Asset & Wealth Management - BearingPoint

White Paper | Asset & Wealth Management

The way forward – retaining competitiveness in a demanding environment

Asset & Wealth Management

Table of contentsExecutive summary ...............................................................................................................................................3

Introduction .............................................................................................................................................................5

Current conditions – characteristics of German Asset & Wealth Management ........................6

High degree of regulation ...........................................................................................................................6

Low interest rate setting ...............................................................................................................................7

Competitive environment ............................................................................................................................8

Digital native customers ..............................................................................................................................9

Changing environment – three trends that are impacting Asset & Wealth Management ........................................................................................................................................................ 10

Trend 1: Regulatory tightening .............................................................................................................. 10

Trend 2: Increasing margin pressure ................................................................................................... 10

Trend 3: Takeover by the digital generation ..................................................................................... 11

The way forward – retaining competitiveness in a demanding environment ......................... 12

Redesigning the product and pricing structure ............................................................................... 12

Implementing a relationship-based customer experience ........................................................ 13

Creating a digital ecosystem .................................................................................................................. 14

Long-term outlook – possible scenario of banking in 2025 ............................................................. 15

Executive summaryThe German Asset & Wealth Management market has been dominated by private and retail banks for the last 40 years. However, with changing client needs and the fast progress in technology, new competitors such as online brokers and FinTechs have been entering the market. They offer transparent, cost-efficient and service-oriented Asset & Wealth Management solutions for all customer segments. In addition, the Asset & Wealth Management industry has been strictly regulated and finds itself in an ongoing low interest rate environment. Building on these already demanding conditions, three trends are going to shape the Asset & Wealth Management industry in the upcoming years and will put additional pressure on all types of investment companies. Traditional Asset & Wealth Managers need a clear direction to adapt their business models, otherwise a new generation of FinTechs will take over.

Current conditions – characteristics of German Asset & Wealth Management

The current German Asset & Wealth Management market is defined by a high degree of regulation, a low interest rate setting, a competitive environment and digital native customers.

The regulatory environment has been very rigorous since the financial crisis. The Markets in Financial Instruments Directive (MiFID I) has had a significant impact on the Asset & Wealth Management industry in recent years. The updated MiFID II version sets an even stricter framework, narrowing the range of inducements permitted and demanding full cost disclosure to the customer.

Since 2007, the European Central Bank’s (ECB) refinancing rate has dropped from 4.25 percent to 0 percent. Although the Federal Reserve System (Fed) is raising interest rates slowly, the ECB has not yet given any indication that it will follow suit. The trend seems to be a further ongoing low interest rate environment for German banks, also predicted by the former head of the German Bundesbank Axel Weber1. Recent figures2 show that lending and deposit banking remains by far the most important business, leaving banks vulnerable to ongoing low interest rates.

Retail banks, private banks, direct banks and private advisors compete in an already crowded market which is attacked aggressively by new market entrants; namely FinTechs. These new companies take advantage of modern technologies, an innovative culture and an agile organization. Even though they are still small, their core product has a significantly lower price tag enriched with digital value-adding services.

For many years, customer behavior and needs have been reshaped by Apple and Amazon. Consequently, the behavior and expectations of wealth management customers have changed significantly. Today’s clients are better informed and can access tools that compare advisory products across national and international institutions. The new generation of customers seek digital interactions with their Asset & Wealth Managers. In addition, the process of changing Asset & Wealth Managers has become quick and easy.

Changing environment – three trends that are impacting Asset & Wealth Management

Three trends are going to further impact the Asset & Wealth Management industry in the upcoming years. If left unmitigated, Asset & Wealth Managers will have trouble to keep up assets under management, earnings and margins.

MiFID II has already restricted the acceptance of inducements. The Netherlands, the UK and Denmark have taken a more restrictive approach and decided to completely ban inducements to all financial institutions. Across Europe there is the risk that inducements are likely to be banned completely in order to have a common legislative foundation and to minimize differences in standards between independent and non-independent advisors. Upgrades of the current regulation (MiFID II and Basel III) to stricter regulations are most likely in the future.

