Post-pandemic Wealth Management (#20)

There is no way that we’re going to go back to a less-digitized world post-COVID19. It will have a lasting impact in that respect, on the client experience, on the way relationship managers and investment advisors interact, but it will also have a lasting impact in terms of how you onboard, how you run KYC, what your future compliance model is going to look like — Anna Zakrzewski

[00:01:57.09] Ben: Anna, thank you very much for coming on the podcast! I want to start with the white paper that you recently issued, called “For Wealth Managers, COVID-19 is a Wake-Up Call”. It begins with the following line:

“Outsiders might think that wealth management, after a 10-year bull market should be in good shape to weather the storm. But this is not what we find.”

Anna, have wealth managers been complacent and failed to prepare for the future while times were good?

Anna: I would say a lot of the topics that we see that wealth managers have to focus on today, they should have already been doing the last two to three years — and I would say they haven’t really done too well in implementing them. Whether they fail to make the world shine, I would say they never really had the huge pressure on which they had to act because margins were still quite okay. On the other side, a lot of them had such a thin profit margin, that right now, with the crisis and with COVID-19, there will be not that much leftover.

[00:02:55.26] Ben: Do you think that they now realize the severity of the situation — i.e. that what we’re facing is a downturn, of course, which will affect assets, but the fact that it’s more than that, that it’s also going to catalyze some bigger structural changes?

Anna: Well, I think what they are realizing is two, three things. The first one that they are realizing is that the topics that they have to act on now, the actions that they have to take on now, are not all necessarily new — with very few exceptions — but they have to accelerate and they actually have to really implement them well. For example, structural cost changes; for example, rethinking how they deliver advice, and actually enabling and embracing the opportunity to work remotely, to work digitally — at the moment, it’s the only way for wealth managers to interact with their clients. And before that, it used to be a threat. So, I think that’s the one bucket.

Anna: The second one, in terms of major structural changes, in the past, most wealth managers have not really embraced and adapted their complete operating model. It’s always been relatively a good business — 10 years of a bull market, a high volume of transactions — which means basically, their long-term view on profits hasn’t really been distracted. So, that also means that they never really had to make more cuts than just little salami slices on their cost and on their operating model — so you have a lot of duplications, you have a lot of complexity, you have a lot of processes that are not necessarily scalable, and most of these structural topics haven’t really been implemented well so far.

the banks that have invested in digitization, they were within a few days able to completely shift 80% of their workforce to working from home, even in functions you wouldn’t have imagined before. They were able to contact, reach out, and provide advice in a digitized, faster way to their clients, far more personalized than anybody else — Anna Zakrzewski

Anna: I think the other catalyst that we see is that after COVID-19, there will be a lasting impact in terms of interactions and also servicing. There is no way that we’re going to go back to a less-digitized world post-COVID. It will have a very lasting impact in that respect, and it will have a lasting impact on the client experience, on the way relationship managers and investment advisors interact, but it will also have a lasting impact in terms of how you onboard, how you run KYC, what your future compliance model is going to look like. These are the three big blocks where we definitely see strong acceleration. And lastly, if you look at the smaller banks and the smaller players in the market, who on average have really high cost:income ratios, the question is, if they will not focus right now, how many of them will really survive? And we actually do expect, as an acceleration, also industry consolidation to start happening.

[00:05:38.20] Ben: What you lay out there is quite a clear blueprint in terms of how wealth managers should be responding. How do you see them responding so far, especially the speed with which they’re now tackling what they arguably should have done a while back?

Anna: What they have been doing quite well — not all of them, but most of them — is the short-term actions directly linked to the COVID crisis: ensuring working from home, ensuring some acceleration on digitization, upgrading a little bit some client experience piece, start to run some scenarios, managed liquidity. I would say those short-term actions — keeping their own people safe and engaged — all of that, I would say that that has been done quite well. The part where they have also, at least some of them, become quite creative, I would say — and some have definitely surprised us — was also how they onboard clients, how they now run KYC, how they now manage compliance and enable work from home, especially in an environment and in a business, where confidentiality and also regulatory elements are very strict. So far, they haven’t been able to even onboard a client remotely, and now, in COVID, some have really been creative. They optimized digital signatures, they were able to do client identification through video calls. Before COVID, nobody really thought video calls, especially around Europe, would be something the clients would want. At the moment, it’s actually one way of getting onboarded. So I think some of these reaction times have been surprisingly quick and surprisingly agile. The thing that hasn’t really gone so well, for some of them, was really the decline in communication. So, some of them where weaker content that was not necessarily personalized it was talking about the crisis, but partially not individualized enough or solution-based — and that is an angle which should have been an opportunity for wealth managers to do really well. And I would say, on average, that part hasn’t been the strongest.

[00:08:05.00] Ben: In your report, you definitely identify that — as you said — is one area where digitization should be able to deliver a much better experience at scale. Do you think now that we’ve had this acceleration and digitalization, that wealth managers appreciate that, and they’re starting to make those kinds of investments? And then, how difficult is it to make longer-term investments in an environment where there’s such a focus on guarding liquidity and managing communication — things that seem so much more pressing?

Anna: There is one major shift in terms of how investments are being done, and also how levers are being prioritized in terms of where the focus and the action of the wealth managers are moving towards. So, to give you one example, one bank actually had a quite broad and ambitious digital roadmap before the crisis — most of the topics and most of the angles were completely focused purely on the front experience, the client experience, and that part. And there was quite a big budget behind it. They have revisited it, not cutting on that client experience piece, but adding a component in the whole digital roadmap, which actually allows them to reduce costs, to unlock some flexibility in the processes, to help them partially in an end-to-end view become more scalable, and through that actually leading to an efficiency increase of up to 20%. And that actually funds the partial investment also into the front and into the client experience piece. So, you see a much stronger balancing of complexity reduction and front client impact. And before COVID, it was mostly focused purely on the front and just on the client — and I think that is just one of the examples that we see in terms of a mindset shift.

