Making Wealth Management Available to Everyone (#38)

[00:00:02] Ben: Hi, everybody. Welcome to our latest 4X4 Virtual Salon in which we’re going to be discussing the democratization of wealth management. So just before we kick off, I just want to put another date in your diary because at this time next week, so at 12:00 CT, 11 UK time, wherever you are, on the 18th of February, we have another 4X4 Virtual Salon also on the topic of wealth management, and we’re going to be discussing new business models in wealth management, and for that we’re going to be joined by Tinkoff Bank, by Elinvar, by additiv, and so we hope you can join us for that as well — sorry, the one I forgot was Impaakt. So we’re also going to be joined by Impaakt, which is a platform for impact investing data. So, hopefully you can join us for that.

[00:00:57] Okay, for those of you that are new to this format, the 4X4 Virtual Salon is so called because we have four speakers who I’m going to introduce in a second. We cover four topics, which for this 4X4 will be Changing Customer Trends, Changing Technology, New Business Models, and The New Fitness Landscape for Wealth Managers. For each of those topics there is a poll. You can see on the portal there, there’s a poll which you can complete anytime and we will make reference to the poll results during the conversation. And then last, but not least, we’ll take one audience question per topic. So if you have a question, please post your question in the questions portal. Okay, right, so we’re gonna kick off. I’m going to introduce our four speakers.

[00:01:49] I don’t know if this is how it appears for other people, but I’m going to start with my top left, which is Nikolai Hack, who is Head of Strategy & Partnerships at Nucoro. Nucoro, which is based out of the UK, has followed the “make yourself the first customer” route to market. Nucoro launched an automated investment service called XO Investing in the UK and then it now offers the platform to others. Its platform is pretty broad and it allows financial institutions to build a range of FinTech, money management, propositions, everything from automated investments and stock trading to digital wealth management.

[00:02:27] Next, we have Mike O’Sullivan, who I think doesn’t need such a big introduction, because he’s a veteran of the 4X4 Virtual Salons, having appeared last year on the one we did on post-pandemic wealth management. But for those of you that don’t know Mike, he is a former CIO of Credit Suisse. He’s the author of the much recommended book, The Leveling, which is about the world after globalization; and if you’re interested, we also have a podcast episode with Mike on that topic. And then last, he’s also a serial entrepreneur and investor and a board member and advisor.

[00:03:03] Which brings us, I think nicely, to Qiaojia and Rosecut, because Mike is an advisor to Rosecut, and Rosecut is a London based automated investment manager, it’s two years old. It has a very interesting customer acquisition model because it has a freemium service where you can access some of the tools and simulations and content to help you manage your financial affairs. But if you want Rosecut to manage your investments, then there’s a 1% fee for doing so. The average AMU of a Rosecut user is £200,000, so this is not an ordinary automated investment service, this is very much a premium automated investment service.

[00:03:45] And then last but not least, we have Sid, who is Head of Product at Hydrogen. Hydrogen is a banking as a service platform, helping brands embed banking services into their proposition, including wealth management services. And to do that it works with a network of partners including Cross River Bank in the United States and Stripe. Okay, so, right, let’s begin.

[00:04:11] As I said before, the first topic is Changing Consumer Trends and Qiaojia, we’re going to kick off with you, if that’s alright.

[00:04:19] Qiaojia: Okay.

[00:04:20] Ben: I wanted to ask you, how big is the opportunity that gets opened up by using automated investment services to target affluent or mass affluent customers? By how much can we increase the size of the wealth management industry by using automated investment services?

[00:04:40] Qiaojia: Thanks, Ben, for the question and glad to be here. I think this is a very interesting question. Because from the tech perspective, they think everyone wants to invest and everyone deserves to invest, maybe with £1, with £10, and it is made possible in the past10 to 20 years by a lot of the first generation robo-advisors. But if you look down in terms of the slice of the market of various segments, there’s core like high networth, affluent and retail based on The Credit Suisse Global Wealth Report, actually, Mike was part of the key contributors to that. It’s in the UK, 1% of the population, the top of the pyramid, owns 3 trillion of assets and the next segment, 15% of the population, affluent, owns another 3 trillion of assets. And the remaining 85% of the population owns 1 trillion, one-third of either the high net worth or affluent. So, this is why Rosecut sees us as a meat market provider. We want to cater to the middle sort of 3 million. And the second point I would make is that wealth is fluid, right? It doesn’t always stay with the same demographics or same group of people. So, wealth transfer is a big topic these days and a lot of the older generation gives the wealth to the younger children who basically use an app for everything. If they don’t put the money into a Rosecut app, they will put it into a crypto app. So, you know, technology first is kind of how we see to capture these kinds of opportunities.

[00:06:29] Ben: And Sid, I want to come to you next. So digital channels, digital services are, if you like, democratizing access to wealth management and what would be the benefit of that? So, if more and more people can access wealth management, what will be, I suppose, the social benefits?

[00:06:52] Sid: There’s quite a bit of benefits and I think one aspect to consider is that, like Qiaojia referred to there’s different layers or different groups of investors, right? If you consider some of the affluent or mass affluent market I think it becomes easier for them to access like a sophisticated products which weren’t available easier, earlier. So, for example, you’re getting access to like uncorrelated assets, like art or like structured real estate deals or private equity deals or even like wine, and those are all uncorrelated assets which weren’t available to that segment earlier. You had to have a much higher base to start off with. So I think that’s like a pretty big benefit to that segment of the market. For the lower end of the market, for the retail market and investors who are just starting out, I think access to like a brokerage and simple investment tools has really made a huge difference, as we’ve seen with all the recent GameStop and all of the other trading things that are happening at the moment. I think like it’s a mixed blessing, a mixed bag, with how some of these platforms are set up. There are some, like, for example, like public.com, which is a good one, which is focused on building engagement and literacy and community around it, whereas there are others which are built more on like gamifying it and at least in my opinion, they don’t always result in a positive benefit because it’s not really a game. So, I think all these tools are really helping bring wealth management to the fore in front of everyone, but I think we need to be a bit careful on what the propositions are and hope that they lead to positive outcomes for people.

