While the market size in European Wealth Management, measured by bankable assets of millionaire households, is ever increasing, Wealth Managers are facing a constant decline in profitability. This emerging gap represents an innovation gap, as results of our analysis substantiate. Wealth Managers lack ambition of creating transformational changes to their core business model. Their innovation efforts can rather be classified as industrialisation (i.e. digitisation of existing processes and structures to reduce costs). Simultaneously, FinTechs - which are commonly presumed to transform the industry - focus rather on digitising existing Wealth Management offerings than striving for transformational innovations. The industry is thus in urgent need for a mind shift to open up towards new realities and foster divergent thinking.
A case for innovation
In recent years, profitability in Wealth Management has been in constant decline with profit margins falling by 40% between 2000 and 2015. The market size for Private Banking measured by the bankable assets of European millionaire households however has grown by more than 60% during the same period.
The emerging shift between profitability and market size indicates an innovation gap within the industry since industrialisation and M&A – the other two main strategic growth levers – have already been employed for years. As a result, Wealth Management has now reached a point where opening up the business model to transformational innovations has become essential.
Wealth Management providers, however, focus their innovation attempts on process and structure related improvements, in order to reduce the costs of the traditional core business model of a highly integrated value chain. In turn, FinTechs either offer digital solutions to support Wealth Managers in their efforts (e.g software solutions for automation or CRM tools) or provide digital offerings (e.g. robo advisory services, digital family offices) to directly compete for digitally aware private clients. Therefore, it can be said that both Wealth Managers and FinTechs attempt to follow innovation opportunities rather as responses to existing business challenges than results of a thorough search for new ways to create value. In summary, this means that the innovation efforts of Wealth Managers primarily relate to industrialisation, while those of FinTechs can be categorised as disruption-focused. Both lack innovation that is necessary to embrace a change of the business model.
Innovations that can change the business model
A mind shift on the management level of the industry is needed in order to allow for transformational innovations. This, however, requires to formally embed innovation as a management discipline and to open up the corporate culture towards divergent thinking. These new structures will help Wealth Manager with the identification of transformational innovation opportunities. As a result, Wealth Managers can start re-designing instead of re-organising their infrastructure, deepening their understanding of client needs, identifying new sources of revenue and refreshing their brand.
Find out more
To further introduce and discuss the topic innovation, our Private Banking team is hosting an annual Private Banking and Wealth Management event, 7th March 2017, in Zurich. Please register here, if you wish to be part of a very interactive event with several well-known industry speakers.