Anna: Another one that is very interesting is, how do you ensure that you have a stable and continuous revenue flow mid to long term. And it’s about really thinking how you make your clients more sticky, how you make your clients stay with you and invest more money with you by truly tailoring on the one-hand side, and on the other side, also making parts of the portfolios in a short term — and it’s not easy — a bit less volatile to potential upcoming future shake-ups. But that’s, I think, one of the big notions. And in terms of reassuring — and, I guess, it also goes in that way — is, in times of crisis or COVID right now, with everybody working from home, you also have quite a large part of your employees in marketing and events or in the client front-facing angle, not necessarily being able to do what they’ve been doing before. So, some players have actually done a creative approach in rethinking and re-skilling some of their employees to now help where you have the big bulk of the work happening, driven by COVID, and allow them a more flexible engagement across the organization, and it actually puts them in a nice position to now experiment what their future working models could look like.

if you actually look at wealth managers today, they are still very strongly vertically integrated and it will require quite a change of mindset to let go of what is not core, in terms of, you know, “We do our own products”, “We build our own app”, “We have our own reporting”, instead of actually leveraging some of the players that are out there in the market — Anna Zakrzewski

[00:11:33.29] Ben: Going into the pandemic, we’re already starting to see a growing differential in performance between those wealth managers that have made big investments in digitalization — I think you call them ‘digital leaders’ in your report — and on the other side, those that hadn’t yet made those type of big investments in digitization. Presumably, that differential in performance is getting magnified during the pandemic, do we already have any evidence that that’s happening, or is it too early to see that divergence in performance?

Anna: You already have seen that divergence in performance before the crisis — and that’s a fundamental difference in performance. So, we have looked at 150 wealth managers last year, across the globe, in all business models, in all shapes and sizes, and we have also looked at the top performers in terms of profitability. There are two major differences that really make the top performers, top performers. First of all, they absolutely excel in the revenue margin because they already, through digitization, are able to deliver better to the client, cross-sell better, they have the right tools, and they really focus their front to deliver. Plus, they have also redefined their pricing model. And the difference, globally, I mean, we’re talking about a delta of approximately — depending on the regions — 15 to 18 basis points. So, it’s really significant. And these top performers, they also invest double and have invested double the amounts in digitization over the course of the last two to three years. So, there is a direct correlation already, before the crisis.

Anna: And thirdly, what was a very insightful angle for us was, we also looked at the cost difference — is the cost over assets of those top performers significantly different than the one of the average? And the third proof point here is that, actually, the difference globally-seen is something like three or four basis points, so it’s not as significant as on the revenue side. But the reason for that is that these top performers have already started to invest: they have invested into the changes in operating model, they have invested into the new talent, into the new and accelerated ways of working and, like I said, double the amount in digitization, not just in the front, but across the value chain.

[00:13:59.29] Ben: Is it too early to have any data points from the pandemic?

Anna: I wouldn’t say it’s too early. One thing that you already see is that the banks that have invested in digitization, they were within a few days able to completely shift 80% of their workforce working from home, even in functions you wouldn’t have imagined before. They were able to contact, reach out, and provide advice in a digitized faster way to their clients, far more personalized than anybody else because they could just review the portfolios. So yes, they were clearly at an advantage when the pandemic hit the market.

[00:14:39.24] Ben: But we don’t yet have data points on financial performance, right?

Anna: No. On financial performance, we don’t have it yet. However, in terms of onboarding clients, in terms of winning new business, in terms of maintaining clients, and in terms of tailored communication, this is what we see, these were the players that have been able to do that better than the others.

Let’s not forget that the customer acquisition cost is quite high. So, I wouldn’t necessarily see the digital players being the consolidators in the market. I would see some of the bigger players trying to acquire the capabilities of the digital players or even more, a partnership model where some of the traditional players have great access to clients and they do have the client relationships, to actually tap into the digital capabilities of the other players, to have it as an integrated service model and as an integrated offering towards these clients — Anna Zakrzewski

[00:15:02.11] Ben: We talked a bit about what digital servicing looks like. What about analytics and the capabilities that wealth managers are using there, in order to build more tailored products for customers? How strong would you say the data analytical capabilities were of wealth managers? And do you think this might be one area where they’re at risk from some of the digitally-native new entrants?

Anna: So, it’s maybe a bold statement, but I don’t think wealth managers yet are really very advanced and reaping the full benefits of the power of analytics today. So, I think that’s where they are, compared to other financial services places. With a few that can already do it, a lot of the times it’s still a bit of analytics here and a bit of analytics there, but very few have a truly centralized data lake, which allows them to on one-hand side, fully personalize their client interface, fully personalize their offering and the value proposition to each one of the clients, and thirdly, also, leverage analytics to allow them to scale up their processes and operating model. So, what we hear more is that the analytics capabilities will significantly accelerate now, in terms of enabling cross-sell, enabling pricing, taking into account client price sensitivities when we’re thinking value proposition design, etc. It’s going to really be a big focus now, and before the pandemic, I would say it’s been there — it’s been a great buzzword — but in very few cases it has been truly implemented, end to end. In Asia, I would say, yes, it’s been there, and it’s been definitely in the tech fins and in the more technology-averse digital wealth managers, it’s been playing to their complete advantage. In Europe, we’re still quite far away from that.

[00:17:10.10] Ben: One other aspect of the report I wanted to pick up on, was that I think you said this also, “in addition to changing operating models and servicing models, banks should also look at their sourcing models. But rather than just try to source things that are cheaper, they should also tap an ecosystem of partners to help deliver improving quality at scale.” I totally agree with what you’re saying, but it’s such a difficult area to get buy-in from banks because this is something that potentially threatens to cannibalize existing revenue streams. And so, I guess the question is, do you think that, culturally, banks and wealth managers are ready to look at changing their sourcing models in that kind of way, to actually insource even parts of their asset management?

