Since the year 2000, European wealth management has faced a constant decline in profitability, with profit margins falling by 40 percent, despite considerable market volume growth of over 60 percent in the same period. This shows that wealth managers are increasingly failing to serve clients successfully with the traditional business model.

Nevertheless, innovation ambitions in wealth management revolve around existing business challenges and rarely exploit opportunities to create value in new ways. Analysis indicates that the industry is facing an innovation gap that requires a change of key beliefs in leadership and the acceptance of new realities in order to be filled. Innovation needs to be formally embedded into a wealth management organization to embrace a successful change of the traditional business model.

It’s time for innovation in wealth management

Wealth management has now reached a point where a mind shift has become essential. The profitability of European wealth managers has been in constant decline in recent years, with profit margins falling by 40 percent between 2000 and 2015.

During the same period, the market size for private banking measured by the bankable assets of European millionaire households has grown by more than 60 percent. This increasing gap between profitability and market size shows that wealth managers are increasingly failing to serve clients successfully with their existing business models of an integrated value chain (average industry integration level of above 80 percent). This suggests that the industry is facing an innovation gap, since industrialization and M&A-the other two main strategic growth levers-have already been employed for years.

The timing is right..

Typically, innovations result from a conscious, purposeful search for innovation opportunities, which are found only in a few situations, such as changes in the industry structure or demographics, or changes in the perception of an industry, economic incongruities, or the appearance of new knowledge.

All these can be found today in the wealth management industry. An increasing number of FinTechs active in wealth management (+300 percent in the past three years) is disrupting traditional industry structures; millennials will form 50 percent of the global workforce by 2020, creating demographic change; and the global regulatory agenda has triggered the reshoring of assets, adversely affecting the prospects for cross-border wealth management.

..but the ambition is lacking

Based on a comprehensive view of the wealth management industry, we identified 28 unique innovations from wealth managers and 11 from FinTechs, and mapped them according to their “type of innovation” and “innovation ambition” to create a clear picture of where and how innovation takes place in wealth management.

The innovation ambitions in wealth management combined from wealth managers and FinTechs revolve mainly around the existing core business: (82 percent) with only limited adjacent, (12 percent) and transformational (6 percent) innovation efforts.The main innovation types addressed today are clustered around process (18 percent), structure (14 percent), and client engagement (15 percent).

The Wealth manager and FinTech lens

Innovations addressed today are mainly configuration- and experience-driven, and revolve around the core business with only outliers touching transformational ideas. FinTechs accelerate the change of the traditional business model in wealth management although they are not as transformational as commonly presumed.

Innovations in the area of client engagement are mainly driven by FinTechs and concentrate on enhancing the existing processes, still mainly on client experience that is dependent on personal interaction. Having realized that wealth managers might be a more attractive client segment than private clients, which is in great need of digital solutions, FinTechs increasingly specialize in offering flexible, innovative B2B solutions to wealth managers to help them close their digital transformation gap and thus have a strong focus on the innovation type process.

In conclusion, it seems that innovation in wealth management still plays a subordinate role, with most innovations being responses to existing business challenges rather than innovations based on the identification of opportunities to create value in a new way.

We will soon release the second part of this blog. If you would like to read more about the topic now, please visit our website where you can find the Deloitte Innovation in Private Banking and Wealth Management report.

Dr Daniel Kobler - Partner, Banking Innovation Leader

Daniel is a partner at Monitor Deloitte and one of the leaders in Deloitte’s Switzerland banking practice where he is – amongst other roles - Deloitte’s Switzerland banking innovation leader. He has more than 17 years of experience in serving universal banks, retail & private banks, and wealth and asset management companies. Moreover, Daniel is intensively working with FinTech companies across Europe.

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Johannes Schlotmann - Manager, Zurich

Johannes is a Manager within the Swiss Monitor Deloitte Strategy practice and co-author of the Deloitte studies “Innovation in Private Banking and Wealth Management”, “Swiss Banking Business Models of the Future” and “Growth in Banking”. He is an expert in the Private Banking and Wealth Management industry and focuses specifically on pricing and profitability as well as growth and innovation topics in this area.

Prior to joining Monitor Deloitte, Johannes worked for a Liechtenstein private bank as well as for a family office and private equity company.

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Cyrill Fischer - Senior Consultant, Zurich

Cyrill is a Senior Consultant within the Swiss Monitor Deloitte Strategy practice. He holds a Master in Quantitative Economics and Finance and is a CFA charterholder. His consulting focus is on legal entity transformations, mergers, branchifications and wind-downs of business units within Private Banking and he is a contributor to the Deloitte Wealth Management Centre Ranking.

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