Stiff Competition Leading to Commoditization of Services Launched by Online WM firms - What is the future?

Traditional wealth managers (WM) have been providing wealth and asset management services to individuals and institutions till date. For their services, these managers charged a fee that ranged from 1% - 3%. In some cases, investors pay more compensation to their asset managers than their real value-add. According to the Simon Lack reports in The Hedge Fund Mirage, during 1998 to 2010, investors earned only $70 billion in the form of investment gains as compared to a whopping $379 billion earned in fees by the hedge fund managers.

Today, with rapid use of technology and software programs powered by carefully thought and designed quantitative investment algorithms, online WM firms are able to provide WM services for a fraction of the cost. They charge the client anywhere ranging from 0.15%-0.35% of AUM, which is nearly one-third the fee charged by the traditional WM.

This should mean investors flocking the online WM firms to benefit from the low cost of service. Is it really the case? Will wealth managers be out of service in the near future? Is a pure play online WM the future of wealth and asset management services?

According to a survey conducted by a research company, Platform, 44% of customers select wealth managers with a well-known name, while only 4% opt for those with the lowest price. This indicates that cost is not the primary decisive factor, but the brand is. Investors want the assurance that people to whom they trust their money will do a decent job.
Firms that sell asset allocation and portfolio rebalancing services will have to reconsider reducing client fees from the usual 1% or 2% of assets.
As technology rapidly automates day-to-day work, it will also lead to commoditization of advisory services due to stiff competition. In order to maintain a competitive edge, advisory firms will have to bring in human expertise or wealth managers to provide its clients with personalized services.
Commoditization of services offered by WM firms will also put pressure on their operating margins, leading to existing companies going defunct an entry of new players with identified competitive advantage.

It will be interesting to find out how each player beats the competition and pose a business challenge. It will also be exciting to see who wins the battle – the traditional players or the online WM firms; or will it be a fine balance between the both resulting out of acquisitions and mergers?

Share with us your views on this paradigm shift.

About the Author

Mohit Sinha is a client partner and currently manages the relationship with a top tier Investment Bank in London. He has over 14 years of experience spanning domain consulting and client relationship management in the Investment Banking and Wealth Management domain. He has been part of successful delivery of transformation initiatives across UK and Europe CIB and PWM, Derivatives Operations, SEPA transformation and CIB/PB Order and Trade Management areas.

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