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Reinforcing independence and holistic advice as the solution to the key challenges faced by intermediaries

Intermediaries consider new client needs, technological progress and new competition to be their key challenges. Strengthening their independent positioning while using a professional and holistic digital advisory process provides the solution to these challenges.

According to a recently published report1, the most significant concerns for wealth advisors are to ‘stay relevant to a younger generation of investors’, ‘keep up with technology’ and ‘cope with new competition’. The key question is how to effectively address these challenges.

How to stay relevant to a younger generation of investors

Based on emerging customer trends and the different client types that have been identified2, the three most important trends for all client types are as follows3:

  1. Younger investors want personalised advice based on their life stage and goals.
  2. They are willing to exchange their data, as they consider their data a form of compensation.
  3. Furthermore, they welcome automated support, as they value this service in the advisory process.

Shifting to a more digitalised advisory process therefore is a highly relevant component in addressing the needs of this new generation.

How to keep up with technology

The amount of automation in larger wealth management firms is still relatively low4, and this applies even more to intermediaries due to their smaller IT budgets. Being able to cope with technology is the only way to reduce high operational costs and address emerging customer trends. Instead of developing their own IT solutions as their larger competitors do, intermediaries will need to start investing in standardised solutions that create tangible added value in the short term and simultaneously help reduce costs. They can certainly do so at a reasonable price, e.g. with available software-as-a-service solution where no integration costs are required.

How to cope with new competition

New competition is currently emerging primarily from traditional wealth managers, who are changing their business models and moving a step closer to that of intermediaries: there is a growing trend to move away from a product-driven to an advisory-driven business model. While intermediaries may still have an advantage due to the more holistic advice they provide, traditional wealth managers are continuing to improve their advisory offerings and by significantly investing in new technologies to gradually overcome existing obstacles.

We are convinced that intermediaries must adapt to such trends sooner rather than later, as most of them are falling behind their key competitors. A good strategy to follow would include the following:

Position yourself as truly ‘independent’

Intermediaries should leverage their strength of independent positioning to ensure maximum credibility. They should therefore provide truly independent advice, offer a broad product universe, and, in order to align interests, refrain from any retrocessions. This is feasible in at least the more established and regulated markets where clients can be charged transparently. It may be more difficult in emerging markets, but here as well, we observe a slow trend away from product-driven to advisory-driven business models. We are convinced, however, that proper positioning as true intermediaries would also allow for such business models.

Improve and digitise the advisory process first

Charging fees transparently requires sound justification through real added value for the end client. A professional, goal-based advisory process combined with truly independent positioning ensures maximum credibility for intermediaries and makes their added value clear.

To address clients’ expectations, a new advisory process should be designed based on the following criteria:

  • Goal-based: The client’s investment strategy is defined by the financial goals they want to achieve instead of a typical risk-tolerance/capacity approach where they get a strategy based on these elements only5.
  • Holistic: Illiquid and non-bankable assets are considered to be the basis for optimising goal achievement, as these assets often represent a significant part of a client’s total assets (e.g. real estate or pension-related assets).
  • Personalised: Clients ideally receive custom asset allocation services that optimise their individual financial goals and their specific situation, as opposed to receiving a standardised model portfolio. Furthermore, their values and beliefs should be taken into consideration when it comes time to construct their individual portfolio.
  • Digitised with instant simulations: The advisory process should be digital, enabling intermediaries to demonstrate during a client meeting how financial goals can be reached if different parameters change.

Initial wealth development and wealth development based on the recommended asset allocation  improving the client’s goal achievement.

Fund selection for the recommended asset allocation based on multiple criteria like ESG.

Since many intermediaries do not have the financial capacity to develop such an advisory process on their own, sourcing is the only available option. This raises the question of integration costs associated with the selection of the right third-party tool: First, it is crucial that a tool like this offer the flexibility to be used as a stand-alone solution, e.g. as software-as-a-service (low-cost option) to avoid integration costs. Second, such a tool should also be based on state-of-the-art IT architecture so that intermediaries can integrate this tool at a later stage and at a low cost. If these requirements are ensured and if intermediaries do not need to share any client-sensitive data, intermediaries can certainly tick all the boxes.

Stephanie Feigt, CFA, CEO 3rd eyes AG

About 3rd-eyes

3rd-eyes is a Zurich based financial technology company founded in 2015 that offers digital solutions to banks, investment advisors, insurance and software companies in Europe in a fully customisable and highly flexible way. The 3rd-eyes goal-based wealth planning system provides investment advice based on client's financial goals and personal values and beliefs. Our solution is built on a set of modules available for individual or collective (white-labelling) licensing and it is delivered either as a cloud service or as API solution. Our solutions are fully compliant with regulatory frameworks such as MiFID II.

[1] Figure 1 of Forbes insights: DIGITALIZATION OF WEALTH MANAGEMENT - Providing High-Tech Service in a High-Touch Industry, in association with Thomson Reuters, published in November 2017
[2] Accenture: Investment Advice: Maintaining trust amid shifting consumer demands, published in 2017
[3] Each client type prioritises them differently, but all of them belong to the top three of all client types
[4] Figure 5 of the study mentioned in footnote 1
[5] In a sound goal-based advisory process, the risk-tolerance/capacity restrains the optimisation processes so that the outcome of the process remains compliant with regulations (e.g. MiFID II).

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