¹ “Ex-Bundesbank-Chef prophezeit dauerhaft Minizinsen“ Welt online, 11th June 2017² “Die Ertragslage der deutschen Kreditinstitute, Bundesbank“, April 2017

3White Paper | Asset & Wealth Management

In the last years, there has been a surge of new digital competitors entering the market with convenient and low-priced wealth management solutions. Furthermore, MiFID II increases cost transparency requirements, helping clients compare pricing levels of different wealth management solutions. The new competition and transparency requirements will lead to significant pressure on margins.

The customer landscape of the investment industry is facing a paradigm shift, as younger generations of clients with different thoughts and attitudes towards Asset & Wealth Management are taking over. Although personal contact as the relationship manager remains very important, the new digital native customer segment will demand digital and location-independent services. One key driver of this paradigm shift is a substantial wealth transfer from parents, who still rely on more traditional sales and service channels, to their children.

The way forward – retaining competitiveness in a demanding environment

To master these ongoing challenges, Asset & Wealth Managers need to adapt their business model, focusing on the needs of the new generation of customers and the future regulatory environment. Their product and pricing structure should be redesigned to reflect a transparent, relationship-oriented offer in the form of volume-based fees and wealth management solutions open to all customer segments. Hidden costs such as inducements should be eliminated. Furthermore, the transactional mind-set must be transformed into a relationship-based customer experience supported by modern technology. The winners will offer value-added services outside classic banking products by creating a digital ecosystem for wealth management solutions.

Long-term outlook – possible scenario of banking in 2025

The ultimate challenge will be implementing a fluid multi-channel customer experience between Robo-Advisor, cognitive agent and personal advisor. Banking itself will be redefined and its core value added within a multi-channel customer experience where client data is willingly exchanged in order to obtain a highly customized solution for real needs. The current banking products that reflect a mechanical process of self-initiated transactions will be substituted by a deep understanding and optimal realization of the real client needs by truly trusted and technically empowered advisors.

4 White Paper | Asset & Wealth Management

IntroductionThe German Asset & Wealth Management industry has been a strong pillar of the German banking system for decades. It manages approximately 2.9 trillion euro3 in assets. BearingPoint defines this industry as the entire investment industry (advisory and asset management) in Germany.

This white paper addresses the relevant issues for investment management executives. Major trends are underway that will affect the current business model of Asset & Wealth Managers in Germany. If not addressed adequately, a new generation of digital challengers will outflank traditional investment organizations with digital, transparent and cost-efficient value propositions.

This report is based on research and analysis conducted by BearingPoint experts, combined with public data on the German banking market made available by the Deutsche Bundesbank.

The current environment of the investment industry is defined by a high degree of regulation, a low interest rate setting, increased competition and digital native customers. These conditions will remain, become even more challenging and transform into three major trends: further regulatory tightening, increasing margin pressure and the surge of a new digital customer generation.

The report examines these trends and outlines the potential paths to respond to these challenges by redesigning the product and fee structure, implementing a relationship-based customer experience and creating a digital ecosystem. We finish this white paper by giving an outlook on a possible scenario of what banking, including Asset & Wealth Management, may look like by 2025.

3 BVI Investmentstatistik as of 30th June 2017


Current conditions – characteristics of German Asset & Wealth Management

High degree of regulationIn general, the regulatory environment for financial institutions has become increasingly rigorous following the financial crisis. Since 2009, various new regulations have been introduced addressing different segments of the overall business model. The Markets in Financial Instruments Directive (MiFID I) has had a large regulatory impact on the Asset & Wealth Management industry in recent years.

Considering the financial crisis and building on the rules already in place, MiFID II was designed to create more transparency and stronger investor protection. The revised regulation aims to address the shortcomings of the original MiFID I release and responds to lessons learned during the financial crisis. MiFID II will come into force on January 3, 2018. The areas that will have a high impact on the invest-ment industry include, among others, inducements, cost disclosure, product governance and research commissions.

InducementsInducements are fees, commissions or non-monetary benefits from third parties. A typical financial advisor usually receives attractive amounts of inducements through the sale of funds and certificates (front-end and regular fees). In the regulation of inducements, MiFID II differentiates between independent advisors, non-independent advisors and discretionary portfolio managers. For independent financial advisors or discretionary portfolio managers, MiFID II completely bans accepting and retaining inducements. For non-independent financial advisors, MiFID II does not completely ban inducements. However, the payment of an inducement must be utilized to enhance the quality of the relevant service to the client and not impair compliance with the firm’s duty to act in the best interests of the client.

