside any delivery capabilities, vendor or in-house, from the outset, starting with building strong service level agreements into your implementation contracts, and achievement assessments throughout implementation.

In summary, digital transformation needs to be closely coupled to business strategy with clear outcomes for the client and employee experience. Maintaining a sharp focus on enabling capabilities such as data, combined with strong implementation and governance disciplines will be required in a rapidly changing environment, underpinned by threats from competitors, challenger banks, global pandemics and macro-economic factors.

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This piece is taken from the 2021 edition of Technology Traps Wealth Managers Must Avoid. Click here to download your free copy. 

Source: EY Global Wealth Management Research 2019