FAANGs Won't Easily Bite Into Wealth Managers' Business

Tom Burroughes

5 April 2018

Big-tech businesses such as Facebook, Amazon and Google could bring out robo-advisory businesses but regulatory uncertainty and worries about trust remain hurdles, a study says.

For some time, industry practitioners say wealth management CEOs lie awake at night worrying that internet-driven and other tech business firms could steal a big slice of their territory. Amazon is reportedly talking to Wall Street banks about creating an online checking account, joining the ranks of firms such as China’s Alibaba in pushing into financial services. Such stories add to the idea that established banks, weighed by regulation and legacy issues, are potentially vulnerable to start-ups often having far larger market capitalization.

Cerulli Associates, the global research and consulting firm, asks in a report: "How would the market react if the world's largest tech companies entered the digital financial advice market?" It considers the position of companies like Facebook, Amazon, Apple, Netflix, and Google – the “FAANG”s.

"Cerulli research shows that, overall, only 12 per cent of investors comprise the digital advice opportunity segment," Scott Smith, director at Cerulli, said. "These large technology firms excel by meeting unmet demands through scalable technology."

"However, the level of nuance and regulation inherent in financial advice engagement would be difficult to scale to be of strategic interest to the world's largest technology providers,” Smith continued.

Another challenge that technology leaders face is creating a digital platform that can be considered trustworthy and secure. "Investors select transparency as the most important criterion in choosing an advice provider," Smith said. "These firms' overriding fiduciary duty is maximizing shareholder value, which does not correlate with building long-term trust in potential investor clients."

In Asia, to some extent even less beholden to legacy banking models than is the case in Europe or the US, e-commerce giant Alibaba that was founded by Jack Ma, is an example. Its Ant Financial affiliate business provides financial services to millions of citizens. Offerings include access to forms of wealth management.

The report also comes amid predictions that so-called robo-advisor wealth management models, either entirely automated or with some “hybrid” elements retaining human contact, will reshape the industry. One research report has predicted that the global wealth management platform market size will expand from $1.70 Billion in 2017 to $3.20 billion by 2022, at a compound annual growth rate of 13.4 per cent during the forecast period.

Human irony
The final consideration hindering the entrance is adding a scalable human advice element to digital platforms. "Ironically, one of the biggest challenges that the robo-advisor platform faces is hiring enough financial planners to handle the influx of investor inquiries," Smith said. "Even investors who thought they would prefer purely digital self-service relationships frequently want discussions with human advisors."

Already, Paypal, the payments service group, helps to power many transactions used by online retailers, so the move by Amazon may to some extent represent the next logical step. Also, with wealth management observers saying the sector should learn from Amazon, it may be ironically the case that the firm could push directly into banks’ terrain.

While such a development might please people who want an alternative to existing checking account providers and add more competition, it might also raise hackles of lawmakers in Washington DC and possibly overseas who might argue that tech giants such as Amazon and Google have too much market share as it is. The firm has been rapped by "tax justice" campaigners over how it has in the past sought to avoid paying high US corporate taxes by parking foreign earnings abroad, although the situation has already changed following the Trump administration's cuts of late last December.

In Facebook’s case, controversy over use of client data has hit its share price and raised questions among policymakers about whether such social media businesses are over-stepping the line. Such worries may make it hard to build trust about any financial services expansion.

Yesterday, the UK’s Guardian newspaper said that while Facebook is rolling out stronger privacy protections to users ahead of the introduction of Europe’s General Data Protection Regulation , its chief executive Mark Zuckerberg will not promise all future changes will apply to the company’s American users. Although the initial tranche of changes, announced last week, will be available worldwide, Zuckerberg refused to commit to GDPR becoming the standard for the social network across the world, the newspaper said. Facebook is introducing new privacy tools following the Cambridge Analytica files, which revealed the company’s historical lack of clarity over how and why user data was shared with third parties.