Cost disclosureMiFID II requires Asset & Wealth Managers to disclose information on all costs to the customers and charges related to financial instruments and ancillary services (front-end and regular fees). The number must be disclosed in percentage points as well as in absolute value. Furthermore, the information must be presented both on an ex-ante and ex-post basis. At least annually, the firm should inform the client on costs incurred.

Product governanceMiFID II sets detailed product governance requirements for investment firms, which include the identification of a product’s target market. The requirements cover both firms that develop products and those that offer or recommend products to clients. Developers will have to provide a first definition for the products’ target markets.

Research commissionsMiFID II imposes strict conditions regarding clients’ payments for research. The new directive requires the use of a dedicated research payment account and regular assessments of research quality.

The new rules are set to change the business model of the investment industry significantly as they make it harder to collect certain types of fees (inducements) and make costs much more transparent and comparable to the customer.


Low interest rate settingEurope has been in a low interest rate setting for almost ten years. The European Central Bank (ECB) has lowered interest rates from 4.25 percent in 2007 to the current rate of 0 percent. Even though the Federal Reserve System (Fed) increased interest rates during the first quarter of this year and the ECB announced the reduction of its assets purchase program, it is likely that there will be no significant change in European interest rates in the upcoming years.

For German banks, interest income is by far the largest contributor to total operating earnings. Across all banking groups, net interest income makes up 75 percent of operating earnings while commission income sums up to 23.8 percent (2015)4. However, earnings allocation differs between financial institutions depending on their business model.

In recent years, there has been a positive overall shift in the earnings allocation. For all types of banks, commission income as a percentage of total income increased between 2010-2015 by 1.8 percent from 22.0 percent to 23.8 percent. This trend has been positive for all types of banks except for regional cooperative banks, where commission income as a percentage of total income decreased by 2.1 percent.

FIGURE 1: COMPONENTS OF OPERATIONAL REVENUES IN 2015

In light of the low interest rate setting, the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and the Deutsche Bundesbank conducted a survey in 2015 asking 1,500 banks about earnings and resilience in the low interest environment. The outcome was that banks expected the aggregated results before tax to decrease by approximately 25 percent until 20195.

The low interest rate environment does impact average German banking customers as well. Life insurance and the “Sparbuch“, which is the typical savings account in Germany, have been the main investment vehicles for the last 70 years. Due to the low interest rate environment and inflation, the money stored in these savings accounts has been decreasing in value in recent years. Hence, these savings instruments have become more and more unattractive and the willingness to invest in alterna- tive products is increasing.

The continuously low interest rate environment has put ongoing margin pressure on banks’ interest income. As a result, banks are forced to focus and foster the share of commission income and the reflected products and services.

0 %

-2.1 %

+2.1 %

+4.1 %

+3 %

+2.4 %

+1 %

+1.8 %

Percentile change of commission income as percentage of total earnings 2010 to 2015

all groups

Credit Banks

Cooperative Central Banks

Savings Banks

State Banks

Regional Cooperative Banks

Large Banks

Special-Purpose Banks 2.8 %79.2 % 17.7 %

65.9 % 26.0 %1.7 %

2.1 %82.5 % 10 %5.4 %

-0.9 % 78.2 % 22.7 %

0.4 %78.4 % 21.0 %

-1.7 % 2.9 %75.0 % 23.8 %

interest rate surplus commission rate surplusother surplus trading surplus

Components of operational revenues in 2015

71.4 % 19.1 % 15.5 %-5.9 %

67.8 % 36.0 %-11.4 % 7.6 %0.2 %

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6.4 %

4 Die Ertragslage der deutschen Kreditinstitute, Deutsche Bundesbank, April 20175 Umfrage zur Ertragslage und Widerstandsfähigkeit deutscher Kreditinstitute im Niedrigzinsumfeld, Deutsche Bundebank/ Bundesanstalt für Finanzdienstleistungsaufsicht, 18th September 2015


Competitive environmentThe Asset & Wealth Management market has become highly competitive in the last years due to the aggressive entrance of FinTechs, with Robo-Advisors leading the charge.