[00:08:56] Ben: Fantastic. So, if I were to summarize what you said, it was slightly caveatic, but basically Qiaojia is telling us that there’s a very large addressable market of people who don’t have access to wealth management, and you’re saying that when they do, they’ll be able to get access to a wider range of asset classes, which will help them to diversify their risk or better manage their portfolios to their risk tolerance and then financial literacy should improve, so it seems like it’s pretty much a win-win situation. So, Nikolai, why is it still hard to convince consumers to sign up for wealth management services? Why is the cost of customer acquisition still so high, for example?

[00:09:36] Nikolai: Very good question. Thank you, Ben, for having me and thank you for being here, all of you. Yes, I think there is a bit of a misconception. I think, especially coming from inside the industry, I think we often think that we need to educate consumers more and explain things better, and explain things more, in more detail, but I’m not so sure that that’s actually what will help us here. If you look at some other examples from, like, I don’t know all the details of fractional reserve banking, but I will still get a mortgage to buy a house, right? Or, I’ll get a consumer loan to buy a car, which rests on that being a thing. Or, if you look at other pieces of technology, at our work we use G Suite and I don’t really know how Google does it, but I can edit a document at the same time as someone else is editing a document, but I’ll still use the product, right? Because it gives me a very material benefit. So, this product is not sold to me on the basis of its functionality, but on the basis of its outcomes for me. And I think we attempt to explain and educate people more, I think we’re actually putting off potential clients more than we are encouraging them. So, what really, I think helps, is if you have a focus on the outcomes instead of the product, I think especially within [inaudible 00:10:55] very guilty of explaining the concepts of investment management, the methodologies, the frameworks, the ins and outs of how it works, but for the average client most of the terminology doesn’t mean much, but they’re also not very interested in the details, they should be interested in the outcomes and what it does for them. They have objectives, goals, and plans for their life and the products we build should only be the underlying rails on which those goals and objectives are achieved. And that’s the winning proposition, I think. Also it means to break down the style of approach between saving, pensions, protection, investing, again, we look at those differently because they’re regulated differently, they have different revenue streams. Again, for the normal, average, especially mass market consumer, it’s quite irrelevant, because they only care about the outcome and they should care about the outcome, we should do the mental bridging in between to get them there.

[00:11:52] Ben: So, Mike, I’m going to come to you next. I want to ask you whether you agree with that statement. Is the way to encourage more people to take wealth management services, to portray their services more in an outcome-based way, rather than trying to explain to them how the mechanics of how the services work? And then the second thing I’d like to get your view on is the question we’ve asked in the poll, where people seem to be a bit split, between whether or not the pandemic has accelerated the democratization of wealth management. So, if you don’t mind commenting on both of those, Mike.

[00:12:33] Mike: I think these are fascinating areas, very apt in terms of everything that’s happening with Tesla, Bitcoin, GameStop, et cetera. So, let me try and react. And to go back to Nikolai, my experience is that that the process and the detail matter when the outcome is negative, right? I always try and design something for when things go wrong, because when you get a negative outcome, as many people who hold GameStop now in the last two weeks have, then you’ve got to go back and question your own decision making process, the marketing, the messaging from your broker, et cetera.

So I think detail and process are important in that regard. Broadly on the idea of the democratization of finance, I’ve got strong feelings in the context of what’s happening with Robin Hood, I would rather term it the democratization of risk, because that is what really is happening, because you have large established places like hedge funds or individual investors who are effectively selling risk to retail investors, effectively that’s what’s been happening with GameStop when we kind of analyze who has won and who has lost, and people are being exposed to lots of different types of risk they don’t know, they’ve never experienced before, illiquidity risk in the case of alternative investments, hurting correlation risk.

So, I rather see this as the democratization of risk. I also think we need to make a very sharp distinction between trading and the volatility of markets which is I think much more of an American than a European phenomenon. And then the idea of wealth management optimizing portfolios, which is obviously more a sane and balanced approach. And think anything that encourages people to have a balanced optimized approach to wealth is good and is useful, and that is in my view democratizing finance. So, I think, I think the idea of democratizing finance is also, someone mentioned financial literacy, and that’s a huge area, obviously being in the EU are beginning to get into this.

And for me, that’s the real barrier. Part of the time I’m involved with something called WEInvest, Women Empowered To Invest, whose aim is to get women to invest more and to invest better. In that project, one of the things we found is that men and women have these glass ceilings to finance and that the finance world talks to them in math and jargon, et cetera, about what should be products and events that are essential to their lives at retirement, but that’s communicated in a way that is obtuse and intimidating. So for me, the democratization of finance is really all about clarity and open and transparent communication.

[00:15:56] Ben: We’ve had a question from Jean Cristof, it’s about gaffers. So, Jean Cristof, I’m going to take it later on when we talk about new business models, if that’s alright, because I think can tie that into a question about aggregating services. So, I’m going to ask the question in this section, if that’s alright, and I would encourage other people to please post your questions, but I’m going to put this to you Sid, because I think Mike is raising a really interesting sort of distinction between the democratization of wealth management and democratization of risk. And my question to you is if we sort of disembody wealth management from the service providers, i.e. you know there’s this big trend towards embedding wealth services in other distribution channels, do you think that we therefore increase the risk of democratizing risk instead of democratizing wealth management?