Anna: When you mean sourcing, like outsource parts of their asset management? That’s what you mean, right?

Ben: Yes, outsource functions to India because they’re low cost. What about finding somebody who could offer a better-automated investment service than the one the bank has, for example.

Anna: I guess what wealth managers are facing today is a true definition of what their core competencies are and it is not like a process or your technology is going to be a key differentiator for you to win in the future. And we already see today that some wealth managers and private banking players are actually setting a primary focus on client servicing and investment servicing while some of the rest in the value chain, in terms of the middle back office, etc, is already quite radically and can be even more radically outsourced to third-party providers. On the other side, if you actually look at wealth managers today, they are still very strongly vertically integrated and it will require quite a change of mindset to let go of what is not core, in terms of, you know, “We do our own products”, “We build our own app”, “We have our own reporting”, instead of actually leveraging some of the players that are out there in the market. So, I would expect going forward, to also accelerate some of the changes that need to happen and accelerate some of the digitization elements that have to happen, that actually FinTechs — who are very focused on individual capabilities — will be a great source to pool and a great source to actually integrate to deliver some of these capabilities required.

The large wealth managers will clearly gain in market share, but they will only be able to do that if they do the right investments and the right level of personalization and client experience, and they will also act quite fast. The broad middle play, they will only survive if they stop being a big-bang, but they will also really refocus and turn around the operating model — Anna Zakrzewski

Anna: And then, the question is, in the future, what will wealth managers be? Will they be the ones that focus on wealth management, financial wellness, client experience? Will they be the players that will have everything in-house across the value chain? And then, the challenge is how do they get to scale in terms of the number of clients, etc. to really put the volume on their platform. And then you will have the players that actually are purely driven by technology — which are the tech fin and the digital wealth managers who actually are already having the digitized business model and don’t yet have the direct access to the customers.

[00:20:30.25] Ben: You said earlier on that you expect consolidation in this market because what COVID and then subsequently what an acceleration digitalization will do, is it will clearly separate the winners from those that are less strong and less able to adapt. How soon do you think that phase of consolidation will happen? And is it just the question of the large consuming the small or is it more nuanced? And then, if you allow me a third question, do digital leaders really need to buy assets? Because won’t superior value add just see them win those customers anyway, from those that aren’t able to provide that kind of value add?

Anna: Let me take one question at a time and try to bundle it. Today, nearly half of all wealth managers have a cost:income ratio of over 80% and some are close to 100, which means they’re already not very profitable today. The degree and the speed of consolidation, in our view, will depend on the severity of the crisis and also on how long the crisis will last. What we see is that size and profitability are definitely correlated, although, also here we see some examples of small boutique banks that are very successful and they are very focused.

Anna: So in terms of the speed at which consolidation will happen, comparing it to the previous crisis from 2008–2009, we have seen the big shift in terms of reduction, in terms of the number of wealth managers, approximately 18–24 months post the crisis. Now, in times of COVID, I would partially expect an even earlier kick-in of the M&A and consolidation wave driven by two drivers. The first one is, already today, a lot of wealth managers that were strong before the crisis are thinking and seeing this as an opportunity how in a relatively short period of time, they can acquire scale and acquire capability to make them stronger post-COVID — And typically, you will have 15 to 20% of players that come out stronger after the crisis. So, they will be the consolidation drivers and they have already started to screen and look for these opportunities, partially, today. And then, you will have the ones that will be so severely hit because they’ve already been in such a poor position before the crisis, that it’s going to be more a matter of decision, when do they sell to still get good value compared to how long can they last to somehow keep their business afloat. And this balance, I think, is going to drive the speed at which the consolidation wave will start.

Anna: On your other question, we already see today that some of the large wealth managers have significantly grown in the share of the market that they owned in the past few years. So, yes, it’s definitely going to be the mid-sized and larger players acquiring some of the smaller ones, which on average, are, today more unprofitable than some of the larger players, of course, because of the scalability of their business. But, like I said before, we will always have a few small boutique plays and niche plays that will continue to be very successful, already like we have today. But they are very focused.

[00:24:09.13] Ben: And then, the last question was around whether it’s actually necessary. So, the really successful digital leaders in this space, do they need to buy up the frail competition, or can they just take their customers through better execution anyway?

Anna: Okay. So, a lot of the pure digital players that we have in the market today, they have simple and nice, pragmatic client experience. They are very customer-oriented and friendly, but what they do not have is access to the clients. And let’s not forget that the customer acquisition cost is quite high. So, I wouldn’t necessarily see the digital players being the consolidators in the market. I don’t see that. I would rather see some of the bigger players trying to acquire the capabilities of the digital players or even more a partnership model where some of the more traditional players have great access to clients and they do have the client relationships, to actually tap into the digital capabilities of the other players, to have it as an integrated service model and as an integrated offering towards these clients. I don’t believe that the entrants such as robot advisors are actually going to be acquiring the smaller chunks of the clients that we see in the wealth managers today that may be up for sale at some point in time.

[00:25:36.23] Ben: What do you think the end state is? Does the middle just disappear? And what’s the final number of wealth managers you think we’ll have, once this consolidation phase is over?

Anna: Once we will definitely see in the future that the long tail of small wealth managers will actually disappear and only a few boutique plays will remain. The large wealth managers will clearly gain in market share, but they will only be able to do that if they do the right investments and the right level of personalization and client experience, and they will also act quite fast. The broad middle play, they will only survive if they stop to be a big bang, but they will also just really refocus and turn around the operating model — be it outsourced or be it really focused on a few segments and a few real credible value propositions.

The digital entrants focus on the younger population, most of them. I haven’t seen a digital entrant that focuses on retired persons yet — Christine Schmid

[00:26:33.27] Ben: Christine, thank you very much for coming on the podcast. Let’s maybe start by asking you, what is additiv?

