Morningstar Magazine - June/July 2017 - 59

will intensify as robos become more of a threat to
the old business models of the industry giants.
While many bank executives profess to see
prospects for cooperation, they may not be telling
the whole story.
For example, Michael Kemmer, executive director
of the Association of German Banks, while
conceding that many German banks cannot be
viewed as "the digitization avant-garde," maintains
that banks have a long history of digital business,
while most fintechs "neither have the capacity nor
the will to seek a banking license, which
poses high regulatory hurdles." This statement
may hold true, or it could be the proverbial
whistling Dixie.
Other experts maintain that robo-advisors will
pose a substantial challenge to wealth managers-
while not denying the opportunities for
innovators. According to the EY Global Wealth
Management Survey 2016, the preference
for robo-advice "is driven by the high-net-worth
segment, not the mass affluent and emerging
high-net-worth segments, as commonly believed
by some wealth managers." The report says
that high-net-worth individuals have significantly
greater awareness of robo-advisors than
do the mass affluent and are much more likely
to consider using robo-advice.
Legacy IT systems also pose a challenge. Running
out-of-date IT systems while trying to embrace
technological innovation and investing in

(regulatory-driven) risk-management tools and
compliance consume a large share of IT spending.
"This leaves little room for true innovation. When
budget cuts are made to IT, there is simply
no choice but to make cuts in innovation, since
there is minimal scope for reducing compliance
and maintenance spend," says Keating, of the
Werthstein Institute.
This concern is echoed elsewhere. "The industry
still operates on legacy infrastructure, in
many cases duplicated across geographies,
booking centers, and legal entities," says
the Deutsche Bank/Oliver Wyman analysis on
global wealth management. European wealth
managers run at cost-income ratios of 72%,
with fixed costs making up the lion's share of the
expenses, the study says.
But technological advances offer opportunities.
Lee Davidson, head of quantitative research
with Morningstar, sees the use of robotics as a key
trend that the industry will be able to capitalize
on. "Robotics process automation has applications
for many areas of wealth management firms-
data collections, compliance, banking activities,"
Davidson says. He also sees the potential for
optical and intelligent character recognition and
machine learning.
Davidson says that technology-driven pressures
to change exist up and down the value chain
of wealth managers, but he says that incumbent

EXHIBIT 2

Going Passive Indexing is gaining traction in the Netherlands, Switzerland, and
the U.K.
Estimated New Flow (€ Mil)
Domicile

Fund Type

2013

2014

2015

2016

Netherlands

Index

874

599

2,638

1,277

Active

-2,662

331

-2,184

-701

Index

-525

12,370

8,155

8,021

Active

-1,141

1,604

4,637

3,321

Index

6,269

13,263

9,738

4,917

Active

26,921

24,531

-6,655

-14,162

Switzerland
UK

firms shouldn't view these pressures as threats.
Instead, they should see them as opportunities to
optimize the way they run their business.
Upside of Disruption
While the prospects for the wealth management
industry are far from rosy, and consolidation
appears imminent, the industry still has ample
room to grow if it proves to be flexible and faces
up to the challenges ahead.

Robert Ruttmann, head of the Center of Customer
Insight on Financial Services at the Swiss
University of St. Gallen and founder of the think
tank Redesigning Financial Services, says that
wealth management incumbents should learn
from other industries. "Disruption can be painful.
But as disruption has become mainstream,
more wealth managers are thinking about
ways to improve the value they deliver to clients,"
Ruttmann says. "And with the right response,
disruption can offer enormous upside to
firms willing to recognize shifting customer and
industry trends early."
Managing current business while exploring new
opportunities will be crucial. Ruttmann
uses Kodak to emphasize his point. In 1999, Kodak
was the world's largest camera and film producer.
Kodak responded to rapidly declining film
sales in 2000 by cutting costs, even slashing R&D
budgets. Kodak's competitor Fujifilm followed
a different path. While maintaining the profitable
film business as long as possible, it successfully
switched to digital by transferring its expertise
to new markets. "Kodak missed the shift
to digital photography, leading to its bankruptcy
in 2012," he says. "This example illustrates
the importance of organizational ambidexterity
in the context of disruption."
How will disruption affect the wealth management
business? The answer depends on whether an old
industry-long immune to changes and still
showing signs of complacency-will pick up the
gauntlet of change and come to grips with
the fact that the good old days will not return. K
Ali Masarwah is editorial director, Europe, Middle East and
Africa, with Morningstar.

Source: Morningstar.

global.morningstar.com/Morningstarmagazine

59


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