Home Banking Leveraging Technology to Capitalise on the Transfer of Wealth to Generations X & Y

Leveraging Technology to Capitalise on the Transfer of Wealth to Generations X & Y

by internationalbanker

TEMENOS - Pierre BouquieauxPierre Bouquieaux, Private Wealth Management Product Director at Temenos, looks at trends in the private wealth management industry, and the software strategy implications for private wealth management firms


The transfer of wealth from the baby boomers to Generations X&Y[1] has begun and is expected to continue for the next 30 years or so. The projected value of this transfer is $1 trillion per annum – a huge opportunity that wealth management firms cannot afford to miss.

This intergenerational wealth transfer is different from the earlier transfer from the so-called GI and silent generations to the baby boomers, which were essentially non-events. This is because it coincides with structural changes in economic conditions, big advancements in banking technology and the evolution of client behaviour, which have collectively changed the rules of the wealth management game.

Accordingly, this wealth transfer constitutes as much of a threat to complacent wealth management firms as it presents a massive opportunity to those smart and courageous enough to transform their business models and embrace new technologies to stay relevant to both boomer and younger wealth management clients.

Retaining the new generation

Statistics on the ability of wealth management firms to retain the younger generations in the midst of this transfer highlight the magnitude of the challenge. Depending on the region and wealth management client segment, the intergenerational client retention rate is anywhere between a moderate 51%[2] and a very lowly 5%[3]. One survey shows 90% of beneficiaries having little interest in staying with the firm that managed their forebears’ wealth.[4] Retaining boomer clients who have not yet completed the transfer is also becoming more difficult: together with poor investment performance and a change in personal circumstances, a “decision by the next generation” is one of the top three reasons for historical clients to change wealth management providers.[5]

At the same time, there is a whole new market of wealthy investors who currently do not use advisers. It is estimated that, today, between 20% and 35% of wealthy investors in the US and western Europe do not have a personal adviser, but over 60% of this group would be willing to work with one, and nearly half of this sub-group would move some of their assets to a wealth management firm that provides technology-enabled business models.[6]

Servicing all generations

While the world-views and behaviours of the younger generations are fundamentally reshaping the wealth management market, the majority of assets are still held by boomers. Consequently, the latter are still the most important source of short- to medium-term revenue – although this is changing fast in emerging economies like China.

These boomers are progressively reaching retirement age, moving from an accumulation period to a spending period – both to enjoy retirement and to help the younger generations. Boomers generally prize loyalty more than the younger generations and therefore tend to trust, and have strong relationships, with their advisers. They most value the adviser-led model, which their own parents knew, but, in contrast to their parents’ generation, they do not shun technology. Boomers are just slower adopters of new technology than their children.

Conversely, the X & Y generations live in a world where internet, social media, emails and short messaging have largely replaced the traditional forms of interaction. Contrary to the boomers, they give much less credit to their parents’ past experience, and give their trust more parsimoniously. They are used to doing things on their own, attach a lot of importance to the cost-to-benefit ratio of services, and expect to be able to do anything, anywhere, at any time – all of which calls for strong virtual service. CapGemini’s 2013 global HNWI survey[7] shows that nearly 30% of respondents under 40 years old prefer digital contact, with only 20.2% favouring direct contact. Hence the younger generations expect compelling, seamless virtual user experiences as much from their wealth managers as from their retail bank, travel agent or online book store.

Therefore, wealth management firms need to offer a range of technological and interactional options if they want to retain both their older and younger clients. This may be seen by many wealth management firms as a risky juggling act to be approached with reserve. However, virtual technologies (interactional and transactional) and the human adviser-client relationship, far from being dichotomous, are in reality highly complementary. In fact, using both approaches hand-in-glove may be the only way for wealth management firms to emerge stronger from this intergenerational transfer of wealth.

Limitations of existing wealth management technology

Unfortunately, IT often hampers traditional wealth management, simply because the virtual user experience lags behind what clients are used to getting from their retail bank, travel agent and virtual stores.

In stark contrast, retail banks have over the past decade extensively experimented with modern user-experience, channel and core technology, and have benefited massively from it. By dramatically increasing the number of client-bank interactions, virtual channels have multiplied cross-selling and up-selling opportunities. And by reducing the reliance on physical interactions and shifting a large part of the transaction burden to clients, the cost to serve clients has shrunk substantially.