Christine: Thanks a lot, Ben! Additiv is a technology company. It was established in ’98 and it helps the leading financial institutions to capitalize on digitization. The most known product is the Digital Finance Suite — that’s an orchestration engine for wealth management in particular. Newly, we have launched the KickStarter campaign that’s even a faster enablement for wealth managers to digitize. Additionally, it provides some expert systems, basically data analytics, but also credit tools. I would say it is global, excluding the US — this has some regulatory reasons — the US is a beast of its own. So, it is doing business out of Zurich, Singapore, Nairobi, and Frankfurt.

[00:27:25.17] Ben: And what’s it like trying to sell technology to banks and wealth managers at the moment during a global pandemic?

Christine: I think it’s the right time. For the ones that haven’t set up a servicing model through digital channels — i.e. where their advisors could serve their client through digital means — they’re doomed.

[00:27:47.16] Ben: So you’re saying almost counter-intuitively that this has actually risen to the top of their corporate agenda because, quite simply, they can’t service their customers in this environment without better technology?

Christine: I would say so, for the ones that are very still more towards the old dine & wine, that’s really over.

[00:28:05.02] Ben: Okay. Let’s assume they have the motivation to implement new technology and they have the budget even in the pandemic to implement new technology. How can they do it practically, if the IT staff are working remotely?

Christine: Working remotely doesn’t harm work. It just shifted. And, if you look for the wealth managers, they were used, I would say, on the IT staff side to work out of different locations — that’s common standard. So, just to give you an example, we were able with a large Swiss bank and it’s public with post finance to launch their new digital wealth advice during the pandemic. So, that’s no limitation at all, in particular, if you talk to IT staff on their side.

[00:28:55.11] Ben: So, Christine, before working at additiv, you used to work in the industry, right? You were in the wealth management industry. What’s your view on how bad a financial correction we’re looking at and how that will affect the wealth management industry?

Christine: So, yes, we will have a negative correction. We don’t know if it’s a V or a U or a W in the end, but it looks definitely like a correction. The numbers that are coming out from either the banks, on their estimate, but also from the IMF, are simply staggering. So, how does that affect wealth management? Certainly, we will have to refocus back on trust in quality, and people will focus more on the preservation of capital. But the line with what I would call stability and service at a fair level, at a fair price, a second thing is what we would expect and we see that also on the government side, is a refocus towards more sustainable investing again. It is already growing like there is no tomorrow but it will continue. So, if you look on the government side, they link their lending, often these days, to a greener approach of doing business. The same will happen on the investment side — this will continue. And on the retail side, I think we need tools in wealth management that allow for saving, that combine it with budgeting, and that have it in a transparent and fairly-priced way. I think the term that is often used and coming out of the UK where I hear it from often, is financial well-being. It’s really, on the retail side, how helping to save, but also helping to fund through a more difficult time on the economic side for every retail client.

I think that’s the ‘new’ normal model we see throughout various countries in Europe, in particular as well, Switzerland. They team up. It has become a ‘together’ and not only an ‘against’ — Christine Schmid

[00:30:51.03] Ben: You recently published a report on post-pandemic wealth management, and I think we’ve seen a number of these types of reports come out, where people try to anticipate what the future holds. And so, there’s a bit of that in your report. But the other thing I really liked about it is, you actually explain what you mean by digital wealth management — because I think a lot of times people either just assume we know what is meant by digitization or they — for me — minimize what it is and just assume it’s about, as you say, servicing clients through digital channels. So, can we start by having you explain what you think and what additiv thinks is digital wealth management?

Christine: Let me explain it from two views — first of all, from the view of a bank for wealth management, and secondly, then, from a client view. From the view of a bank, it transforms its business model. We always say, at additiv, it changes the operating model, it changes the servicing model, and it changes the sourcing model. So, operating model, it allows a cheaper production on wealth management. It allows on the servicing side an easier, simpler interaction with advisors to the clients, even taking all the regulatory means we have out there into account. And, on the sourcing side, it allows that you benefit from an engine in between, an orchestration engine in between, that already sources either the best partners for solutions or the best investments for solutions — and you can build upon that. So, you don’t have to do it on your own. And these three layers together, it’s not only wealth management; for the banks, it makes the risk management easier, it makes the compliance side easier, but also the audit side easier. So, it’s really various layers where it helps — coming back to where it all had begun — to transform the business model. That’s from a bank’s point of view.

Christine: From a client point of view, digitization in wealth management is partially about democratizing. It’s, from an exclusive offering, open to a broader number of clients. Honestly, it allows, as well, to produce cheaper, it allows as well to have lower fees in and lower costs. It can be personalized. So, in the past, you had a fantastic product and this fantastic product had to fit for a majority of your customers. You know more about the customers by combining different data sources and you can start to personalize that, you can start to personalize the offering, the information you provide. It’s not only that it has to be included within the e-banking but also it can be banking as a service. So, it has to be of becoming even more seamless to include it, for example, in a super app where you do all the transactions as a client, but you have banking services as well, aligned. This is how we break it up. But it will always be about trust, it will always be about a safe way to store your wealth. What is newly added — it has to be convenient. So, where the clients do their transaction they expect, as well, banking — and it has to provide a value add. I think that’s where digitization or digital wealth management really changes from the old world.

[00:34:21.24] Ben: Essentially, the trade-off that used to exist between quality on the one hand and scale on the other has sort of disappeared. We can provide better quality at better scale or higher scale. Would you say that’s fair?

Christine: And to lower assets under management levels. So, to lower levels of wealth per end client.

If you look in the Western world, pensions had quite a decent level of cost of living covered. The risk is, with the demographic pattern we have, with the lack of reforms we have seen, but also with the low interest rate level, you face a pension gap in which your targeted cost of living will not be covered by your pension anymore, and thus, you have to find a way to decumulate your wealth during the retirement period in a most efficient way, by not giving up completely on risk, by having the right investment products, which then allows you to live a life free of financial concerns. That’s a huge opportunity— Christine Schmid

[00:34:40.03] Ben: And in that kind of world, it would suggest that we can provide wealth management to a much larger population of customers? And so, how much bigger do you think we could grow the addressable market? Because I guess, most of what we talked about up until now is how we’re talking about a crisis in reduction in assets. But, on the flip side, if this accelerates the push to digitalization, then it also accelerates the opening up of a much bigger market for those wealth managers that can capitalize on that shift.

