Al Chiaradonna of SEI Private Banks talks about how disruption can be good for the wealth management industry, the role of start-ups in this, and regulatory implications.

As the wealth management industry responds to evolving client needs and emerging technology, firms are continuously trying to identify the threats and opportunities related to their business. In recent years – and even more so in recent months – the industry has kept a sharp eye on start-ups, which SEI Private Banks believes have enormous potential to disrupt the industry.

Many banks and wealth managers are scooping up these players and incorporating them into their offerings. However, those trying to get into the tech game are up against another source of disruption: technology companies pushing into the finance business. As the term “fintech” begins to encapsulate more and more business, banks and wealth managers need a strategic view on how to address this shift. This is something SEI Private Banks is tracking closely, and, here, Al Chiaradonna considers some of the forces at play.

What form of start-ups are most relevant to the wealth management sector?

Currently, technology and financial technology start-ups are the most relevant to the wealth management sector. This is due mainly to the fact that they are focused on the front-end, and not encumbered by current regulations that bigger companies often deal with. Financial technology start-ups are also most likely to develop complementary or competitive solutions to what today’s wealth managers offer their customers, thereby creating more than just incremental change, but fundamental change. 

Please describe the ways in which these players are seen to be “disrupting” the industry.

With the benefit of not being saddled with outdated infrastructure, these technology companies can be viewed as “disruptors” because they have the potential to change the individual’s experience with money – whether through back-office systems or simply transferring money to a friend. PayPal is a great example of a disruptor that most people are familiar with today, as the company turned the industry on its head by allowing people to exchange liquid assets easily online – both between friends/family, as well as between consumers and retailers.

Although its effectiveness can be called into question, robo-advising is another example of a disruptor in the space. Many argue that robo-advisors change efficiency of advice and provide consumers with a variety of choices for their investments. We can also look at IBM Watson, where artificial intelligence has the potential to change the effectiveness of advice as well. Then there are platforms that allow us to invest in funds like Kickstarter, which are changing access to capital, and the increasing rise of mobile payments applications like Venmo – transforming the way that individuals interact with money. 

How might disruption from start-ups be “good” for the industry? Where are the biggest opportunities and challenges?

Disruption can inarguably be good for the industry – primarily as a result of disruptors driving competition. This enhances the overall customer experience, and also drives greater innovation across the industry as a whole. Ultimately, this also encourages bigger companies to be nimbler. As more entrepreneurs enter the industry, competition then changes entry requirements, and in turn, capital requirements. In addition to these factors, disruption also creates opportunities for end investor choice. 

You have observed a trend whereby a growing number of wealth managers are “scooping up” start-ups and incorporating them into their offerings. How are they approaching this endeavor? How can they assess all the relevant considerations to ensure the move is appropriate for their operational structure and clients?

We continue to see a trend in which fintech start-ups are providing services (like wealth platforms and electronic payments) that allow new merchants to thrive in an increasingly cashless economy. The start-ups’ comprehensive understanding of technology and their ability to innovate makes them attractive to larger corporations looking to take advantage of their flexibility and growth. For example, JP Morgan just began bringing fintech startups in-house last month, as many larger corporations such as Citigroup are finding it difficult to use dedicated in-house teams to defend against the nimbler startups.

JP Morgan has incorporated these start-ups into their offerings by allowing them to work through a fintech program within the company, exchanging access to the corporation's facilities for fintech knowledge and development technique. Other large companies have been allowing fintech start-ups to work at labs within the company, rather than side by side with their bankers. 

These collaborations reflect a larger trend we are seeing of corporations shying away from outright acquisitions that can be expensive, and instead opting to work with start-ups earlier to explore business models and new technologies. This method allows the start-ups to stay independent and use resources otherwise outside of their grasp, while the corporations can adopt the practices of the start-up and learn how to keep up with their innovations. 

On the other side of the equation, as stated above, you are observing technology companies pushing into financial services. Can you please provide some examples, and outline what, in SEI's opinion, such firms can offer that banks can't?

As the financial services space continues to become populated by technology companies, we see large firms like Amazon, Google, PayPal and IBM emerge prominently within the space. There are several offerings that tech firms, like the ones mentioned above, can provide that banks typically do not. These include an infrastructure that supports emerging technology, as well as a culture of innovation that constantly looks for new ways to engage consumers and brands. 

While these attributes most definitely contribute to the rising prominence of technology companies in financial services, it is important to note that banks, too, have key “assets” that tech companies do not: clients and a history of managing money. With a healthy roster of pre-existing clients and more extensive experience managing their money, banks bring their own offerings to the table, as well. 

What are the regulatory implications in all of this?

With the emergence of tech companies in the financial space, there are of course regulatory implications that result. For these technology/financial technology companies that are smaller, however, many are able to explore offerings without being under the regulatory microscope that many bigger companies face. The biggest risks we see here pertain to privacy and data security. For bigger companies especially, the reliance on innovative technology to store large masses of data can be risky, and the need for a reliant system to protect valuable information has become increasingly necessary.