[00:16:46] Sid: Yeah. I mean, I think there is a possibility, like, for example, if you offer through a brokerage to a provider who doesn’t have ownership of the risk in the book, then he is not going to be too worried about offloading it to as many people as possible, all he’s worried about is customer acquisition or making a cut on that. So I think where the risk sits is a very important sort of consideration, and so is the fiduciary responsibility, like exactly what are you giving to people, and takes the ownership, like when Mike mentioned, when things go wrong? So, I think just simply embedding some of the wealth management products without having a strong team to take on the fiduciary and risk and responsibility is actually going to be a bit harder and a bit more complicated than it seems.

[00:17:54] Ben: And so, in a model where you have banking as a service provider sitting between the regulated entity, the custodian and the customer, how does that play out in terms of risk management then? Who manages the risk?

[00:18:12] Sid: Usually it will be the banking institution, the institution that has the license that will always manage the risks. It’s on their books. They’re the ones who report to the regulators. So either the platforms or the software providers usually don’t have the risk on their books. And so that has been probably one of the reasons why sometimes embedding some of these wealth management services into other platforms takes way longer and way more complex than people think it is.

[00:18:46] Ben: Great, okay. I’m going to switch to the second topic and I’m going to come to you Nikolai again, we’re now going to talk about changing technologies. The question I wanted to ask you is which are the technologies that are most important in your view, in this democratization of wealth management? Do you think it’s analytics and the ability to use the trail of data that people leave as they interact with digital channels to be able to do that whole personalization at scale? So, what was once the preserved ultra high or the high net worth individual being, you know, democratized, so personalization being democratized.

[00:19:27] Nikolai: Yes, absolutely. I think, I mean, if we really talk about core technologies or deep tech, what is it then? I think obviously it’s cloud computing, it’s parallel processing, all the things on which most of the advances lie, and this is in general, of course, but yes, of course, and that brings with it the use of a lot bigger data sets and the extension of that is hyper-personalization definitely, and there especially, I think we can draw conclusions also from what’s happening in other industries, especially with e-commerce, media consumption, where hyper-personalization is the norm right now, where the offer you get is significantly different from what somebody else consumes, especially think about your Spotify recommendations with a curated playlist you get there. For example, you mentioned investing earlier that build in the UK and therefore example, based on an extremely high degree of automation, the platform builds a unique portfolio for every single client and then this portfolio is managed on an individual basis, on a daily basis, potentially; it doesn’t rebalance daily but it could. And that only works of course, because you have extremely capable server farms, in this case, it’s Amazon or Azure on which the proposition is hosted. And then at the moment of when you need to make the calculations to rebalance the portfolios, you just rent a thousand more workers that Amazon gives you at that very second, the couple of seconds it takes.

So based on that, personalization becomes a possibility at scale at very low unit economic cost, of course. I think something else that I’m quite excited about is the context generation through natural language processing and more important actually natural language generation. We work with a firm called Personetics and then there’s Cognitive Investment Technologies, a smaller UK player, they do very interesting stuff where, with the means of, of course sifting through again big data sets you give the client context to what’s happened in the market, how it has affected their portfolio, much like an advisor would, of course, but again, by bringing down the cost through skipping the human element, you are able to have a mass market proposition.

And I think the last one is classical automation and straight through processing along the entire chain, from onboarding investment proposals, reporting, et cetera, and especially their thing is also about the fluidity between the products, as I’ve mentioned before, saving, investing, pensions, et cetera, but also between the channels of self service and the advisor and that that becomes one experience. I think that’s also will be a key in propositions going forward.

[00:22:11] Ben: I’m going to come to you next, Qiaojia, I want to ask you, so Rosecut uses, still it’s human beings that manage the investments. But if we listen to Nikolai, if I interpret what Nikolai is saying, we can personalize portfolios and we can build a bespoke portfolio for everybody that matches their risks and so on, and in addition, it sounds like we’re getting closer and closer to doing the thing that’s much harder, which is, if you like the emotional aspect of wealth management, giving reassurance by using natural language processing and so on. Do you think there’s still going to be a role indefinitely for human beings in the provision and delivery of wealth management services, especially I suppose, for mass affluent and affluent customers?

[00:23:06] Qiaojia: Yeah that’s really a question that’s been debated within the digital community for the past 10 years or so. And I would say first of all, I want to make a distinction between personalized device and personalized portfolios. So I think for financial advice, it should always be personalized to your circumstances, your long-term life goals, your income level, even your wealth personality, am I a legacy kind of a person or to maximize my wealth and pass down to my children in the most tax efficient way, or I’m a freedom type of person who just wants to earn enough.

So in this case, we help you to define what is enough for your personal circumstances. I’m of the view that this is much more important than personalized portfolios. The traditional industry has come a long way from bespoke the portfolio and doing advisory services and frankly sometimes does not actually maximize efficiency or the return for the client. It’s like you are a chef and asking the customer to detect how you cook the meal, it does not always work very well. So, for us, we standardize portfolios with certain customization elements, but not necessarily bespoke or personalized that might really attract the affluent people.

So, this is why our discussion of offering has a standardized element, basically model portfolio, and then let you pick some interesting semantics, very much related to what Sid was saying, that the alternatives can play an interesting role here. So, going back to the personalized financial advice bids, if you think about the different types of client needs, as well as sort of the cost of human advisors, these are the two most important things driving the industry change.

So, people joke about going to see a wealth manager is like going to see your dentist every year. It’s the right thing to do, but it’s painful, and you really don’t see it, you know, private banks throwing, lunch and dinners and entertainment to make it slightly better, but still not everyone wants to sit down to go through a two hour integration of what are your assets, liabilities, and those kinds of topics. So, we actually found a lot of people enjoying a quiet time sitting at home, just going through that step by step at their own pace, rather than being interviewed by a wealth manager.

So, I think a digital service is a great place to capture those kinds of preferences who are sort of incremental wealth to the industry. And second is about the cost of advisors, you know, since RDR there is such a decreased in the qualified advice space and advisors that are retired, basically retired with some of the older kinds. So, if banks can’t make a living by providing bespoke advice to affluent people and then sort of dropping those clients then digital providers can’t either, and this has been evidenced by some of the first-generation robo-advisors having a hybrid model, hiring financial advisors to provide advice on an hourly basis.