Christine: It’s a huge opportunity. It allows the scale — be it either self-serve with call center or with an advisor behind. At the moment, the only small amount is really advised of the assets out there. If you take the growth we are expecting in Southeast Asia but also partially the growth we are expecting in Africa, it’s really a super, super multiplier. So, from today’s around 50 million of people that really are fully advised, certainly at a lower scale of complexity, up to nicely into the 1.7 billion number of people — if you can scale it properly.

Ben: So, I’m not going to try to do the maths but that’s, as you say, it’s a big multiplier.

Christine: It will come at a different price tag and it will come obviously for way lower assets on the management per client, but there is where digitization helps to open their client groups.

[00:36:09.15] Ben: And what’s the share of your business that’s coming from existing wealth managers versus new entrants? You’ve got kind of all the right ingredients for new entrants here because you’ve got a large profit pool, fast-changing technology, fast-changing customer needs, which would suggest that there’s a once-in-a-generation kind of opening for new entrants. To what extent are you working with new entrants? And to what extent do you think they can enter the market successfully and build trust?

Christine: We are working with both sides. With new entrants, in particular on the pension side, it is not that simple because it is a highly regulated area. But they’re faster in terms of the platforms and the offerings. And normally, the new entrants then offer their model as a white label for the incumbents, so they follow fast behind. I think that’s the normal model we see throughout various countries in Europe, in particular as well, Switzerland. So they team up. It has become a ‘together’ and not only an ‘against’. Payment was different. On the payment side in particular, if you look at the case of Revolut, this was different because it really heated into a highly profitable area of foreign exchange. But here, it’s more a collaboration and a service model in the interest of the end clients.

[00:37:34.24] Ben: You’re saying that so far new entrants are more friend than foe, but how hard would it be either for banks to replicate these kinds of simple digital services that new entrants have provided? And also, how hard would it be for these new entrants to move up the value chain towards larger, higher net worth customers?

Christine: For the bank, if they start on a greenfield, it is doable. For the bank, if they integrated into their existing systems, it is rather expensive and a long-term project. So, it really depends on the incumbent side how willing they are to start businesses from scratch and maybe even cannibalize some of their still attractive earnings streams. How easy is it for the new entrants to scale up? We are seeing most of the digital banks, really, at the boundaries of wealth, I would say. They started with payment. They had a lot of success by cannibalizing into high-profit areas like foreign exchange. Now, they are really at the border of wealth management.

Ben: Barbarians are at the gate, as it were.

Christine: At the gate, exactly! They’re at the gate of wealth management. And what we see is they’re not growing as they were originally expecting, and this has really to do with the trust where you store your wealth. If you have a chatbot on the other side that sends you in circles, or if you at least can call a call center, or can call your advisor, that’s different. That’s really a difference. So there are some limitations in Europe. In the US, we have seen a completely different picture. If you look at the aims of Acorns, for example, they’ve entered in particular the 401k business quite successfully, and they’re growing nicely there.

[00:39:27.17] Ben: What you’re saying is, to be truly digital requires a business model change, and to some extent, is going to involve cannibalizing existing revenue streams. But, what you’re also saying about the additiv system, if I understand it correctly, is this can be introduced in a much more phased fashion, right? So in other words, you can both help banks to deal with the immediate need to service customers better, but also provide a simpler route to fundamentally changing their operating and sourcing model over time. Would you say that’s fair? So you can either, for those that are really progressive, they can immediately switch to a new business model with a new operation, a new business venture. But for those that are a bit more conservative, they can do it in a phased fashion using additiv’s orchestration engine.

Christine: Absolutely. So, the beauty is that they can transform their business model in steps if they want to, or they can even become more aggressive. The way it is built, if you look at the hybrid wealth management, it’s really tailored to a new servicing model. New servicing model by allowing working from home and serve the client as best as possible, and certainly better than through a simple phone call. At the same time, you could go fully towards accumulation robo, even being more aggressive out there, in the wealth management side, combining with other sourced options. So, it allows both.

[00:40:56.16] Ben: Decumulation versus accumulation. Why is that decumulation opportunity A so big and B, as you wrote in your report, so overlooked up until now?

Christine: Accumulation is growing wealth. So, you start to save preferably as early as possible, at the age of 25, and you grow your wealth through savings and obviously through smart investing over time, towards where you start to live partially from the wealth you have accumulated. It also can be that you grow your wealth at a young age and then start to decumulate because you start your own venture — for example, startup — or you go traveling around the globe for 12 months and you have saved 20K and you want to live off that for a year. Things like that are possible. That wealth will be decumulating — a reduction of wealth. Why is decumulation these days such a large opportunity? Why has it been neglected till now? If you look in the Western world, pension had quite a decent level of cost of living covered. The risk is, with the demographic pattern we have, with the lack of reforms we have seen, but also with the low interest rate level — which we now had for quite some years — you face a pension gap so that your targeted cost of living will not be covered by your pension anymore, and thus, you have to find a way to decumulate your wealth during the retirement period in a most efficient way, by not giving up completely on risk, by having the right investment products, which then allows you to live a life free of concern or free of financial concerns. That’s a huge opportunity. If you look into numbers, the gap is estimated up to 400, I think it’s trillions — a staggering number — which will be needed to close the gaps, either through savings, but also through smart investment offerings.

The paradigm we worked alongside was optimizing for return. Well, the problem was that not all the costs were internalized. That was really the problem — the costs that were taken by society and, in particular, by the planet. And if all the costs would have been taken in properly, certainly then, the financial market would have priced it differently. And therefore, it’s really the goal of the financial industry to start to not only recommend sustainable investments, but also to lend on the corporate lending side, according to the rules that take this cost into account— Christine Schmid

[00:43:04.01] Ben: If you look at all the FinTech entrants into Wealth Management, they seem to be mostly focused on accumulation — people like wealth from betterment. Why so few people focus on decumulation?