Over the past couple of decades, wealth management institutions have chronically underinvested in technology, partly because they have lived off low customer volumes and customised offerings (which do not require large processing power), but also because they have typically perceived technology more as a threat than a source of competitive advantage. Indeed, historically, private banks have been extremely protective of the business data they capture and use. In the 1990s, while most enterprises were busy connecting to the worldwide web, private banks mounted their defences against unbridled information flows. Email to the outside was tightly controlled, attachments were banned, codes and secure i.d. cards were required to access the internet.

Responding to the threat of disintermediation

However, traditional full-service wealth management institutions can no longer afford to play catch-up, especially in the face of increasingly disruptive forms of competition. New wealth management service models, possessing the fundamental advantage of having been conceived on a virtual platform are an attractive proposition for tech-savvy and self-guided investors. By covering a wide range of the services traditionally offered by wealth management firms – and by often doing so better and more cheaply – these new entrants are disintermediating the traditional wealth management players. Online investment management services like Wealthfront.com in the US (for a fee of 0.25% of AUM) offer a crisp and cost-effective alternative to traditional advisory services for tech-adept investors who are comfortable managing their investments themselves.

Other new entrants are providing services that typically haven’t been offered by traditional wealth managers for reasons of cost or apathy. TradeKing, for example, offers free high-quality financial education and online networks where investors can share ideas and strategies, and access to proprietary and all sorts of third-party research.

These emerging trends beg two key questions: what do traditional wealth management institutions need to do to stay attractive? And, how can the adoption of modern systems throughout their enterprise help them execute their strategy to retain clients of both older and younger generations?

A technology-enhanced strategy for intergenerational needs

A strong virtual delivery strategy providing a consistent user experience across all channels and devices, covering both interactions and transactions is a must for wealth management firms if they want to retain clients across the generational spectrum. At the same time, full-service wealth management institutions’ most valuable advantage over direct/self-service competitors is the personal relationship between their advisers and clients. Therefore, technology cannot replace the human relationship at the heart of the full-service wealth management model. Rather, technology and the personal connection should complement each other to deliver a virtually-enriched, collaborative relationship. By respecting this, wealth management firms should be able to offer the best possible traditional proposition to the boomers while developing a new proposition for the next generations.

Furthermore, rather than limiting innovation to end-client empowerment (to reduce transaction costs and increase data collection), wealth management channel strategies must aim to enrich interactions and improve the bidirectional adviser-client flow of knowledge. Research suggests that technology-enabled service features developed as part of this strategy should include online collaboration with experts (accessing them on demand), educational videos, alert services, and even task assistants driven by speech recognition.[8] With a comprehensive virtual offering, wealth management firms will significantly extend their reach and substantially reduce the overall cost of servicing customers, while giving advisers the tools to better explain (and therefore increase sales of) more complex products and transactions.

Capitalising on social media

Integrating and monitoring social media should be considered a vital element of collaborative strategies in wealth management, mainly because social media is a powerful business origination tool. Indeed, nearly one third of wealthy investors use social networks to find a trustworthy adviser through peer recommendations[9].

Moreover, social media is central to intergenerational retention as wealth management advisers can use it to build a much better awareness of their clients’ contexts: where they are, what their current interests are, whether they have been prone to transacting more or less in the recent past, whether they are at work or on vacation, etc. Advisers can also use social media to facilitate communities of interest (e.g. inheritance, estate planning) which can become powerful segmentation, indirect marketing and interaction tools by prompting clients and prospects to reveal their interests, opinions and desires.

But to manage this mass of data – internal and external, proprietary and public, transactional and interactional – and generate clear and actionable information, wealth management firms need cutting-edge business intelligence and analytics tools. Indeed, the 100 to 200-fold increase in interactions[10] driven by the adoption of virtual channels can produce a data deadweight as much as it can be a goldmine of behavioural client information, if the right systems are not in place.

Virtually-enhanced collaboration

A top priority for wealth management firms should be to enrich relationships with virtually-delivered collaborative advice. Although a large portion of investors no longer delegate investment decisions to their firms, they often seek advice and validation from trusted wealth management advisers to complement self-gathered information (from investor communities, for example) and personal analysis before making their own investment decisions.

To deliver outstanding service of this sort, the expertise of wealth management advisers and collaborative planning tools must be supported by cutting-edge household management and customer relationship management (CRM) tools, as well as remote/virtual financial training and family counselling sessions. Firms with this ability will not only satisfy their boomer customers but will also be in a good position to establish solid relationships with the next generations without alienating older clients.

Renovating the business model

That said, modernising front-end technology alone is not sufficient. Wealth management firms must also rejuvenate their business models to stay relevant in the face of disruptive competition and satisfy the product preferences of the younger generation. Just as importantly, they must modernise their core banking systems, because any competitive advantages gained from front-end innovation and business model transformation will be eroded in little time if built on a weak or rigid foundation.