FinTechs’ investment management solution is mostly based on Robo-Advisory. Clients simply answer a set of questions regarding their personal risk and investment preferences and an algorithm finds the optimal asset allocation for their needs. The money is usually invested in standardized, low-cost wealth management solutions.

Most of the Robo-Advisors have a volume-based pricing model. As a result of their low cost-structure, they can provide services for a price between 0.39 percent to 1.00 percent p.a. on the assets held in the securities account. The established Wealth Managers usually offer their services to an exclusive clientele with liquid assets of more than half a million euros. In contrast, Robo-Advisors offer their services at very low initial investment amounts. Since their business model is based on economies of scale, it is even favorable for them.

Although all Robo-Advisors offer similar products in the form of standardized wealth management solutions, there is a differentiation in the service range. Robo-Advisory 1.0 offers a questionnaire and allocates the assets once in line with the results of the assessment. The more evolved group of Robo-Advisory 2.0 offers managed adjustments (rebalancing) of the client’s assets and the allocation over time in line with their risk profile and the initial distribution of asset classes. Robo-Advisory 3.0 offers an investment strategy approach as well as managed and algorithm-based adjustments (rebalancing). The next level, Robo-Advisory 4.0, is a completely self-sufficient working model, which takes all the invest-ment decisions based on the learning algorithm and the client’s risk profile. This Robo-Advisor 4.0 is part of a digital ecosystem overseeing the entire financial income and risk exposure (for example salary, insurance and mortgage). Currently there are no Robo-Advisors that would fall into category 4.0. However, eventually new Robo-Advisors will evolve into this category.

In terms of management type, most Robo-Advisors use passive funds management, which only invests in ETFs to implement the client’s strategy. Only few Robo-Advisors use active funds management, which takes stocks and derivatives as hedging instruments in more opportunity-oriented strategies.

FIGURE 2: ROBO-ADVISOR OVERVIEW

Easyfolio

individual risk assessment,

minimum costs, long investment

horizon

anti-cyclical investment,

diversification, individual risk assessment

diversification, individual risk assessment,

tax optimized funds, profit

and risk optimized strategies

concrete goals, diversification, individual risk assessment,

minimum costs

low costs, high liquidity, small tracking

error, save replication

method

diversification, individual risk assessment,

profit and risk optimized strategies,

minimum costs

no minimum investment



1,000 € (with savings-plan)

5,000 € (without

savings plan)

10,000 € 5,000 €

0.65 % + ETF-costs

0.39 % + 10 % of profits + ETF-costs

0.39 % - 0.99 % + ETF-costs

0.75 % + ETF-costs

0.79 % + ETF-costs

Ginmon Growney Vaamo Scalable Investify Liqid

price (p.a.)

minimum investment

strategy

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

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- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

1.00 % + ETF-costs

0.15 % - 0.90 % + ETF-costs

100,000 €

controlled, diversified

portfolio and low costs

individual assessment of chances and

risk, transparent price structure

2,500 €

0.45 % - 0.95 % + ETF-costs

Fintego

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

implementation of

investment strategy

ETFs

ETFs from Blackrock,

active funds from

Morningstar

ETFs ETFs ETFs ETFsETFs ETFs

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The new companies have heated up the competition in an already crowded market. Even though they lack the personal relationship of traditional Asset & Wealth Managers, their core product is highly competitive and has a significantly lower price tag.

In addition to the mentioned Robo-Advisors, the NIIIO finance group approaches the market with the strategy of software as a service (SaaS). These software solutions will be operated by NIIIO but appear in the corporate design of the financial institutions. That gives the established players an opportunity to offer their clients a new product without the high cost and risks of developing a software solution from scratch, while new regulatory requirements will be implemented within the respected versions.

Digital native customersSince the mid-1990s, the digital world has had a revolutionary impact on culture, commerce and technology, resulting in digitally-enabled business models across all industries. Nowadays, roughly 40 percent of the world’s top 32 brands are so-called “digital ecosystem managers” such as Apple, Google and Amazon. Digital ecosystem managers have been highly successful due to their in-depth customer understanding and their ability to bundle products and services to offer customized solutions for the new generation of customers.