So Rosecut’s view is that we, first of all, want to automate as much as possible, to build a beautiful user experience as close to social media experience, but you have the emotional elements, as well. Of course we still have a long way to go. And then use human as insurance. So anything that the automated platform doesn’t do we have the human advisor to pick up the slack and over time with the trend and the learning from those unanswered questions, you patch it up into the system and make it more and more sophisticated.

[00:27:18] Ben: Mike, I want to come to you next because, thank you very much, Qiaojia, because so far we’ve been sort of thinking about the wealth market and we’ve been splitting the demographic almost by how much money they have; are they affluent, mass affluent and so on, but it’s more complicated than that. Because as you said before, there are other demographics you can layer on top, such as women have different preferences, to men younger generations have different preferences to older generations.

And so I wanted to ask you a question that’s coming from the audience. If we assume that some of these robo-advisors, they have a high cost of customer acquisition today, for example, and they target say mass affluent or affluent, what is the possibility to grow with the demographics, whether they slice them in different ways? So they target younger generations who are mass affluent, who may over time accumulate more assets, how do you see the possibility for some of these new entrants to kind of move upstream into high net worth or ultra high net worth, that may be either by targeting a different demographic or growing with their existing demographic?

[00:28:35] Mike: Okay, so I think that there’s maybe two things here, one is the various changing demographics and then the other is the business model and how we capture that. And I think some online banks and online digital new entrants to the digital wealth management marketplace have made a mistake in paying far too much in terms of customer acquisition costs, and you see that in some of the results and some of the grounds they have, at a gross level they push the model of focusing more on the experience of what the theme is, which is sort of high net worth works because you don’t rely on playing odds on social media, there’s an element of kind of professional conduct as well.

So first of all, on the demographics I think in general, the wealth management industry is very poor at demographics and I kind of scold banking colleagues in old banks by saying you go to a supermarket or a shopping center, or go to High Street and look at how well luxury goods companies and retailers target different demographics, and banking doesn’t do that, it’s lazy not to try. And in the future, I think we will have more attention on younger niche over the topic of longevity would be a really big issue in wealth management, pensions, the accumulation of wealth, and then also women as a demographic is an area that banks in my view haven’t given any attention to at all in terms of services.

In terms of business models. I don’t think that digital banks who are currently focused on mass market community move up to the higher end for a whole load of reasons, one is you need to hire bankers with experience to have different products and a different product range and probably a different platform. And I think most of the people in the high net worth space and upwards, they want a focus on them, they want something that’s maybe less hands-on, they want something that’s sleek in terms of the service, but that’s less transactional. That’s a very, very different proposition if you’re a kind of more of a mass banking app. And I think the problem for those companies that they are increasingly going to be encroached upon by what individual banks are doing with their own digital projects.

[00:31:19] Ben: Just then one follow-up for you then, does that mean, do you think we’ll see turn? So, in other words, as customers get wealthier, they’ll switch from robo-advisors potentially to private banks when they demand a different type of service, in person, and so on?

[00:31:36] Mike: I think that will be the case, depending on the extent to which they get wealthy or not, and I think what also will happen is that some wealth managers will become better at IT, so better back office, Nick has talked about some of the solutions, better at reporting, really basic things that many wealth managers don’t do very well. And I actually think that the biggest revolution would be product and access to what I would call kind of the portfolio of the future, which would have more private assets, probably more crypto, and being a bit more international and these are the offering on new and old players. Not many of them have that.

[00:32:22] Ben: Fantastic. Sid, I want to come to you next, there’s a nice segue there because Mike is talking about some broader portfolios that extend beyond some of the traditional assets. And so the first part of the question I want to ask you, so we’ve had two really good questions here, that I want to put to you, the first one is around the role of tokenization in opening up some of those asset classes. I think you briefly touched on that before, but if you wouldn’t mind picking that up again, and then the second part is around gamification.

So, what is the role of gamification in terms of keeping people engaged with wealth management services? Because I always think about banking as having this engagement challenge, which is principally in the transaction-based service, therefore it doesn’t have high levels of engagement and therefore is open to being embedded in channels that have higher engagement. So the two-part question is tokenization and do you think gamification might provide enough engagement to keep people using wealth services for wealth managers?

[00:33:22] Sid: Good questions. I think that tokenization can definitely help, especially with alternative assets and like allocating ownership in a fair and equitable and a transparent way. So, when you’re talking about art, when you’re talking about wine, when you’re talking about obviously crypto is that very thing that originated from, I think tokenization can really help with access to some of these assets which were reserved for the ultra high net worth in the past, and I think that’ll definitely be a trend that takes hold. In terms of gamification, I think there’s definitely room for it.

For me, I think financial literacy is a really important aspect, and like academic research has shown, for example, that in Europe only about 30% of the population has even basic levels of financial literacy, and it’s about the same in the US, and these are affluent, OECD nations. Simple things like time value of money, about saving, about inflation, teaching people about having a savings account and having an emergency fund, just inculcating some of those habits, those basic financial literacy habits can make a huge difference in their financial outcomes.

And I think gamification for positive cases like that is really important. I think you have to be a bit careful where gamification doesn’t become about getting people to trade more, and I think that is that is something that I’m quite worried about, but in terms of increasing the literacy, getting people to save more, getting people invested more in equities, but more as a portfolio rather than like individual stocks, teaching people about those sort of a risk return trade-offs and better financial habits is where gamification can help.

