By Shri Krishnansen Posted on 13.08.2024
Are you a digital leader or laggard? It matters how you answer this because it could have serious cost implications for your wealth management business.
An analysis by Harvard Business Review of multiple datasets found that financial institutions which led the way digitally were creating significantly higher shareholder value than their laggard counterparts.
Between 2018 and 2022, those who had invested more in digital transformation had achieved an average total shareholder return of 8.1%. Whereas businesses that had taken a slower approach to tech adoption delivered just 4.9%.
Additionally, digital leaders enjoyed a superior return of pre-tax tangible equity (ROTE) – reaching 19.3% in 2022, up from 15.5% in 2018. The laggards, meanwhile, saw their ROTE rise modestly from 13.6% to 15.3%.
There were similar patterns when it came to active customer growth, with tech embracers experiencing a 0.5% uplift, compared to zero percent among those banks dragging their feet.
And although this data largely relates to banking, an adjacent vertical to wealth management, it offers urgent lessons for our sector – particularly when we consider that 50% of wealth managers are finding it challenging to offer a more sophisticated digital experience, according to research by the London Stock Exchange Group.
Anyway, enough about the impact of innovation on income. What about the costs associated with being a digital laggard?
The cost of wealth management innovation: cloud versus on-prem
In WealthOS’ experience, adopting modern wealth management technology offers businesses an opportunity to make major savings.
Companies that switch from an on-premise solution, which involves having hardware installed and maintained on site, to a remote cloud-based equivalent should easily be able to make a double-percentage-point cut to costs.
Indeed, WealthOS’ own experience suggests savings could be as much as 40% initially, and even more in the long run, as the overall workforce requirement reduces over time.
That’s because with on-premise set-up, there’s a need for a sizable and skilled team to take care of product testing, production and infrastructure management.
Such functions are largely automated through cloud-based tools – for example, Infrastructure-as-Code (IaC) – which handle many of these processes electronically.
As a result, the manual intervention requirement shrinks and organisations can manage infrastructure efficiently with leaner in-house teams.
Cloud deployments can also easily leverage more agile software development lifecycle (SDLC) practices like continuous improvement / continuous deployment (CI/CD).
This facilitates fully remote software updates to be automatically rolled out without the need for lengthy onsite installations and testing, as would be the case with on-premise updates.
Savings transferred: how modern technology is streamlining a vital wealth management function
One area where the WealthOS platform can make a significant savings impact for wealth managers is transfers.
Businesses that still use legacy systems for this function are almost certainly struggling to connect multiple transfer gateways to other vital technologies, such as CRM platforms.
As a consequence, operators will be wasting time switching between systems to manually import and export data. This carries a “swivel chair risk” of incorrect data entry, dissatisfaction among both clients and employees and financial losses arising out of long and inconsistent transfer completion times.
Compare this to the performance of a fully interoperable wealth management platform, based in the cloud rather than on-premise, accessible through a robust suite of APIs.
Integration with third-party transfer gateways and CRM systems is seamless and operators find it easy to manage all transfers through a single core system.
There’s also a real risk of large employee headcounts and missed-service level agreement compensation payouts sending operational costs skywards.
It’s a world apart from a cloud-based, API-powered approach.
Digital technology that has been designed to be highly interoperable with other platforms can transform transfers by automating operations and orchestrating workflows across third party transfer gateways and other external systems – saving time and resources.
And if the solution is ‘end to end’, it will take good care of all stages of the transfer process, including secure third-party communication, live status updates, document management and record keeping for cash and asset receipts.
Defy gravity: how digital transformation can ease downward pressure on profits
Having made the business case for becoming a wealth management digital leader, let’s consider for a moment the challenges facing the sector.
In recent years, growth has been significantly offset by burgeoning operating costs. Nowhere is this more evident than in the US, where assets under management have enjoyed 10% CAGR during the past decade. Yet revenue has only hit 6% CAGR over the same period. Behind this trend is a combination of downward pressure on fees and rising costs.
However, an effective way to break through this income bottleneck is to innovate and become a digital leader. By making savings through cloud-based automation, businesses can improve both their shareholder value and customer satisfaction.
To find out more about the different wealth management functions enabled by the WealthOS platform, contact us today.
Sources:
Harvard Business Review – The Value of Digital Transformation
LSEG Digital engagement in wealth management
Get in touch with shri@wealthos.cloud to find out about how WealthOS can support you with digital transformation.