The behavior of Asset & Wealth Management clients has changed in line with the surge of digital business models over the course of time. The exclusivity that Asset & Wealth Managers used to enjoy by their clients belongs to the past. Today’s clients are better informed and can access tools that compare advisory products across national and international institutions in seconds. They consider carefully which task they allocate to which Asset & Wealth Manager, thus demanding transparent and easy to understand solutions for comparing fees and service levels among Asset & Wealth Managers. Any skepticism older generations may have against the “digital world” will not play an important role when the digital natives take over.

In all areas of banking there has been a surge in the number of digital interactions among younger generations of clients, such as video chat and online brokerage. For instance, trade ideas are now executed via mobile devices and can be cancelled over the phone if the customer changes their mind. This confronts Asset & Wealth Managers with a new challenge: Amid their highly complex IT infra-structure, they must now synchronize data across all sales and service channels. Moreover, once customers have gone fully digital, they access on average more services in contrast to clients who mostly use traditional channels.

When asked, clients insist on the importance of a stable relationship manager. However, the rise of the new generation has put traditional Asset & Wealth Managers under pressure to offer new technology-based solutions while at the same time differentiating themselves from the new competitors.


Changing environment – three trends that are impacting Asset & Wealth ManagementTrend 1: Regulatory tighteningOne of the more controversial topics in European regulation has been the handling of inducements received by financial advisors. Regulators see these fees as non-transparent and responsible for misguiding client advisory.

As mentioned in the previous chapter, MiFID II has already restricted the acceptance of inducements. Nonetheless, each of the 27 EU members is allowed to use a more restricted approach in implementing MiFID II. The Netherlands, Denmark and the UK for example, have decided to implement a complete ban on inducements. This has been a significant change in the operations of Asset & Wealth Managers operating in these countries, thus forcing them to re-evaluate their entire business models.

Across Europe, inducements are likely to be either banned completely or further restricted following the implementation of MiFID II. Furthermore, the differentiation between independent and non-independent advisors in the acceptance of inducements may be a short-term solution calling for a more consistent inducement standard across all advisors.

Regardless of the jurisdiction, there is a clear regulatory trend to move away from inducements and towards a more transparent, front-end fee structure.

Trend 2: Increasing margin pressurePrior to the wave of regulation triggered by the financial crisis, the investment industry benefitted from a low level of regulation, allowing it to generate high margins by offering complex and non-transparent products and pricing models. The Asset & Wealth Management industry also benefitted from loyal, uninformed and non-price sensitive customers. The investment fund business was especially lucrative. Advisors collected front-end fees up to 6 percent, transactions costs, management and administration fees as well as inducements from the capital management company. A reallocation of the deposit to generate further fees at the client’s expense (churning) was not unusual.

However, the end of the golden age for this business model has arrived as margins are being attacked from two sides: lower prices through increasing customer price sensibility and higher costs through further regulation.

In the past, clients used to be guided by their relationship manager. Prices and services between different Asset & Wealth Managers were either not comparable or a high effort of comparing them was required. The lack of alternatives and the custom of conducting business face to face usually led to a strong customer-advisor relationship. Today, digital businesses and transparency requirements are changing the situation. Through transparency requirements, clients have complete clarity over all costs related to a transaction. Furthermore, clients check offers online before considering an investment decision and compare prices and service levels. As clients are getting used to doing business online, the asset of having a personal advisor is becoming less valued, taking away the last reason for traditional Asset & Wealth Managers to charge higher prices – unless the role of the personal advisor is fundamen-tally redefined.

An abatement to increasing regulation does not seem to be in sight, competition is higher than ever before and clients are becoming more price sensitive. Consequently, Asset & Wealth Managers should expect further increasing operational costs and lower prices for current products and services.


Trend 3: Takeover by the digital generationThe customer landscape of the investment industry is facing a paradigm shift, as younger generations of clients with different thoughts and attitudes towards Asset & Wealth Management are taking over. The new digital native customer segment will increasingly demand digital and location-independent services accommodating their needs. One key driver of this paradigm shift is a substantial wealth transfer from parents, who still rely on more traditional sales and service channels, to their children.

Taking the “Diffusion of Innovation” theory by Rogers into consideration, not only tech-savvy customers are going to demand digitally fueled services but also older generations will adopt them at some point. How customers approach a new technology can be classified into five segments:

Innovators (2.5 percent) – Innovators are the first customers to adopt an innovation. These customers are willing to take on more risks and are typically young, have a high social status, great financial resources, are very social and have close contact to scientific sources and interaction with other innovators.