[00:35:26] Ben: Fantastic. Okay, I’m going to switch now to new business models and I’m going to combine my questions, because we’ve had some good ones here also from the audience. So, I think what I’m going to do is I’m going to kick off with you, Mike, if that’s alright. I’m going to ask you, you might argue that wealth management potentially has lower engagement than some other services through which you could distribute financial services, but it has a high level of trust and you can use trust to aggregate other services, but we see very, very few examples of aggregation models in wealth management, by which we mean using the pull of an existing customer base to aggregate wealth and non-wealth services. So, why don’t we see more aggregation models from big private banks, for example? Why doesn’t UBS, for example, aggregate, other services?

[00:36:22] Mike: Yeah, I think it’s a good question. The answer for me lies largely in the area of organization culture. We’re beginning to get consolidation in wealth management in the UK, Western Europe, Switzerland, where we are today, and the logical question is why doesn’t Google buy UBS, or why doesn’t Amazon buy Credit Suisse? Because what we find is the brands, the top level expertise coming to clear out the tech problems. I’m not a tech person like Nick or Sid, I’m kind of a bystander, I see those things happening across the industry. There are big barriers in terms of banks doing tech, there are lots of interests on the part of people inside banks not having tech disrupt their own jobs. In Switzerland, we have an issue with data projects internally that are simply inefficient.

And then I also find that many tech people in FinTech have very logical solutions to what I think are banking problems, but actually what they don’t spend enough time thinking about is the idiosyncrasy of the banking problem and the fact that banking possibly is like to have humans rather than robots vested in their tech problems. And there are lots of reasons why the two don’t meet. I think that the most interesting space would be crypto because that would be, if I can call it tech banking or tech money designed by tech people. So, it’s entirely consistent within the ecosystem, and from Zurich and other parts of Switzerland, lots of people could get in to develop crypto operations, trading, digital assets, so that space is a very interesting kind of proving ground.

But, to come back to your question, there should be a logic in some of the bigger wealth and asset managers who trade quite cheap particularly compared to [inaudible 00:38:38] just being embasked by tech companies or tech entrepreneurs who can potentially cut the banking cost at least in half by introducing a much more rational tech focused approach. Finally, just to not go on too much, I think the disrupter to the industry will be consumer goods companies getting into finance, probably from the bottom up. They will have scale and they’ve already solved the customer acquisition problem. So the question of just starting with a range of sense of the products. So, that’s where the threats are going to come from.

[00:39:29] Ben: Okay, which is a super segue to use, Sid, because your business model is basically in facilitating that, facilitating non-banks to offer banking services or in this case wealth management services. Do you see that already happening? What is the level of demand for embedded wealth management services? And you kind of alluded to this earlier on in one of your answers, but it seems like it might be more difficult than people think. So, would you mind elaborating on that as well?

[00:40:01] Sid: Yeah, so, getting started with a wealth management product is hard. When I had a startup and we were setting up a brokerage, it took us almost two years to get a license, get all the legal agreements, get everything set up. I think having an embedded finance option, like some of the new platforms like ours, which are coming up make it a lot simpler. They abstract away some of the complexity, some of the compliance, some of the security. So I think that whole process can really be sped up. I think there are still roadblocks and those are related to who takes on the fiduciary responsibility, who has the licensing, and that is always going to be a bit of a problem in wealth management.

So, for example, with some of the embedded services that we’re offering, we finding that a lot of financial advisors are calling us about them. They already have the licensing, but they want to have a mass acquisition channel. And so for example, they want to offer like an aggregator or like a small calculator or risk analysis services on their website and that serves as an acquisition tool for them. So, I think in those sort of cases, having an embedded finance solution works well.

We’re also finding that platforms that are starting to take on more of the financial services burden off a particular segment, so for example, like freelancers, for example, there are people who are building like payments services for freelancers, because a lot of them don’t have even bank accounts. So, we’re setting up facilities to have bank accounts, but then why not add an extra feature where you can also allow them to save easily.

So, you know, having an embedded solution, which they can get up and running quickly is like a real value add to those types of companies, as well. So, we’re seeing a mix of both. We’re seeing both financial services providers who want to acquire people cheaply and non-FinTech companies as well, who want to start dipping their toes into offering some of these services to their customers.

[00:42:36] Ben: Thank you very much. Nikolai, coming to you next. I want you to, if you don’t mind, expand on this topic by talking about some of the interesting business models that you see, the kind of customers that are coming to Nucoro, and I want to just frame it slightly by talking about there’s many network type models that Sid touched on there, like can you take a pool of freelancers and help them to build a collective savings pool, for example. So I just wonder, are there other models like subscription services and things like that, that we start to see emerge in wealth management? So, can you just comment on what you’re seeing in new business model types?

[00:43:15] Nikolai: Yes, absolutely. I think it’s a very interesting question because it’s only remotely relative in tech than the business model which is a much more strategic topic and less tactical, and often overlooked. I think there’s a lot of potential for innovation, totally. I think a few models are interesting, and Rosecut is a great example, right? You have this premium entry level model where you can dip your toes in before it even draws you into the actual corporate position.

But generally the move from AUM based models or in performance based models I think which is flat subscription based fees, which is what consumers are by now very much used to, rather than a lot of the other services, digital and non-digital, starting again, as I mentioned before, Spotify subscriptions, Amazon Prime, everything else. I think another definitely related Sid to what you just said, I think the idea of building ecosystems and making connections with other services and selling across the services.

I think of the challenger banks, like Revolut does this natively within their app, they switch another tile and there is insurance, they switch another tile and there will be risk management. They build a lot of these things themselves, but not necessarily, that it needs to be necessary, right? You can still offer this functionality, but rely on someone else who actually will have the capabilities of technologically doing but also from a regulatory perspective, doing it, it will still be the service that you will be the gateway to that service. So building connections with other distributors in not only the direct approach, I think also plays into that.

And there’s also, there’s a bit of a fear and a concern around being commoditized in a way, however, and also coming to Michael’s point earlier, the biggest attack vector comes from the big tech players. And Google will not become a bank, but Google or Apple will be the biggest distribution partners you will have that you can possibly find if you are a bank.

