These trends are causing disruption and innovation across broad areas of politics, business and social interaction; they are not limited to the asset and wealth management industry. When change affects us, we tend to believe that things are shifting more often than they used to. In part, that is the perception the media has given us, because innovations in media technology allow us to find out about events more readily, as they happen in real time. If there’s a natural disaster on the other side of the world, we see the images and footage immediately – and then multiple times on a loop the following day. And while our awareness of global events is higher than before, it doesn’t necessarily mean that disruption has become more common.

Disruption versus innovation

When change is happening, it’s important to understand it and how it affects you. You also have to understand the nature of the product or service you offer. Disruption is a complete change in the demand for the product or service offered that affects an industry’s longterm growth. If you start to believe that people will not need your services anymore, then there is no point in continuing to offer them.

For example, gaslamp lighters have been replaced completely – that is a true disruption. On the other hand, innovation changes how a product or service is delivered, priced or used, but does not necessarily put the longterm growth of an industry as a whole at risk. Individual industry participants could be at risk if they fail to adapt to the innovation.

I believe very strongly that many of the global demographic trends are supportive of the growth of asset management and advice. However, some of the trends in generational preferences, coupled with innovations in technology affecting risk management, communications, product design and pricing, mean industry participants must adapt.

Behavioural responses: flexibility is key

There are really only a few approaches you can take to deal with disruption and innovation: you can panic, bury your head in the sand or make a plan. And only one of these actually works. The key to a successful plan during periods of significant change is flexibility. It is critical to understand what clients want to achieve and how they want services provided to them. We have all heard the legendary story of Henry Ford’s statement, “You can have any colour you want as long as it’s black.” We should ask ourselves how much we have progressed past that thinking, or are we still largely pushing our concept of what our clients should want onto them?

Technology is creating more time for delivering insights and client service

New technology means there’s more data for us to analyse. In the past we spent a lot of time collecting data and collating it into useful information, and then from there we garnered insights. A computer system like IBM’s cognitive technology ‘Watson’ is showing us how a traditional research process can benefit from innovative technology. In a recent case study a woman had a very unusual form of cancer. Watson read all the data, produced a couple of scenarios, and then an experienced doctor was able to determine a more specific diagnosis.

And that’s key. This technology doesn’t replace us as asset managers, and it doesn’t replace financial advisers. It enables us to spend more time developing and delivering insights, provided we are prepared to alter or give up some of the daily routines we take comfort in. Innovative technology allows research teams to spend less time on the basic functions of collecting information, arranging it and carrying out a basic analysis, and more time on developing insights.

For advisers, technology can help concentrate on the most valuable aspects of what they do and expand what they do into areas thought to be less profitable. Working with technology-driven approaches like robo-advisers mean human advisers will be able to spend more time on client contact.

Pitfalls to avoid

Corporate giants in other sectors can offer cautionary tales about what can go wrong for those who fall victim to two behavioural hurdles: overconfidence and the innovator’s dilemma.

Nokia was once the number one mobile phone company in the world and is now essentially out of business. It was confident that it could continue with its approach; a cell phone was a device used by people to talk to each other and the great innovation was to make it mobile and small. Meanwhile, Apple understood that an integrated approach to communication and content delivery created a different buzz, and created the smartphone.

Apple’s success was less about technology innovation as creating a new ethos: the flexibility for people to communicate and be entertained how, when and where they chose. By the time Nokia caught on, it was too late and it saw its market share collapse.

Similarly if asset managers take too narrow a view of their business, such as a provider of mutual funds rather than providing a broad and flexible set of investment solutions that are vehicle agnostic, they may face the same future as Nokia.

Kodak thought it was in the celluloid film business. It fell victim to the innovator’s dilemma: companies with a strong, established market share are often the most reluctant to accept change. Kodak was so successful at selling celluloid film it was reluctant to push innovation in digital photography. Its real mission was to help people capture memories, but it didn’t want to put its profitable celluloid business at risk to pursue that goal.

Adapting to investors’ changing demographics

Both the age and the attitude of investors are evolving – Generation-Xers and millennials have different approaches and priorities than baby boomers, and these nuances need to be reflected in the services and advice they receive. But baby boomers also face changes. Many have not faced rising interest rates in their adult lives. The shifting proportion of various ethnic groups in the overall population might be a catalyst for change as well.

Partly as a result of changing demographics and partly because new technology makes choice readily available, people want to pick and choose what they’re paying for and they expect full transparency. It’s leading to an unbundling of services, and the cable TV industry is a good example. Older generations have grown accustomed to paying upwards of $200 per month for hundreds of channels and they may only watch a handful. Younger generations are choosing to unbundle these packages and instead buy the highest speed internet and then purchase extra services to target the shows they want. Ultimately, they may not save money, and they certainly don’t save time, but they prefer having transparency into what they’re paying for.

This unbundling of services is happening in advice and asset management, too. Traditionally, the investment returns and investor services offered by mutual funds were bundled together, and the individual cost of each element was too complicated to discern within the overall fee. Increasingly, people can now pick and choose what part of a product’s investment performance they want to pay for. The performance can include beta, strategic beta (or factor exposure) or alpha. Investors can increasingly access each one individually instead of in a package.

It’s unclear how far this trend will go in the financial services industry, but the cost of services is going to become more transparent and flexible. The prices that financial advisers pay large investment firms and the prices they charge to their clients are going to be on the table, giving clients more control to get exactly what they want.

Traditional revenue streams may get disrupted for a while, but as in the case of Nokia and Kodak, it was the failure of business leaders to take a holistic view of the service they provided and to adapt to innovation that led to their demise.

There are more mobile communication devices and more photographs taken today than ever before, illustrating that innovation can present longer-term opportunities if it is embraced.

A strategy for the future

The financial services industry has dealt with huge upheavals in the past – from stock market crashes and recessions to the rise and fall of currencies and countries. History shows that change represents a risk, but also an opportunity if you’re more prepared than the people around you. At a time of uncertainty and change, a clear head and good advice are more valuable than ever. Having a strategy, rather than panicking or burying our heads in the sand, will help us succeed, together.

Read the full report.

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