Christine: I think it’s a natural pattern. The digital entrants focus on the younger population, most of them. I haven’t seen a digital entrant that focuses on retired persons yet — maybe that’ll come, but I haven’t seen that yet. So, obviously, if you focus on a client group — 20 to 40 years old — you do not look into decumulation into pension savings, yet; you look into accumulation. You want these fun products, these easy to use, you want to cover traveling — or you wanted, in the past, to cover traveling — and foreign exchange, payments made easy; it’s the lifestyle that covers to that age group. Therefore, obviously, the ones entering that market were not focused on the needs of the elderly population. But also we all become older at some point. And, if you look at the age of 55 into your pension, it’s too late to cover the gap. You have to start earlier. We believe this is a huge trend and wouldn’t be surprised if market entrants not only start to look into accumulation but also on the way to build up into retirement. The best example will be Acorns, with its 401k plans. They do that. It’s still in the accumulation phase, but at some point, their clients will be retired. It might take a bit longer if they’re 25 years old today, but they will be retired, so it will become a normal business for them.

Assets under intelligence, how we call it, or return on intelligence, it’s not using only an investment product per se, but using multiple data sets, combining them and then giving even more personalized advice, optimized risk advice, and therefore, as well as optimized returns. So, it’s not the product per se that’s in focus. It’s really the whole construction within wealth management, but also other data sets around, that are more important to advise the clients going forward — Christine Schmid

[00:44:49.21] Ben: One of the concepts that I really, really liked in the report — in fact, it goes as far as to say I loved it — is this pivot in value proposition from being about return on assets to being about return on intelligence. Can you just go into slightly more detail about what that fundamental shift is in the value proposition of wealth managers?

Christine: In terms of the return on assets, you look at your assets under management, and you look at the profitability of the investment products that could have been sold within that group of assets under management. And obviously, therefore, the focus was on the best products to source. The best advice, then, to give to the clients that the level of sales, with hopefully, the best product was the highest. We expect this to change. Assets under intelligence, how we call it, or return on intelligence, it’s not using only an investment product per se, but it’s using multiple data sets. It’s combining it and it’s giving even more personalized advice, it can give even optimized risk advice, and therefore, as well as optimized returns. So, it’s not the product per se that’s in focus. It’s really the whole construction within wealth management, but also other data sets around, that are more important to advise the clients going forward than simply the pure investment product focus.

[00:46:28.18] Ben: You don’t see that many wealth managers yet ready to cannibalize their business. How ready do you see wealth managers are to take advantage of this move to return on intelligence, which presupposes that they’re ready to take this role as a kind of concierge and act to introduce customers to all sorts of different products and services?

Christine: The shift towards return on intelligence, that’s something they’re very keen on doing. It is linked, obviously — and we briefly touched upon base — before it was well linked to the whole area of sustainable investing. Sustainable investing has a lot of intelligence behind to select the right investments, but also the willingness if an investment wasn’t or hasn’t proven as sustainable to shift the transparency therein, I think the banks are really willing to go that extra route, as well to unbundle. At the moment, we have a clear shift towards ETFs and index products, but we don’t know what’s really in there — the detailed level of know-how we have per index is limited. And therefore, there will be another layer of intelligence that you could add, but really looking into the portfolio, unbundling all the ETFs, unbundling all the indices and adding it up then, again, on investment level. And guess what? You might be surprised by some concentration risk that’s in a client portfolio. And you might advise the client differently. That’s another level of adding intelligence to advice or combining it with payment data. If you know the client’s behavior on the consumer side, on the consumption side, you might know products a client would like, so you can, again, use this intelligence and provide it in a better way. Or, last but not least — and I think the industry has discussed that for quite a long time — you bring the intelligence of various clients — clients behaving the same — together and leveraging that for every single client.

[00:48:42.04] Ben: Last question. So, we’ve talked, I think, reasonably narrowly about wealth management. But I wanted to, if you’re okay with it, to zoom out and talk about another paper that you recently issued, which was about the changing needs of society when it comes to financial services. Financial services haven’t provided the insight that it needs to, and have those needs become more urgent in light of the pandemic?

Christine: The big question mark, is it the financial services who haven’t provided it, or is it the general economic, academic rules we are all behaving alongside? The paradigm we worked alongside was optimizing of return. Well, the problem was that not all the costs were internalized. That was really the problem — not all the costs that were taken by society and, in particular, by the planet. And if all the costs would have been taken properly, certainly then, the financial market would have priced it differently. And therefore, it’s really the goal of the financial industry to start to not only recommend sustainable investments but also to lend on the corporate lending side, according to the rules that take the cost into account. For the society to live on this planet — and I believe we just have one; there is no alternative, no planet B — the financial sector has a key role because it’s still the engine that keeps the funding alive. So, from savings, deposits into lending, into economic growth, into job creation. And obviously, this cycle has to be profitable, yes, but at the same time it has to take the costs for society and has to take the costs for the planet — climate change is a big topic — into account.

[00:50:45.17] Ben: So that was my last question, but as it turns out, it was actually my penultimate question because, how do we do that? How do we take those externalities and bake them into the price of assets and transactions?

Christine: How do you do that? That’s the question this industry is looking into, for the last 20 years. If you use the market to do it, then you would need to take the majority funding for each corporate. And the majority of funding for a corporate normally is bonds, and not equity. So I’m a big believer in the international capital market — the ICMA — rules for green bonds and for social bonds. These are rule sets that are not only legally enforceable but also international. So, if a corporation can issue a bond under a green bond ruleset the requirements have to be clear and they have to fulfill that. And the market, then, can price a green bond more attractive than a normal bond from the same company.