So, overlooking that I think may be a lethal mistake, as well. And then I think it’s also got very strategic and business motivators, holding a flanker brand maybe, or a stock brand, and moving away from and giving up a bit of the brand equity you have potentially, because having an established brand is a great asset, but it can also be a liability if you want to reinvent your offering and reinvent also the target groups you have.

The biggest players doing it right with Marcus by Goldman Sachs or JP Morgan is rumored to launch something in the UK. It varies with a lot of brand equity but still, I think it plays for midsize market players and all of these, I’m aware all of these are harder steps and I think we often are a lot more comfortable to tinker with internal processes and tech and all this stuff that clients already touched, but I think it pays to be bold in applying some of these more strategic transformation points.

[00:46:32] Ben: So, I want to put the next question to you, Qiaojia, which comes from Ian Stewart and he asks which of the incumbent financial institutions are the most progressive and making the most progress in this area? So, kind of picking up on Nikolai’s point, who is taking the risks, so we’ve heard about Goldman Sachs launching Marcus, and now Marcus is also, the platform is also now offered to others. So, Goldman Sachs is potentially taking some risks and being quite progressive in this area. Who else do you think is leading amongst the incumbents?

[00:47:06] I probably wouldn’t say there is one single leader in the space, and we have seen sort of an influx of incumbents trying in this space in the past five years. I think UBS spent a huge amount of money launching UBS Smart Invest. Actually, the head of the program is one of those advisors, so we’ve learned a lot from their experience. Coutts have launched their mobile app with the basic functions a couple of years ago, and sort of piloted a program called Coutts Invest. At the beginning, it was only open to Coutts clients and then eventually was distributed under the RBS and that was invest with £500 to start with benchmarked against — not make that I suspect.

So, I think one of the key things is that people, the incumbents are worried about things like wealth transfer and how not to be left behind with digitization of the service, but they face two challenges. One is a legacy IT system. It takes forever to build something new and then bolt onto the old gigantic machine. So, in the case of UBS Smart, it took them 18 months to do that. And for Rosecut to have a fresh state of art tech stack, it took us six months. So, this is the level of challenge.

And second, in my view, it’s always easier to start evolution. You can be an independent, almost like a single cell creature, and then rapidly iterate your offering along the way, than starting a revolution within an organization, because you always are fighting against people who prefer the old ways of doing things. Another point is that a lot of the times incumbents treat the digitization as a back-office problem. So they see it as an IT project that a bunch of engineers there needs to go to work. At one of the major banks I worked, I really squeezed into the digital offering team out of my normal KPI and tried to contribute a front office perspective. They think it’s an architectural issue. It’s not only an architectural issue, it’s a user experience, client experience issue as well.

So, I think this is where we see happen again and again are the industries where independent, small, scruffy startups eventually over strong the established companies. And this is personally why I made the career switch and trying to figure out independently. But that said, I have not seen, I think Marcus is probably the best example of mostly investment bank trying to get into a more mass markets, and they have a good strategy plan of investing to not make during the saving product and now moving to investing.

[00:50:33] Ben: And what about somebody like Standard Johnson, because they seem to have a similar kind of playbook, with [inaudible 0:50:42] and I think they’ve got this new platform called Nexus, which is a bit like Marcus. I suppose this is open to anybody to answer, but it seems like, Nikolai was making this point, that if you’re a large bank launching a new kind of your own challenger brand is a way of, if you like, transferring some of the brand equity you have into a vehicle where to your point, Qiaojia, you don’t have the problem of Legacy IT and to your point, Mike, you don’t necessarily have the same cultural obstacles to introducing change, particularly around business models. So, is that the best way for an incumbent to face up to this digitalization threat?

[00:51:23] Nikolai: I think one key element there is also from a cultural perspective it’s the only way that innovation on a technological level can work, just because within the organization you have cultural bottlenecks, especially what Qiaojia said, you have a legacy system bottleneck that just prevents you from being able to do any meaningful change at a scale where it makes it a dent in what is the customer outcomes in the end.

I think there are good and bad ways to go about that. I have felt and we do a lot with the innovation labs or the digital arms that retail banks have set up, and that’s also to Qiaojia’s point, it’s also the way of looking at technology as something that happens outside the business, and then somehow goes back into the business and then change happens. But I think it’s great as a channel to introduce innovation, source ideas for innovation, but it’s not what drives true business model transformation. If you want to truly build a digital first proposition the business and the tech has to evolve and be built in synch, and that’s exactly what the challenger brands are doing, it’s what Rosecut are doing, it’s what all of us are doing, we are building a new startup but also a new technology spec.

So, by creating a subunit or an outside unit, I think it’s probably the only way to do meaningful change, it really then has a transformation curve that is not just like a band-aid to what is essentially a very heavy wound.

[00:53:02] Ben: You’re right, because Qiaojia made the point that a lot of banks kind of view digitalization as a back office function. And then on the other extreme, you’ve got a lot of banks that sort of see it as some sort of innovation function, a play thing for a group of people who aren’t really key decision makers in the organization to work with. And it needs to be in the very top of the corporate agenda. And so how do you do that? How do you make it top of the agenda? Do you hire people that aren’t bankers to join the board?

[00:53:31] Mike: Maybe I’ll chip in, the Rosecut experience opened my eyes to how the big banks were with tech and how good a small focused team can be. I’m now going through the same experience, we invest in startup, in terms of me learning what lots of different areas. So I think the decision would be made by the CEO of the large bank. So I think the kind of thing you want to do is to take some of your senior executives, make it clear to them that this is an essential part of their career, that they’re not just being part in operations.

