The Boston Consulting Group (BCG) and Lufax jointly published Global Digital Wealth Management Report 2018: Building Trust and Reshaping the Value Chain with Technology; The report notes that digital wealth management should be distinguished from pure online wealth management and pure cash management, underscoring the increasingly important role of technology in wealth management, especially in the Chinese market.
According to report, China’s wealth management market has reached $6 trillion in AuM, with an online sales penetration rate of 34.6%, both ranking second globally behind only the United States. Chinese wealthtech players have received the highest cumulative funding of $2.83 billion, accounting for more than 40% of the global total. Such facts indicate that China has a strong foundation and tremendous potential for digital wealth management.
However, China’s digital wealth management market is now at a turning point for transformation, and four types of players, namely traffic-based institutions, vertical institutions, digitalized traditional institutions and integrated institutions, are vying with each other. Digital wealth management platforms cannot win without six key success factors (KSFs): value proposition, business model, client value management system, investment research and advisory capabilities, technological application capabilities and agile organization.
Digital wealth management redefined: neither pure online wealth management nor pure cash management
Over the past five years, developments in the online space have dramatically changed the financial ecosystem, giving rise to a host of new concepts like internet finance, fintech, independent online wealth management and robo-advisory. Despite the global trend towards digital wealth management, not many offerings can be recognized as digital wealth management in the strict sense. It is essential to redefine digital wealth management in this new market context.
According to the report, with the reinvention of the entire client experience through data and technology as its value proposition, digital wealth management targets clients who are sensitive to prices, highly value convenience and embrace innovative technologies. It provides them with relatively standard, easy-to-understand products as well as an efficient, smooth and transparent experience through online and mobile interactions via videos, robots and other means.
“Different from pure cash management (e.g. money market funds) and pure online wealth management, digital wealth management primarily focuses on wealth preservation and enhancement rather than liquidity management, leveraging technology to provide optimal asset allocation with greater precision, efficiency and transparency. Digital wealth management is not restricted to offering online channels but rather uses technology to create value and reshape the value chain with minimal human involvement,” said Mr. David He, partner and managing director of BCG and head of BCG Greater China Financial Institutions practice.
Great potential for real digital wealth management in China as the penetration rate is significantly lower than in the US
China has already established a leadership position in the wealthtech space. By the end of Q3 2017, there had been more than 600 wealthtech firms worldwide, with their cumulative funding reaching $6.7 billion. Chinese wealthtech players had received the highest cumulative funding of $2.83 billion, representing more than 40% of the global total. According to BCG estimates, China had around $2 trillion in online wealth management AuM in 2017, second only to that in the United States.
However, independent third-party internet wealth management – a business model deemed the closest to digital wealth management – has a penetration rate of only 10% in China, compared with 35% in the United States, which means real digital wealth management has ample room for growth in China.
Joint research by BCG and Lufax reveals three characteristics of China’s current wealth management market.
Firstly, the market is in urgent need of regulation. The implicit guarantee transfers risk from vast numbers of investors to a few financial institutions, leading to an unhealthy concentration of risk in the financial system. As sales are not truly customer-centric, many investors have to accept existing product offerings rather than choose wealth management instruments tailored to their own needs and risk appetite.
Secondly, investors remain unsophisticated. Chinese investors have strong independence of mind in wealth management, which, however, does not translate into investing professionalism. Their risk awareness is still associated with institutions’ capability for guaranteed repayment rather than underlying assets, and their average time horizons are significantly shorter than those in mature markets. The report shows that 84% of Chinese investors have an average investment horizon ranging from three to 12 months for their main assets and Chinese clients invest more than 80% of their wealth in fixed income products.
Thirdly, institutions vary widely in service capabilities and technological applications. Some players have become industry leaders with ever-improving expertise and compliant operations, while other platforms use fintech as simply a marketing tool rather than an agent to transform the business, failing to unlock the true value of technology and data.
The report points out that China now stands at a strong footing and is expected to become the world’s fastest-growing digital wealth management market, with technology playing an even greater role in the industry. Regulatory guidelines released in early 2018, such as the “New Asset Management Rules” and Document No. 29, will present new opportunities for digital wealth management.
Six KSFs for four types of institutions to win in the market
As China’s digital wealth management market undergoes fundamental changes, market players will face disruptions in terms of user needs, policy, technology, and market environment. The report notes that active in China’s digital wealth management market are traffic-based institutions, vertical institutions, digitalized traditional institutions and integrated institutions. These four types of players face different challenges in using technology to create added value.
“Traffic-based institutions, for example, primarily serve relatively long-tail clients and focus chiefly on cash management and convenience. This model has a limited potential for growth and profitability. Such financial platforms therefore need to offer a more diverse range of products and services to clients as they grow wealthier. They should also invest in investment research and advisory capabilities to gradually acquire higher net-worth clients,” said Mr. He.