Early adopters (13.5 percent) – This is the second fastest category of customers who adopt an innovation. These individuals have the highest degree of opinion leadership compared to other categories. Early adopters are typically young in age, have a high social status and financial resources, an advanced education and are socially forward thinking. However, they are more discrete in adoption choices when compared to innovators.

Early majority (34 percent) – Customers in this category adopt an innovation after a varying amount of time. This time of adoption is significantly longer than the innovators and early adopters need. The early majority adopters tend to be slower in the adoption process, have above average social status and seldom hold positions of opinion leadership in a system.

Late majority (34 percent) – Customers in this category approach an innovation with a high degree of skepticism and after the majority of society has already adopted the innovation. The late majority are typically skeptical about an innovation, have below average social status, very little financial resources and very little opinion leadership.

Laggards (16 percent) – Customers in this category are the last to adopt an innovation. Unlike some of the previous categories, customers in this category show little to no opinion leadership. These customers typically have an aversion to change-agents and tend to be advanced in age. Laggards typically tend to be focused on “traditions”, are likely to have a low social status, low financial resources and contact with only family and close friends.

More importantly, according to this same theory, a new innovation such as Robo-Advisors will achieve mass market acceptance when market penetration reaches beyond the early adopters segment, which is about 15-18 percent of the entire market. Consequently, after the wealth transfer from the old to the new generation, it is very likely that market penetration has grown beyond that tipping point. This results in an acceptance of new digital sales and service channels within the older, more skeptical customer generations.


The way forward – retaining competitiveness in a demanding environmentThe further expected regulatory tightening, increased margin pressure and the takeover by the all-digital customer generation demand immediate actions by Asset & Wealth Management companies.

The product and fee model should be transformed into a transparent and easy-to-understand structure. Hidden costs such as inducements should be completely abolished and replaced by clear volume-based fees.

The customer experience must be transformed from the current transactional experience to a relationship-based model underlined by modern technology. Value-added services will support the customer experience.

A digital ecosystem should be implemented to partner with specialized FinTechs. Through this, services outside classic Asset & Wealth Management products can be offered, creating a true value proposition and unique selling point.

FIGURE 3: SOLUTIONS OVERVIEW

Redesigning the product and pricing structureThe pricing model of Asset & Wealth Managers should be designed to reflect a transparent, volume- based structure. Inducements should be reduced significantly or, preferably, abolished completely. This requires a significant change as many Asset & Wealth Managers still depend highly on transaction-driven (non-transparent) pricing structures with a strong reliance on inducements.

The future pricing structure should be built on two pillars: a volume-based pricing model for investment products and wealth management solutions open to all customer segments.

A volume-based pricing model for investment products

Nowadays, most Asset & Wealth Managers rely on transaction-driven pricing models that charge the customer for each transaction made. In contrast to this transactional perspective stands the volume- based pricing model. In this model, clients pay a volume-based percentage fee on the assets held in the securities account and are not charged any additional costs. Usually these models are supplemented by further services, such as regular portfolio reviews and chief investment strategist publications. There are several advantages in offering volume-based pricing models:

• Creating easy-to-understand and transparent fee structures • Implementing a volume- based pricing structure• O�ering wealth management solutions open to all customer segments

• Regulatory compliance• Transparent pricing/product structure• Margin increase

• Implementing a quantitative advisory process• Offering the same process on all distribution channels (branch, online, app)• Personalizing the customer relationship

• Additional customer value• Unbiased and sophisticated investment advisory process• Client centricity

• Creating a digital ecosystem for wealth management solutions• Using strategic partnerships to innovate the business model• Offering value-added services outside classic banking products

• Big data analysis• Specialist service offerings• Performance leadership

Strategy impact on business model

Redesign product and pricing structure

Implement a relationship-based customer experience Create a digital ecosystem

1 2 3


• The advisory process is transformed from a pure transaction-based process into a customer- centric relationship-based process. The advisory process gains quality since the advisor is not incentivized by any additional payments

• The digital native customer is already used to all-in fee service models from other areas and products (for example Netflix, Spotify, Amazon Prime)

• The amount of inducements is reduced as there are no transaction-based cost components

• On average, margins are increased as fees are collected regardless of any transactions

Due to the advantages for clients as well as for providers, volume-based pricing models are significantly gaining market share but are so far mostly used by FinTechs.