You want to incentivize them. You arguably want this to be geographically remote from headquarters to give it sort of a mental break. I think we need to put tech and banking people together on party, maybe I think have a lot of interactions with customers or potential customers just to make absolutely clear what the problem you’re trying to solve is, and try and do it in that way. And maybe also look at the bankers, tech classes, entrepreneur class, and teach banking to the tech people, as well. So, it’s something I think, in which people have to be very, very invested, but it should pay dividends.

[00:55:5] Ben: And do you think banks can attract the right tech talent? Because if the competition for tech talent is global, because tech is part of everybody’s business, arguably the most important part of everybody’s business, can banks hire that tech talent or should they be using third party suppliers, like Hydrogen and Nucoro, more than they do today?

[00:55:26] Mike: Let me answer that. Tech talent is already very expensive in London and Zurich, tech talent is as expensive as banking talent. I kind of think what you want to hire, just my limited experience, hire project managers who have a taste of both and can actually advance the project, kind of skilled in both languages, but that’s not an expert opinion.

[00:56:01] Ben: Fantastic. And Sid, a question I want to ask you, I’m sorry to keep coming back to you on these questions of embedded banking, but I just think it’s fascinating as a new business model type. I’m just wondering, if banks or wealth managers in this case, don’t control the customer interface, i.e. that’s controlled by other brands, how do they continue to have a profitable business where they have some control over pricing, some ability to upsell and cross sell, or do they have to accept that they’re just balance sheet providers or custodians or whatever, or regulated services providers? What is the role of wealth managers embedded in the banking world? And then if they do have a profitable role, how do they bridge between being a back office supplier and having some engagement and continued role with the customer?

[00:56:59] Sid: Yeah, that’s a tough problem for them and that’s why some banks have not gone down that route of just providing the services, like in the US. You see most of the FinTechs are using only a couple of banks, like Evolve or like Greenberg.

[00:57:19] Ben: And Cross River.

[00:57:20] Sid: Yeah, Cross River. So there’s just like a handful of banks, but none of the big banks. But for these smaller banks, who have a much smaller customer base, for them it gives them access to huge amount of customers, which they would have never had access to previously. So for them it kind of made sense to build like a tech stack specifically for integration for the fintechs, where it’s like a scalable kind of solution for them. So, they’re still making money and they don’t have the customer acquisition costs. So, it can still work for them. I mean, it becomes obviously a bit harder to like cross sell anything, but I think just in terms of the scale that they can access, it’s huge, and it’s worked really well for people like Cross River, I mean their scale has just grown dramatically in a couple of years.

[00:58:19] Ben: Okay, so I actually looked because we’ve got a report coming out and I looked at some of these smaller banks in the US and some of these guys have got return on equity of 40% plus, because as you say, they don’t have to acquire the customer, they’re just providing regulated services, but it doesn’t seem to me that that would work very well for an incumbent with the kind of cost base the incumbent has.

So this is a question to anybody to answer, is an incumbent, therefore, with a large customer cost base, excluded from participating in embedded finance, or is there a way to kind of leverage the brand to make it such that if I’m using a third party service, I still would want the service from a given institution. In other words, is there a way to still differentiate when you don’t control the customer channel? And how is that possible? Is that a tech question?

[00:59:16] Sid: I think there just one aspect I’ll give, one example, which is like the Apple card offering, for example. Goldman Sachs was still involved in that, but they weren’t at the front of that brand offering. But what they were able to do is they were able to take on some of the risk assessment off their clients and that worked out poorly in some examples, but you know, people were able to see that they were able to get cards much easier. It also gave them access to a huge channel, as well.

So I think there are some possibilities of being embedded and still having the visibility and some control on the proposition that you’re offering. But it becomes challenging. I think now a couple of the banks are trying to offer banking to Google as well, and they there have been some deals that have happened over there. But they will just be in the background in that case, but it’s a huge customer acquisition channel for them.

[01:00:25] Ben: Does anybody else have a view on that? Because it seems to me that implicit in what you’re saying with Goldman Sachs Apple tie up is you have, if you like, two premium brands. Is it just about building brand? Do you think there’s a tech answer to it, I suppose is another way of putting it. If I can build sufficient, contextual information and I can serve up relevant offers and content and so on, even if it’s through somebody else’s channel, can I still carve out some differentiation that makes me more than just a commodity supplier of regulated services? And I’m curious to know if you think that’s a tech challenge, brand challenge, or whatever.

[01:01:01] Qiaojia: I’ll chip in a few of my observations. On the tech side, I think it’s really challenging because of the legacy system and the executive team may not have the courage to put in a couple billion and do a complete overhaul. But what other things they could have done is to really sort of reshape the sort of incentive system.

One thing that a power banking colleague put to me in terms of the private banking model, she described it as a hair salon model. You know, every advisor has their own desk and has their own support and look after their own group of clients. So it started with a bad habit of banks, I’m talking about specific power banks, poaching each other’s high producers and paying them a lot of money and hoping to attract the book. But overall it’s not a very structured effort of growing the organization together. So, this is one thing to think about, how to incentivize team effort, rather than rewarding lone wolves. This is something that we can think about.

And second is that when you face regulatory pressure and margin compression they you race up to the top of the pyramid and dumping your smaller clients to slow regulatory pressure, then rather than doing the reactive thing, it’s more important to be really clear who you are focusing on. It doesn’t mean if you are a big bank you should be just thinking, okay. I’m catering to everyone, have a tiered offering, like some of the British banks with retail, affluence, and then high net worth and ultra high. You really need to think about how you’re going to do that. Maybe outsource your lower tiered clients to some partners and then focus on the most important segments that you have the right skill and expertise for.

So, UBS went through the process of, well, let’s try to dab into affluent, no actually we should just focus on ultra high and a lot of banks feel like they focus on ultra high now, but there are only so many ultra highs in the world. Like you can even slice down the target market to entrepreneurs or certain industries or just really have a good view of what you can do, and a more organized effort and reinforce your brand in that. So, yeah, this is a non tech perspective.