“Three inevitable trends will emerge in wealth management,” said Mr. Greg Gibb, co-chairman and CEO of Lufax. “First, AI will complement and even replace human advisors. Second, the new asset management rules will drive a shift towards performance-based asset management. Third, as investments increasingly pivot away from fixed-income to equity products, smart portfolio management tools will probably be widely adopted. It will become equally important for us to know how we invest and what we invest in.”
The report stresses that, in order to win in the digital wealth management market, the four types of institutions should build on their respective strengths and bridge capability gaps in respect of six KSFs: defining an unambiguous value proposition to always act in the best interests of clients, building a more open product and advisory platform, establishing a robust client lifetime value management system, developing professional investment research and advisory capabilities, improving technological functionality and building an agile organization.
Technology to fundamentally transform the wealth management value chain and renew client trust
Trust is at the core of wealth management, and technology is fundamentally transforming wealth management across the value chain. According to the report, wealthtech, represented by big data, AI, blockchain, and robotic process automation, will lead to a paradigm shift in client profiling and analysis, planning and allocation, trading and execution, and portfolio management, helping wealth managers cut costs, improve efficiency, expand the client base, enhance experience and control risks.
“Technology enables more inclusive, professional and open wealth management,” said Mr. He. “Technology fills the gaps created by a limited supply of professional investment advisors and increases the accessibility of professional investment advice. It helps significantly lower service fees so that professional wealth management becomes affordable to a wider group of clients. Technology also makes wealth management more efficient, precise and personalized, as data mining and analytics enable wealth managers to better understand and predict client needs and advanced algorithms allow them to provide investment advice tailored to each client’s unique needs. Furthermore, technology can foster a more diversified competitive landscape for digital wealth management. In the future, wealth management firms cannot rely on a single capability to stay competitive, but must develop strong, integrated capabilities if they wish to survive. In order to quickly bridge capability gaps and remain undisrupted, they will have to learn to befriend their foes.”
The report also notes that, as the wealth management market undergoes fundamental transformation, Chinese investors can no longer base their trust on wealth management institutions’ ability to guarantee returns or their personal relationship with a relationship manager. Technology will rebuild investor trust in wealth managers in three ways.
Firstly, technology helps wealth managers know more about client needs than clients themselves do. With the aid of technology, they can now profile and segment clients precisely and then match them with appropriate products. Lufax, for example, is exploring ways to create “precise profiles” of investors leveraging big data, machine learning and other technologies. In so doing, it allows clients to buy products tailored to their needs and avoids recommending unsuitable products. Secondly, technology imbeds financial services with transparency, impartiality and better experience to advocate client centricity. Thirdly, technology enables informed investing decisions using knowledge about products and clients. For example, by offering ways to capture massive data and derive from it key insights, technology empowers investment advisors and independent investors alike to optimize portfolios. Moreover, technology can strip away human irrationality and ensure the execution of pre-set investment strategies.
According to Mr. Gibb, digital wealth managers should carefully consider three questions regarding their future development: How soon will wealth management shift to equity-based investment management? Who and what institutions will become the most successful asset managers? How far can AI go in helping select desired products? The answers to these questions will carry direct implications for the development of the digital wealth management industry as a whole and institutions individually.
“After five years of rapid development, China has established a preeminent position in fintech and online wealth management,” said Mr. He. “However, real digital wealth management is still in its embryonic stage in China. 2018 will be a crucial year for the transformation of China’s wealth management market and all market players need to carefully consider their chosen route forward.”
To arrange an interview with one of the authors, please contact Jeremy An at +8610 8527 9926 or an.jeremy@bcg.com.
About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with offices in more than 90 cities in 50 countries. For more information, please visit bcg.com.
About Lufax:
Shanghai Lujiazui International Financial Asset Exchange (“Lufax”) was founded in September 2011 in Shanghai with a registered capital of RMB837 million. Headquartered in Lujiazui, Shanghai, an international financial hub, it is a subsidiary of Ping An Group and operates a globally leading online wealth management platform.
Riding the trend of financial globalization and IT innovation, Lufax is dedicated to providing financial institutions, businesses and qualified investors with integrated financial asset information and advisory services that are professional, efficient and secure, underpinned by its robust risk control system.
Officially launched in March 2012, Lu.com is Lufax’s online wealth management platform that provides SME and individual clients with professional financing and investing services at lower costs and with greater efficiency. As of April 2018, it has had more than 35.51 million registered users.
While sustaining rapid AuM growth on its platform, Lufax has also introduced KYC 2.0, a one-of-a-kind investor suitability management system, which covers Know Your Customer (KYC), Know Your Product (KYP), matching products to client risk profiles, information disclosure, and investor education. The system leverages big data and machine learning to create “precise profiles” of investors and, through smart recommendations, offers products tailored to clients’ needs and risk appetite.