In terms of products, for Generations X&Y, simplicity is not paramount. These millionaire investors are more likely to hold sophisticated investments than their parents, with nearly 40% of them holding derivatives and venture capital, in contrast to barely 10-12% of boomers. They are in general more financially literate (largely thanks to self-education tools) and better able to understand the mechanisms and risks of more complex products. Sophisticated products also cater better to their wealth creation drive. Indeed, wealthy Gen X and Y investors trade more actively and take more risks, and also make changes to their investment strategy more frequently than boomers.

…and renovating the core system

For all that front-end innovation and business model renovation can bring to wealth management institutions and their clients, the benefits will be short-lived – and any competitive advantages gained very costly to maintain – if the enterprise is not modernised through and through. Indeed, front-end innovation and business model renovation lose their value in little time if the operating foundation is weak – in other words, if they are not supported by a modern core banking system.

Such a solution preserves the competitive advantages of a modernising wealth management enterprise in many ways. First, it provides a high level of business agility by enabling business users (including those with limited technical skills) to adapt the firm’s product offering fast and easily, to effortlessly integrate cutting-edge front-office systems, and to scale up the enterprise practically without limit and at very low cost. Second, by breaking down the silos that typically exist within a wealth management firm, it provides advisers with a consistent view of the client, across the entire firm.

Third, front-to-back process streamlining and workflow automation afforded by such systems dramatically reduces the operating resources requirement and increases the efficiency of remaining back-office staff. It also frees up wealth management advisers and front-office assistants from menial or non-revenue-generating tasks so they can focus on high-value and revenue-generating tasks.

Finally, the enterprise architecture of the leading modern core banking systems allows wealth management firms to seamlessly integrate modern business intelligence systems and user-experience platforms. 

Wealth management institutions slow on the uptake

Despite all of these benefits, however, an analysis of the core systems used in wealth management institutions reveals a worrying level of quiescence. According to Ernst & Young, the slow pace of core renovation can be explained by the fact that the vast majority of back-end systems were built in-house by wealth management firms[11], and this tends to perpetuate the self-made approach. The same study shows that nearly half of wealth management firms’ strategic technology spending goes into improving the client user-experience and adviser effectiveness, but that ageing legacy core systems prevent these firms from fully leveraging their front-end systems.

The first to suffer from postponed core renovation are of course wealth management institutions and advisers themselves, especially as they find themselves increasingly exposed to constantly evolving demands and constraints (regulatory, competitive, client-behavioural). The weight of legacy core systems is notoriously heavy in mature economies. An astonishing 55% and 78% of wealth management firms in the Americas feel that their product/portfolio management systems and enterprise data management systems, respectively, are either not effective or only somewhat effective.

Ultimately, wealth management firms that haven’t yet defined a strategy to address the transfer of wealth to Generations X and Y and to meet the interactional preferences of the younger generations face a big risk of losing a substantial part of their business. Many of their best customers are baby boomers, creating a false impression it is not yet time to invest in the new generation of technology and clients. But, with $1 trillion in wealth being transferred every year to Generations X and Y, it is more than time for wealth management firms to catch up on the technology front.



[1] Baby boomers defined as born 1945 – early 1960s; Generation X – b. 1960s-1980; Generation Y – b. 1980-early 2000s
[2] “Global Private Banking and Wealth Management Survey 2013”, PWC, June 2013
[3] “Top 10 Trends in Wealth Management, 2013”, Aite Group, January 2013
[4] “Technology in Wealth Management: Opportunity or Threat?”, Finextra, 5 February 2013
[5] “Global Private Banking and Wealth Management Survey 2013”, PWC, June 2013
[6] “Reinventing Wealth Management with Technology-Enabled Video Services”, Cisco Internet Business Solutions Group, December 2012; survey of 1,200 wealthy investors in the US, UK and Germany
[7] “World Wealth Report”, CapGemini and RBS, 2013
[8] 74% of wealth management clients polled found the combination of these five services appealing; Telstra poll, 2013
[9] “Reinventing Wealth Management with Technology-Enabled Video Services”, Cisco Internet Business Solutions Group, December 2012; survey of 1,200 wealthy investors in the US, UK and Germany
[10] “Outmoded IT Could “Evaporate” Big Retail Banks – Temenos”, Forbes, 17 April 2013; quoting John Schlesinger, Chief Enterprise Architect at Temenos
[11] “Enhancing the advisor and customer experience through technology”, Ernst & Young, 2012

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