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Capgeminis World Wealth Report 2018: Wealth management firms need to accelerate hybrid transformation and transform budget approaches to deal with potential BigTech opportunity threat

The World Wealth Report 2018 (WWR),
released today by Capgemini,
reveals that high net worth individuals’1
(HNWIs) satisfaction level with hybrid advice2
fell 5.1 percent to 57.3 percent. Additionally, more than 50 percent of
HNWIs expressed interest in wealth management services offered by BigTech3
firms. To address the decline in HNWI hybrid satisfaction and prepare
for BigTech’s entry into the industry, wealth management firms are
accelerating the transformation of their hybrid advice model and
investing in innovative technologies such as intelligent automation and
artificial intelligence (AI).

“We are seeing that returns alone cannot sustain a wealth management
business. Hybrid models are gaining popularity because HNWIs can tap
into financial planning services in a modular, pay-as-you-go manner and
take control of their wealth management journey. Depending on their
needs, they can choose from automated self-service delivery, a wealth
manager-led approach, or a combination of the two,” said Anirban
Bose, member of the Group Executive Board and Head of Capgemini’s
Financial Services Strategic Business Unit.

Wealth management firms accelerate move to hybrid in anticipation of
BigTech entry

According to the report, 68.7 percent of HNWIs globally said hybrid
advice, which combines human wealth managers and online tools, would be
a significant factor when consolidating assets with their primary wealth
management firm over Q1 2018 to Q1 2020.

Regionally, hybrid advice was considered most important by HNWIs in
Latin America (76.1 percent) and Asia-Pacific, excluding Japan (68
percent.) There was also strong importance placed on hybrid advice by
North American HNWIs (55.2 percent), while Europe and Japan were the
only regions where fewer than 50 percent of HNWIs cited hybrid advice as
highly important (48.4 percent and 29.3 percent respectively),
indicating that it is nonetheless a key element of the value proposition.

Wealth management firms must accelerate their transformation

Wealth management firms made progress in their hybrid business model
transitions globally between Q2 2017 to Q1 2018, with 57.1 percent of
firms reporting that they have a hybrid transformation program underway
in 2018, a 3.4 percent jump over the previous year. But the report
highlights that these advances are not fast enough, considering the
decline of HNWI satisfaction with hybrid advice propositions and the
potential entry of BigTechs into the wealth management industry.

There is broad consensus that the widespread global entry of BigTechs
into the sector is likely to be a case of when rather than if.
There is also consensus that Asia-Pacific will be the first region to
see this development followed by North America and then Europe.
According to the report, with more than 50 percent of HNWIs expressing
an interest in wealth management services offered by BigTech firms, this
could translate to an estimated US$12 trillion of potential asset flows
based on the percentage of the portfolio that HNWIs would allocate to
BigTech wealth propositions.

The interest in BigTech wealth management was highest among HNWIs in
Latin America (87.8 percent), while interest in Asia-Pacific, excluding
Japan (81.5 percent) jumped 9 percentage points from Q2 2017. Globally,
younger HNWIs (under aged 40) continued to be the most open to BigTech
wealth management services, with 75.8 percent indicating significant
desire compared to 21.9 percent of HNWIs aged 60 and over.

To ensure flexibility and innovation in meeting the new business models
that will emerge from BigTech entry, wealth management firms will need
to move away from traditional budgeting approaches of “run the bank”4
and “change the bank.”5 The current need is to move to a more
dynamic, portfolio-based approach focused on four pillars of
transformation: catching up; maintenance; big bets on new initiatives;
and ventures.6 To transform and drive hybrid innovation,
leading firms are heavily investing in technologies such as intelligent
automation and AI, as they prepare for an industry landscape in which
BigTech firms play a larger role.

BigTech entry most likely to be based on cooperation and competition

According to the report, the most likely approach for BigTech entry into
wealth management will be based on either collaboration or frenemy
co-opetition7 models. White-labeling of an
existing wealth management firm’s products and services offers one route
to a mutually beneficial collaborative partnership, whereas a frenemy
relationship could arise when an existing wealth management firm
leverages BigTech technology and operational scale with outsourced back-
and middle-office processes, while at the same time competing with them
in other areas of the financial services business – such as payments and
consumer loans. Wealth management firms have a clear point of
differentiation around investment expertise, value-added services and
client intimacy, while collaboration, based on white-labeled
distribution (especially relevant to asset managers) or through
selective areas of partnership, could drive client acquisition. However,
the report concludes that the frenemy approach is most plausible,
since the jump in required capability and resulting investment to enter
wealth management may lead BigTech firms to both compete and collaborate
with wealth firms.

Research Methodology

The World Wealth Report from Capgemini is the industry-leading benchmark
for tracking high net worth individuals (HNWIs), their wealth and the
global and economic conditions that drive change in the wealth
management industry. This year’s 22nd annual edition includes
findings from in-depth primary research on global HNWIs’ perspectives
and behaviors. Based on responses from more than 2,600 HNWIs across 19
major wealth markets in North America, Latin America, Europe and
Asia-Pacific, the 2018 Global HNW Insights Survey explores HNWI
investment behavior including asset allocation, fee models and
investment preferences. The survey also measured current HNWI investment
behavioral patterns of global HNWIs, including their asset allocation,
HNWI confidence levels and asset allocation decisions.

For more information or to download the report, visit www.worldwealthreport.com

About Capgemini

A global leader in consulting, technology services and digital
transformation, Capgemini is at the forefront of innovation to address
the entire breadth of clients’ opportunities in the evolving world of
cloud, digital and platforms. Building on its strong 50-year heritage
and deep industry-specific expertise, Capgemini enables organizations to
realize their business ambitions through an array of services from
strategy to operations. Capgemini is driven by the conviction that the
business value of technology comes from and through people. It is a
multicultural company of 200,000 team members in over 40 countries. The
Group reported 2017 global revenues of EUR 12.8 billion.

Visit us at www.capgemini.com.
People matter, results count.

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1 HNWIs are defined as those having investable assets of US$1
million or more, excluding primary residence, collectibles, consumables,
and consumer durables.

2 Hybrid advice is defined as “Putting clients in the driver’s seat
by allowing them to tap into life-stage and need-based wealth management
and financial planning capabilities in a modular, personalized
pay-as-you-go manner. These capabilities will be delivered through: the
amalgamation of (1) a cognitive-analytics-driven, automated/self-service
delivery (such as for basic investment management); (2) a human-led
delivery (such as for complex wealth structuring); or (3) a wealth
manager-assisted hybrid approach – as preferred by the client.”

3 BigTech is a general term to cover data-driven technology firms
not traditionally present in financial services, such as Google, Amazon,
Alibaba, Apple, and Facebook.

4 “Run the bank” refers to catching up and maintenance related
investments such as investment in legacy and new systems, tools,
processes, talent, etc.

5 “Change the bank” refers to big bets and ventures which involve
investments in major new initiatives, platforms, experimental areas
FinTechs, etc.

6 Catching Up refers to investments into new tools, processes, and
platforms deemed to be below par compared to the competition.
Maintenance refers to Ongoing investments into legacy systems, process
improvement, training, and talent, etc. Big Bets refers to investments
into major new initiatives, such as M&A, new markets, new segments, new
platforms, and new propositions. Ventures refers to investments into
experimental areas – tools, FinTechs, direct acquisitions, new models
etc.

7 The frenemy co-opetition model is one in which BigTechs both
compete and collaborate, thus enabling a wealth incumbent to capitalize
on BigTech’s technology and operational scale to deliver enhanced back-
and middle-office processes.

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