Christine: So, let’s take, for example, Volkswagen. They want to fund a new plant where they build the new e-cars. The new plant has to be according to certain standards — the buildings are done — but also about alternative energy use, so solar panels on the roof — all that set. They get cheaper funding than if they built a plain vanilla plant next to a nuclear power plant, for example. It’s a very basic example but you start to shift the funding towards greener, towards more social — by social I mean, for example, if you have to fund the bond for Inditex — and obviously, they have to fulfill certain rules in the way their clothing is produced, even if it comes from Bangladesh. And only if these rules are fulfilled, they are controlled, then they can issue the bond under these standards and they can issue cheaper. And the more the companies shift toward that standard, the more the rest in the old style will become expensive. That’s a way of market mechanism starting to include the pricing and using the market to do the pricing. Because what’s not working out there, if we’re trying to find out who is doing what and externalize the price into, this won’t be of thrive, this is not working. And through the bond side and through the debt side, you could use the market mechanism to start a pricing mechanism. That’s important.

If anything, this crisis has indeed accelerated the way we look at the digital world — Laurence Mandrile-Aguirre

[00:53:33.02] Ben: So, Laurence, I wanted to start off by just asking, what, so far, as we’re living through this pandemic, has been the hardest thing for you to manage in your job?

Laurence: Coordinating everything. We had to adjust to a lot of changes. Usually, when we need to adjust to change, it’s about your manager is changing or something is changing — but one element. In this case, we had to adjust to how we deal with clients, how we ensure continuity in the way we service our clients, how we deal with our people, understand their personal circumstances, how we communicate among each other internally. So, it’s more of making sure that we had everything under control to ensure continuity of business. And I must say that on the technology aspect, it took us a few days, but because we are a global bank, and we are used to having people traveling all over the world and working from a laptop, we were pretty well set up. The challenge was more coordination with the clients and the people.

[00:54:48.18] Ben: Because, I suppose it was not only with the normal channels of communication disrupted, but at that very time, you probably needed to speak more often with customers and with employees or with coworkers than normal because they needed reassurance and so on. Is that true? Would you say that’s a fair statement that, at the very time you needed to speak most and communicate most, the mechanisms you would ordinarily use for communication were disrupted?

Laurence: Absolutely! I mean, in a very short period of time, we had to get used to a lot of technology-related jargon — how to connect, which system to use, are we on the cloud, are we on the network, are we inside our own safe environment at work, terms of network. And the same for clients. Our clients are ultra-high net worth. They are global citizens, they travel a lot. They were not necessarily used to dialing to Zoom. They were used to go to a meeting and meet actual people, so we had to revisit entirely how we communicate among each other internally — it’s important as well — because we needed to be mindful of the bandwidth that we were using; audio/video had consequences on the network. And with customers as well. But, I must say that it took about a week or two to get used to this, and it’s almost common practice now.

I think digital is the way forward, and it was clear to the wealth management community even before this crisis. But it’s also a world that is constantly evolving. There are new technologies all the time. Things are being tested — whether it’s blockchain or artificial intelligence to see how we can use our clients’ preferences or behaviors to deliver a better tools to service them more efficiently. But definitely, I don’t think clients would want us to go back after this crisis and be less digital — Laurence Mandrile-Aguirre

[00:56:35.10] Ben: Yeah. I was reading somewhere that it takes something like 60 days for people to form new habits. Would you say that your customers and your team members have formed new habits? And to some extent, even if we could get back to normal, we won’t go back to the way things were exactly before the crisis.

Laurence: We have completely reorganized the way we communicate. So, we have large forums internally where we like to communicate the important features and the decisions that we are taking for the Private Bank. And, at the same time, we have smaller forums where everybody can voice their own concerns and ask their own questions. And I think we are going to keep that for a while because, obviously, in Switzerland, the economy has reopened. But, at the same time, we have not sent anybody back to the office. We are thinking about the safety of employees. So, we will need to continue communicating that way, definitely, for a longer period of time. And even when we will be able to go back to the office — we’re trying not to say ‘go back to work’ because we feel we are efficiently working — but when we go back to the office, because of the distancing and the security measures, I don’t think we will be able to do large meetings anyway and it will be from our desks, and therefore, phones and videos will continue to be the way forward.

[00:58:21.15] Ben: Looking back on this, you can argue whether this was a black swan or a white swan, whether we should have anticipated or not, or whether we couldn’t have anticipated this crisis. So, we’ll leave that question aside for a second. But, I guess, if we could just argue that what the pandemic is doing in some form is just accelerating the pace of digitization, right? So, we’re moving much quicker than was the case before the crisis in terms of remote work and digital interactions. Do you think that the wealth management community could have been better prepared, and maybe should have made more investments in this digital future while the times were good and ahead of this crisis?

for large banks, I would say — and Citi is focusing on the ultra-high net worth, what we are trying to do is to focus on keeping the full-service offering. That’s very important to us. Therefore, when we look at technology and outperformance, it’s under a more strategic long-term basis. — Laurence Mandrile-Aguirre

Laurence: Well, what I would say is that for sure, there was a strong level of awareness of the disruptive technologies — the need to become digital. We were all exploring our options. I would say that the smaller players could benefit from adding some new digital tools quite easily and for larger wealth managers it had to be compatible with a broader network and system. But I think we’ve been spending a lot of time looking at the options that were around us, how we could become more digital, how we could use AI in the way we improve client’s experience, the tools that we make available internally to our bankers. And we actually created a group called the Investment Innovation Lab, dedicated to that. So that’s what they were doing all the time — talking to FinTech companies, technology companies, looking at the new options, and what could take us forward. If anything, this COVID-19 crisis has indeed accelerated the way we look at the digital world. Just to give you an example, we had started to onboard clients digitally, but we still had a few hurdles to overcome. Most of the time, it was around regulatory requirements that we couldn’t fulfill completely easily. So the fact that we had to work from home triggered a lot of conversation to solve these points and basically, we managed to be 100% digital in onboarding and opening new clients in a week, while if we had not had this crisis, we would be probably still trying to work on the hurdles. So it has accelerated, definitely.