[01:03:43] Ben: And the cultural questions again, so Mike, you seem to have strong opinions on culture. Is that possible, moving from the hair salon model, outsourcing customer management, all these things, again, to be quite alien, it seemed to me, when I speak to private banks, to be quite alien to their thinking, because they still think that they are in control of the customer and the fulfillment of those customer needs.

[01:04:14] Mike: That’s been enforced by the individual bankers. They will jealously guard their clients. I think, just to go back to your original question, which was I think if you have a high cost base, can you put in place some of these changes? My response to that would be ask why you have a high cost basis, is it a defunct business model, is it the wrong blend of bankers, that kind of thing. When you end up in that situation where you have a competitive margin, outsourcing tech might be a solution, but the real problem lies elsewhere, lies with core management, maybe institutional cultural issues that are very, very deep seated.

I think you’re going to see if you walk into a wealth manager in say Switzerland, they all look the same from the outside. People who meet you all look the same, to the extent that it’s become a bit of a party and that maybe tells you that means cultural elements are very, very strong and that trying to change them will meet a lot of resistance.

[01:05:33] Nikolai: Maybe to add something there, because also coming to your point, Ben, I do think certain elements or changes is met with a lot of skepticism. What I find interesting is that a lot of times it’s very difficult for them to articulate what is actually the value that clients see, a lot of them don’t really know actually. Is it because a rather trivial element like customer service team, for example, on the middle office side, for example, it might be that it’s very important for your clients. Maybe you don’t see it as important at all.

It may be other elements, maybe it is for the status symbol of what the brand represents, or it is the user experience with a personal relationship with your advisor. It might be a very wide range of things. A lot of times they don’t know. And I think that’s the starting point, first figure out what is it actually that your clients like and see as the value to add, then maybe actually only have a discussion around that, not doing all the things that you think are necessary to do.

[01:06:35] Ben: I think that brings us to I think probably the last question that I’ll ask, which comes again from the audience, it comes from Christopher, and it begs the question, what is the ultimate role of a wealth manager? What underlies his question, because he asks are technology solutions sufficiently so advanced that a wealth manager can outsource the entire thing to a technology ecosystem? And then what would be the USBs that remain? So, if I’m a wealth manager and I’m in charge of the brand, can I source everything else from an ecosystem of tech providers, from FinTech providers, et cetera.

[01:07:20] Mike: I think at the very high you can’t, and at the high end what some banks are beginning to do is to bring corporate finance bankers into relationships with families and family offices and that kind of stuff can’t really be commoditized, because I think at that level clients want security and they want the client to know them intimately, and you can’t do that remotely, you can’t do that with technology. That kind of advice networks are finding the business of clientele, that’s not something for which bankers offer a solution. I think also for senior bankers, they often play a partner role. So, at the very top end I don’t think that’s possible. I agree with Nick and Qiaojia.

[01:08:28] So, if I interpret that correctly, you’re saying that beyond the people that serve the ultra high net worth individuals, the family offices, whatever, everything else theoretically could be, because you’re saying ultimately it’s a question of scale and lowest unit cost, and access to networks.

[01:08:44] Mike: I think most of it could be, obviously as you go down the scale, I think you also want to think about content and education. Content is not something the banking industry does very well. Most banks keep an account with Twitter, no bank I know does research on TikTok, so I think there is actually a huge scope there, not to make things more efficient, but make things a bit more clear and more entertaining, as well.

[01:09:23] Ben: Okay, interesting you say entertaining. Absolutely the last question and then we’ll wrap this up. How do you make wealth management more entertaining? I’d like to get everybody’s views on that.

[01:09:39] Nikolai: Just one example I have, my girlfriend is learning German at the moment and she uses Duolingo to do this, it’s a very popular language app on the iPod. So, there is a daily lead, basically every evening before 12:00 she would go online and just rush in some sessions to improve her score for that day to end up, among the top 10 of her league.

I think there is a lot of literature around what are the best ways to learn a language, the most efficient ways to memorize vocabulary, a lot of theoretical approaches to that. The app sold it in a very different way, a very compelling way to get in maybe 10 more words or something. I think we don’t have to reinvent the wheel with wealth management, but to draw inspiration and insights from other sources, at least a starting point, because we’re a bit behind, others are ahead of us.

[01:10:57] Ben: How would you gamify wealth management without introducing democratization of risk, to Mike’s earlier point? It seems to me you can’t gamify a portfolio because then you’re changing risk, so is gamifying what aspect of wealth management, savings, because that seems external.

[01:11:20] Nikolai: You’re totally right, it must be different levers, not only the risk lever. But then you have, again, we see approaches like that already, like roundups, we see one sets a goal and we see visually how that goal materializes on a map and I think it’s more tangible. I think there are ways that are not risk taking.

[01:11:43] Ben: Maybe there’s an intergenerational play, parents or grandparents helping children, grandchildren to save, to invest sensibly and so on, which might help with the intergenerational, risk of attrition.

[01:12:01] Sid: I think a social aspect can be very huge, especially for the new generation, and I think we saw that with some of the Reddit boards and stuff, but that can be harnessed in a more positive sense where you have peers and maybe some interesting people who are talking about finance, talking about investments, and you’re kind of working with a group to kind of solve your financial problems. I think that is going to be some of the new kind of FinTech platforms that we’re going to see in the future. I’m already starting to see some of those they’re just starting to get funded now.

[01:12:42] Ben: Perfect, great. So, we’re almost out of time. So, I think all that remains is to thank the four of you very, very much for taking part in this discussion, to thank everybody who has listened to this either live or the recording, and then also just to remind you that if you enjoyed this, next week, we’re going to be double clicking on the new business model aspects of wealth management, and we’re going to be joined by Elinvar, Impaakt, Tinkoff and additiv to that discussion. So thank you everybody for participating and taking part in this, and see you at the next4X4 Virtual Salon. Thank you very much.