Innovation in the private wealth industry is crucial, but if it is not "purposeful" can be costly, non-effective and disruptive, delegates at a recent Family Office Exchange conference heard.

“Purposeful innovation” was among the topics covered at Family Office Exchange's 2016 Wealth Advisor Forum, held in Coral Gables, FL. The organization's president, Alexandre Monnier, talked in depth about how purposeful innovation will increasingly form the basis of competition in the private wealth management industry, and how wealth advisors and family offices can incorporate this into their business development strategy.

Most businesses in the private wealth management industry are looking for ways – or new ways – to gain an edge in what has become an extremely competitive sector. However, one of the biggest challenges faced by all players in the space is that competitive advantages deteriorate over time. Organizations therefore need to be able to identify new sources of innovation in order to repeat what should be a virtuous cycle, Monnier said. “The challenge for us all here is that the speed of erosion in the private wealth management industry is definitely accelerating; we believe there is a shift happening and a need for leading players to adapt in order to retain the edge.”

The basis of “competition” in the private wealth sector was once very much based on relationships and often confined by geographical boundaries. But the sector has evolved into one which is more centered around scale, processes, and, increasingly, technology and innovation, Monnier said. The industry has also gravitated away from being heavily investment performance-orientated to being much more client experience-centric. For a long time, organizations chose to innovate when it was required, and therefore innovation didn't happen very often. While the industry has hitherto embraced “somewhat controlled innovation,” this strategy is starting to claim a more permanent role, and is beginning to really characterize the industry, he said.

But how can innovation be achieved when the aforementioned “speed of erosion” is accelerating? “It requires new strategic priorities and capabilities,” Monnier said. The industry's “key success factors” are changing, gravitating away from “slower” attributes such as: nurturing protected markets and building barriers; focusing on having stable, exclusive client relationships; targeting talented individuals; and leveraging distinct assets.

Newer approaches to innovation, however, have seen organizations begin to: create economies of scale; consider market segmentation and “controlled” growth; learn to partner and share relationships; create performance and scale advantages; and foster a team-based approach that can efficiently leverage systems within the enterprise.

Even faster innovation techniques are also coming to the fore, involving: an intensified focus on shifting client preferences and behaviors; managing risk and uncertainty; managing unstable relationships, characterized by temporary loyalty and shifting distribution channels; being able to manage information and adapt rapidly; and generating new ideas. As an example, single family offices are increasingly partnering with advisors and creating an “ecosystem” – doing some things in-house but outsourcing others in a “hybrid” model.

Defining and creating a culture of “purposeful innovation”

“Purpose” is really about the “why,” and less so about the “what” or “how” (although the latter two are of course very important too), Monnier said. “As an industry we tend to think and act from the outside-in. When prospecting, for example, people often say what they do - then how, and, lastly, the crucial “why.”

“Purposeful organizations will do the reverse,” he said. They'll start with the why, such as “we keep families of wealth together,” and then go on explain how exactly they are doing this, with “we take a holistic approach to wealth management,” for example. It follows that the “what” might be: “one of the services we offer is financial planning, do you want us to help you?” “People buy why you do something, not what you do,” he said, quoting Simon Sinek.

Monnier went on to outline how an organization can create a culture of purposeful innovation, referencing seven key sources of innovation identified by Peter Drucker in the Discipline of Innovation:

1. Unexpected occurrences: For example, is a product or service in greater or less demand than anticipated, or has something such as a cyber breach brought a particular issue to the fore?
2. Incongruities: This refers to the difference between what “is” and what “should be,” which can be ascertained by asking clients and prospects for feedback, for example.
3. Process needs: These need to be mapped out in order to be able to identify the “pain points” within an organization, which then of course need to be corrected or redesigned accordingly.
4. Industry and market changes: Technology advances, for example, can help lower costs and boost the client experience by providing greater access, transparency, control, convenience and personalization. An example here could be online platforms to access investment products.
5. Demographic changes: Think about the needs of Millennials and how increasing longevity is changing family dynamics and thus the need for certain wealth planning approaches.
6. Perceptions: Consider changes in client perceptions in terms of how the rising generation is seeking to align their wealth with their values, as well as how they want to engage with their advisors.
7. Knowledge: Keep in mind what kinds of information clients have access to today, which is empowering them. Meanwhile, advisors should leverage “big data” for a 360-view of their clients.

Purposeful innovation requires starting on an “inside-out” bases, starting with the “why,” not the “what.” Monnier emphasized that it requires time spent on rationalizing and listening, internally and externally. Without proper brainstorming and reflection, it is nearly impossible to “cut through the clutter” and find where the new possibilities lie and how to attain them. Fostering a culture of continuous learning and collaboration is also key, he said, as innovation requires a tolerance for trial and error – but calculated risk. “You need a culture that rewards and praises innovation; otherwise, no one will follow.”

Innovators need to also invest early enough to successfully gain competition advantage – not so early that time is spent on resources that are not relevant, and not too late whereby an organization is forced to play catch-up, Monnier said. “Purposeful innovators do this very successfully, and repeatedly catch the wave at the right time, know how long to ride it for and then jump on the next one when it starts to fade.”

In the words of FOX: “Innovation is the cornerstone of enterprises today as businesses compete in their ability to provide unique service offerings and value to the clients they serve. Yet, innovation without purposeful planning, strategic dialogue and targeted implementation is costly, non-effective and disruptive.”