Wealth management solutions open to all customer segments

Traditional Asset & Wealth Managers offer wealth management solutions as premium products only for wealthy clients as there is a substantial minimum investment requirement. This is done as these products are usually tailored to the specific needs of the customer and thus require high minimum fees in order to operate profitably.

The mentioned trends require Asset & Wealth Managers to offer clients standardized wealth manage-ment solutions in addition to their already existing customized solutions. These products are usually based on cost-efficient ETFs or index funds and are offered with or without low minimum investment requirements. FinTechs almost exclusively offer such standardized wealth management solutions. There are several advantages in offering standardized wealth management solutions:

• These wealth management solutions do not produce inducements

• On average, margins on assets under management are increased as fees are collected regardless of any transactions

• The investment process is standardized and automated leaving the advisor more time to foster client relationships and acquire new clients

However, a clear differentiation between the standardized and customized solutions is required to avoid cannibalization effects and allow upward selling. A preferable option is the differentiation with individual value-adding services and the leverage of the bank’s USP – the client relationship.

Implementing a relationship-based customer experienceWith an almost endless pool of financial institutions competing to provide a wide range of products to clients, Asset & Wealth Managers must strive to provide a superior customer experience. This requires a shift from a transactional mind-set to one that is focused on the relationship with the customer.

A relationship-based customer experience is built on three pillars: a consistent, quantitative advisory process, multi-channel integration and personalization.

The advisory process – human or Robo-Advisor or both – is the central value proposition of any Asset & Wealth Manager. The advisory process should be designed in order to be consistent, achieve the optimal risk/return profile and be comprehensible to the customer. A consistent advisory process ensures that regardless of the channel or the advisor, the same customer profiles always receive the same solutions. In order to achieve the optimal risk/return profile for the customer, the asset allocation has to be defined on behalf of the customer needs (the needs define the risk) and quantitative data (income, expenses, assets and credits). Comprehensibility is important as the customer needs to understand the reasons and consequences of the chosen solution.


Customers need to engage with their Asset & Wealth Manager via their preferred channels at a time which is convenient for them. Asset & Wealth Managers should offer their advisory process with human advisors as well as with Robo-Advisors (preferably with different service levels in order to differentiate the processes).

For traditional Asset & Wealth Managers, personalization is probably the most important part of the customer experience as it is the only aspect that truly differentiates them from pure technological Robo-Advisors. A requirement for personalization is customer data. Customer data needs to be digital-ized and integrated in one central platform. Building on up-to-date customer data can generate leads for advisors and give them personalized opportunities to approach clients. It is critical for Asset & Wealth Managers to deliver on the personalization promise in order to be competitive in the battle with Robo-Advisors. To do so it requires the fundamental redefinition of the advisor role to a dedicated ambassador for the client towards the bank, which constantly gathers client information and designs a seamless customer journey.

A superior customer experience will result in increased customer satisfaction, loyalty and greater customer lifetime value.

Creating a digital ecosystemFinTechs have created a clear and simple value proposition for the customer. They offer standardized wealth management solutions through technology-based platforms at low prices. The worst possible solution for traditional Asset & Wealth Managers would be to copy this value proposition and enter into a price war. Instead, traditional Asset & Wealth Managers need to create their own personalized value proposition.

One feasible scenario would be to base this value proposition on a digital ecosystem offering superior services to clients outside classic banking services. Within a digital ecosystem, Asset & Wealth Managers could selectively partner with specialized FinTechs.

A partnership would be profitable for both sides. The cooperation would offer the clients of the established players new valued-added services and thereby strengthen the relationship with the institution. The FinTech would be provided with a bigger client base allowing it to leverage its business model. The possibilities and risks of a cooperation between FinTechs and established players in the financial services sector is the topic of the more detailed white paper “Co-opetition in the banking industry” by BearingPoint.

Looking further into the future there is a high potential for a digital ecosystem solution within the investment industry. Customers would be given the option of choosing different value enhancing services within the platform of the Asset & Wealth Manager. This would be the additional service and modernization the new generation of customers is looking for.