[01:01:20.02] Ben: So clearly, the most pressing problems that the bank is solving very quickly, like, how do we onboard a customer completely digitally? But, do you think you now prioritize more digital spending, particularly for things that are deeper down the technology stack, or for things that affect not just client servicing, but also the operating model and the sourcing model of the bank? So, do you think now there’s an appetite to make bigger investments in digital beyond the stuff that you absolutely had to do because you couldn’t function as normal without it?

Laurence: Absolutely. I think digital, anyway, is the way forward, and it was clear to the wealth management community, I’m pretty sure, even before this crisis. So, all this has just been an accelerator, and I’m pretty sure we will lock in what we’ve managed to achieve in that field. But it’s also a world that is constantly evolving. There are new technologies all the time. Things are being tested — whether it’s blockchain, which is a technology we use a lot at Citi — or artificial intelligence to see how we can use our clients’ preferences or behaviors to deliver a better system or better tools to service them more efficiently. But definitely, I don’t think clients would want us to go back and be less digital, especially the new generation and the millennials that are used to connect and access everything — and making information available efficiently and quickly is very important.

[01:03:12.24] Ben: Would you say that you’re clear on what the next big priority is in the digital journey for your bank?

Laurence: It’s clear we have a full team dedicated to exploring our options and are talking to technology companies all the time. If anything, a big portion of our budget, I know, goes to technology and anything digital. So, I have no doubt that we will continue to lead in that field. Absolutely.

[01:03:47.19] Ben: So, pre-crisis, I think it was clear that we were starting to see the big banks operating at a massive scale. We’re starting to outperform smaller wealth managers. What do you think happens post-crisis? And do you think this acceleration in digitalization also creates the potential entry point for new players? Maybe more FinTech-oriented players.

Laurence: I think indeed there is an opportunity for smaller banks or FinTech players, to enter the industry and be extremely good at one particular thing — for example, online payments or robot advisory. In one particular field, if you start from scratch and you don’t have the legacy of a large database and a full network, it’s, by definition, an opportunity to be very competitive and very good in one particular line or segment. But, for large banks, I would say — and Citi is focusing on the ultra-high net worth, what we are trying to do is to focus on keeping the full-service offering. That’s very important to us. We’re not trying to be extremely good in one area, but we are trying to continue to provide the full breadth of service. Therefore, when we look at technology and outperformance it’s under a more strategic long-term basis.

[01:05:31.26] Ben: Do you think that we’ll see consolidation as a result of this crisis? I.e., if what we’re seeing in other industries happens in wealth management, there’s a bigger separation in performance between the winners and those that are left behind. Do you think that will lead to consolidation?

Laurence: There should be opportunities as well in that field, and it’s been a trend anywhere, especially in Switzerland, for several years now. If you count the number of small banks, mid banks, and large banks, clearly there is a trend for consolidation. So, I guess that should continue. Whether it creates opportunities because of the current situation? Probably. We can see that, for example, access to lending is still available, but it’s becoming a bit more restrictive. So, I guess, at some point, there will be some difficulties for smaller banks to continue to provide certain services and therefore they could be open to merging. But it also triggers the questions on, when we think about consolidation and we try to merge two teams, two systems, two client database, there is a culture element to it. So, it’s also complicated. So, I guess the M&A activity will continue because the trend had started before, but it’s not that simple to buy a smaller bank and integrate culturally with the systems and the client base. It’s not that simple.

[01:07:25.14] Ben: What are you telling your clients? What advice are you giving your clients about how to position their portfolios and their assets in response to COVID-19? Are you advising them to sit tight, try not to worry too much about the volatility and just hold for the long term, or are you actively getting them to reposition to more defensive assets?

Laurence: So, that’s an interesting question because obviously, the market’s reaction has been quite sudden in March, and we had very limited time to review our recommendations. So, we had just finished our outlook for 2020, for example, which was quite promising — so, we had to do a lot of groundwork trying to understand when we had been in previous situations, if markets tended to recover quickly, if we were in a situation completely new that needed to be reassessed completely. So it took us about two weeks just to reassess the situation, take a bit of perspective. And we are taking always a strategic long-term view when we issue recommendations to our clients and guide them to manage their wealth. For example, advising to remain invested. We feel that trying to time the market in this environment is very tricky, and if you missed the best 10 days of the market over the last years, you could significantly miss out. So, we are telling clients to remain invested, but we’ve increased the quality of the underlying investments. Diversification, which is a very common concept, has never mattered that much than today. But we are also taking a thematic view — I give you an example: investing in private equity today, putting new money at work, giving money to a manager who would be able to invest post-COVID and deploy the money as the opportunity arise, I think could be a good recommendation to look at this space. To try to generate some returns that are less correlated to the traditional markets, I think it’s very good thematic investing. We were very engaged before this crisis in technology, healthcare, digital disruptions — the key themes that we believe will have superior growth going forward because they have their own trends. We continue to focus on, and we commit to invest in them.

Laurence: At the same time, what we are telling clients is that it’s very important to measure the impact of this crisis on the EPS earnings, and I think EPS growth has been revised downwards quite significantly, but it’s not clear yet how much it will hurt in Europe and in the US or Asia because the crisis is evolving at a different pace and economies will reopen at a different timing, and we don’t know whether there will be a second wave, etc. So, what we are telling our clients is to be careful about the equity markets, to invest in high-quality, high-dividend paying stocks and thematic investments, but to be ready to deploy more money along the way, because we might see market lower before it actually turns back. We’ve also advised our clients to explore opportunities in the capital market area — volatility has increased, our clients are trading a lot and by selling volatility, at least short-term is a good way to enter the market at a lower level. So, we are trying to be cautious but and remain invested, but there are some opportunities around volatility and private equity that we are recommending to capture.