Digital wealth management and the Icarus deception

Digital wealth management requires willingness to change the current comfortable and seemingly safe business practices.

The truncated message from the myth of Icarus, is that it is dangerous to fly high; but the forgotten message is more important for Wealth management: “It is equally dangerous to fly low”.

It is Not Safe anymore to continue “business as usual”. This is a Warning.

The Icarus myth animates this warning in a very clear way.

“Just south of the Greek island of Samos lies the Icarian Sea. Legend has it that this is where Icarus died—a victim of his hubris. His father, Daedalus, was a master craftsman. Banished to prison for sabotaging the work of King Minos (captor of the Minotaur), Daedalus created a brilliant escape plot, described in the myth that we were told as children. He fashioned a set of wings for himself and his son. After affixing the wings with wax, they set out to escape. Daedalus warned Icarus not to fly too close to the sun.

Entranced by his magical ability to fly, Icarus disobeyed and flew too high. We all know what happened next: The wax melted, and Icarus, the beloved son, lost his wings, tumbled into the sea, and died.

The lesson of this myth: Don’t disobey the king. ….

The part of the myth you weren’t told: In addition to telling Icarus not to fly too high, Daedalus instructed his son not to fly too low, too close to the sea, because the water would ruin the lift in his wings.

…. But it’s far more dangerous to fly too low than too high, because it feels safe to fly low. “

The Icarus Myth, excerpt from Seth Godin’s book “The Icarus Deception”

The year is ending and reflections are common. Wealth management is a broad area that should feel safe for its clientele. We are at the very early stages of Digital wealth management entering into the mainstream. Incumbent wealth managers have mainly focused on the front end UX of the spectrum of services. In the insurgent field, some doors have opened to those underserved with minimal amounts to invest and save; in other cases, doors have been opened to offer financial products that were only accessible to few.

This year also, witnessed an overall pivoting towards developing “picks and shovels” for the incumbent institutions delivering services in Wealth management. End users of these new technologies, will have to wait a while for the benefits to trickle down to them. We are in a process of transformation. The business of providing financial services in Wealth management is by no means broken and urgently looking for a fix, But it is Different. Cutting costs the conventional way and implementing the same strategies for growth, even though they may still feel comfortable for financial institutions, are soon going to prove inadequate.

According to an EY 2015 report wealth managers remain predominantly in their comfort zone: “The majority of wealth managers do not invest heavily in IT, but neither do they see high levels of business return from IT investments”, Digital disruption and the game-changing role of technology in global wealth management.

The new economy has been coined as, the Sharing Economy, and brings all sorts of new Uncomfortable processes to consider. The obvious examples, are Transparency, Decentralized processes, and provocative Connectedness. In addition, an emerging world of powerful and accessible analytics is emerging from areas as Big Data, Artificial Intelligence combined with Behavioral finance. UBS, one of the biggest wealth managers, organized an innovation competition focused on Artificial intelligence innovations for advising clients.

No matter what business area one considers, the new ways of conducting business and extracting value, are simply Uncomfortable. Mobile, Cloud, and Social, are the core ones employed not only by Fintechs but also by Google, Amazon, and the likes.

The entrepreneurial activities undertaken by Fintechs, have initially been threatening, as they are developing and bringing to market, business models that are cannibalizing the “business as usual” ones. A survey by Corporate Insights firm (also referenced by Deliotte in their report “10 Disruptive trends in Wealth management”) points to significant growth of AUM from low-cost online digital advisors. The leading 11 standalone platforms grew at a 208% rate over the last 15 months (from April 2014, to July 2015). These are strong indications that such distribution channels are here to stay, whether in a standalone or partnership business format; whether in a hybrid (human-tech) or a pure version; even though they currently only command small fraction of advised assets.

Accenture reports in “Digital Wealth Management: Reimagining Wealth Management for the Digital Age” that “With growth rates north of 400% per year not uncommon for a few of these disruptors, large incumbents do need to take note and determine where and how they want to make their digital bets”.

At the same time, “Only 6% of board directors and 3% of CEOs of leading banks have professional technology experience” (in “Bridging the Technology Gap in Financial Services Boardrooms,”)

Some financial institutions keeping faithful to their silo structure have launched in-house accelerators and are participating as observers in Fintech developments. Fencing these developments in one’s basement is Comfortable.

So, what is wrong with being Comfortably involved in Digital Wealth Management innovations? What is wrong with running your own accelerator, or your own Corporate VC fund, or sponsoring other accelerators or conferences?

This is a Warning:

It is not Safe anymore!

Long gone are the days that the twin sisters, Safety and Comfort, were inseparable. The truth is that the Comfort Zone for financial institutions in Wealth Management has not changed. But the Safety zone has moved considerably. The good news is it has not split apart entirely.

Excerpt from Seth Godin’s book “The Icarus Deception”

However, it has shifted enough to require a re-alignment. Successful businesses will be those that shift their Comfort zone towards the direction of their Safety zone.

Doing nothing in this new era, is Unsafe

(This is a Warning and requires your attention) 

Replacing everything with a Fintech product or service, is Unsafe

(this is common sense)

All financial stakeholders are capable of transforming but the new market conditions require Willingness to re-align the conventional Comfort zone to what is currently becoming the New Safety zone. What is Safe during the work-in-progress of digitization of wealth management, is simply and clearly different from what Safe used to be. Private banks and wealth managers have been slow in the process digitization of their businesses; they have been Flying Low. Less than 50% of private bank websites are not integrated with smartphone applications (PWC reports in “Taking wealth management digital”)!

The current reality is forcing Wealth managers to realize that Flying too low in the face of these disruptions that are growing in triple figures (even though they still command a small % of total market share) and are replacing conventional business practices by using unconventional technologies to leapfrog and grab marketshare; is not an option anymore. Fintechs and their innovative products and services are gaining mindshare, and even though many will fail before being able to scale-up, the incumbents are beckoned to learn and transform from the process.

Flying too low, waiting for concrete evidence of proven processes, will turn out to be the wrong strategy. The only way for each wealth manager to design a customized route to Fly away from the Old Wealth management Continent towards the 1000 islands of the Digital wealth Management world, is to start Flying Not too Low and Not too High.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Efi Pylarinou is a Digital Wealth Management thought leader.