Long-term outlook – possible scenario of banking in 2025The trends and recommendations described in this paper refer to necessary transformations in the near future. Looking beyond the horizon and considering the impact of the aforementioned regulatory changes as well as PSD2 (open API for available client data), GDPR (client data protection regulation), the next evolution of client-facing cognitive agents (for example Siri, Alexa or Amelia) and thinking through the real core value of banking products and services, the following picture could be a probable scenario:

FIGURE 4: BANKING 2025

1. Individualized omnichannel customer journey between robos, humans and agents The interface to clients occurs through multiple channels, is synchronized with the individual customer journeys and is indifferently and fluently merging interactions between clients, cognitive agents and relationship managers.

2. The synchronization between resources and needs is the real core productBanking evolves from “mechanics” (a means to an end) into a comprehensive service to synchronize, optimize and manage all available resources to fulfill the customer’s real needs.

These needs can be understood as living up to a certain standard with regards to education, family, security, health, mobility, a household, food, entertainment, information, luxury, etc. Resources encompass available and predicted income, savings, investments, assets, credits, etc.

Relationship manager & cognitive agent

Synchronize, optimize, manage

Comprehensive client data

DEMTrusted providers for:

Documentmanagement

Providermanagement

Customized service o�ers

Advanced service portfolio (all inclusive)

Core service portfolio (banking)

Asset & liability management & reporting

Credit Account Assets

1

23 5

4

2

cloudGoogle AnalyticsmobileSocial media

taxe-commerceeventsreal-estatemobilityinsurance


Shifting from offering mechanics that are self-initiated by the client (for example buying and financing a house or making payments) to an all-around advisory and management service, the “trusted” relationship manager becomes a personal coach with a comprehensive understanding of the client, optimally performing and orchestrating all adjacent activities according to the needs.

3. Client data requires trust and innovative servicesIn order to enable and receive these services, clients will seek the most trusted provider and will increasingly provide their personal data set. Both an attractive service offering and a trusted relationship are the preconditions to a successful engagement with clients in the future.

4. Desired transparency follows legal requirements, client types and the quality of the relationship

Transparency (including product and risk understanding, reports and rationale for transactions) will evolve into an individualized function combining legal requirements, customer-specific wishes and the established level of trust or relationship. A decreasing number of clients will want to maintain control and detailed oversight over all transactions, as most of the new generation will choose the wealth management services and be willing to let the relationship manager decide as long as they believe in the outcome and the fulfilment of their real needs.

5. Digital ecosystem management as the powerful add-on for the realization of clients’ needs

Beyond optimizing, managing and synchronizing needs with resources, a powerful add-on banks will offer is to significantly enhance the availability, proximity, speed and quality of highly customized service bundles through digital ecosystems with providers such as insurance companies, universities, retailers, etc.

All three trends covered in this paper are leading towards a development in this direction. First, client data becomes a fungible item and can only be used at the discretion of the client. In addition, client-appropriate transparency and risk management are the cornerstones of new regulatory requirements.

Decreasing margins are forcing banks to look for new digital and value-added services and this new model leaves extensive room for new revenue generation. Young clients will especially welcome such an evolution of the banking model and find their expectations met.

The realization of a volume-based model as well as an enhanced offering of increasingly intelligent and cash-flow oriented Robo-Advisors, with the relationship manager taking the role of an ambassador for the client as recommended in this paper, paves the way towards this probable scenario.


List of figuresFigure 1: Components of operational revenues in 2015 ......................................................................7

Figure 2: Robo-Advisor overview .....................................................................................................................8

Figure 3: Solutions overview ........................................................................................................................... 12

Figure 4: Banking 2025 .................................................................................................................................... 15


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Contact

Germany

Theodor SchabickiPartner [email protected]

Authors: Günther Petelin, Binjamin Sancar, Sören Schröder


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About BearingPointBearingPoint is an independent management and technology consultancy with European roots and a global reach. The company operates in three units: Consulting, Solutions and Ventures. Consulting covers the advisory business; Solutions provides the tools for successful digital transformation, regulatory technology and advanced analytics; Ventures drives the financing and development of start-ups. BearingPoint’s clients include many of the world’s leading companies and organizations. The firm has a global consulting network with more than 10,000 people and supports clients in over 75 countries, engaging with them to achieve measurable and sustainable success.

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