Digital wealth managers and robo-advice to command Middle East market

20 February 2018 Authored by

Digital wealth managers will control up to a third of the global wealth market by 2025 according to assurance and advisory firm EY, and the Middle East is no exception, with local firms looking to cater to a growing segment of non-traditional investors.

In its latest annual wealth and asset management report for the GCC, Big Four professional services firm EY has predicted that digital wealth managers, that is, those who provide digitised investment advice for clients with genuine added value, will dramatically increase their market share over the next few years to ultimately crowd out traditional wealth managers by 2025.

In a report from last year, the firm examined the distinct primary models of the contemporary wealth management industry, namely diversified product specialists, independent wealth advisors, family offices, boutique finance houses, and the traditional wealth managers, with the latter the most under threat from trends toward focused and advisory-oriented business models such as those adopted by the emerging new category of holistic digital wealth managers.Business models, their positioning and amount of assetsThis rise in market share for digital wealth managers, from a negligible percentage today to a possible 30% slice of the global market captured in less than ten years, is being driven by new technologies and a developing client base with a distinct preference for digitised channels. The report states; “Holistic wealth managers in particular take a digital advisory approach driven by life events to deliver genuine added value for wealthy clients. New technologies and client affinity for digital solutions are smoothing the way for profitable business model design.”

And the Middle East is no exception. George Triplow, EY MENA Wealth and Asset Management Leader, says; “Historically, there were two main groups of clients in the GCC who have investable assets: GCC nationals and high-income expatriates. However, a third group is emerging that is attractive to wealth managers and private banks: the affluent segment of upwardly mobile millennials who want to transact business in a different way and communicate with advisors in a different way.”The disintermediation of providers: an existential threat for some advisorsWith the arrival of automated advice, the report says, and the development of digital offerings, clients can now more readily bypass and avoid general interaction with advisors, implementing their own investments by going directly to the companies providing the services and products required without the need for an intermediary. In terms of this growing disintermediation, these direct to consumer models (D2C) will continue to prove a challenge for wealth managers and force a requirement to adapt.

Previously, according to data cited in the report from Insight Discovery, 63% of financial advisors surveyed in the region were concerned over the disengagement as to its potential for a lack of commitment from clients on offered solutions, with only 18% of respondents considering the development an opportunity rather than a challenge. Meanwhile however, 49% of advisors are reported by EY to view the prospects of robo-advice – the use of online tools to make automated recommendations to clients – in a positive light.

Here, while the report notes that robo-advice hasn’t captured a significant market share to date – ‘partly because the persistence of paperwork in the GCC region’s insurance industry means that digital transactions are a long way from the mainstream’ – the authors contend that robotic solutions are set to revolutionise the wealth management industry across the globe, with benefits including greater speed and accuracy, round-the-clock service, and a significant saving in costs.Breakdown of number of robo-advice collaborations by modeAs of 2016, there was approximately $55 billion in assets under management (AUM) through standalone robo-advisors, with the market figure projected to exceed $2 trillion by 2020 at a CAGR of 68%. As such, the report notes, the established asset management firms have begun to launch their own robo-advisory services to undercut the existing players, with an analysis conducted by the consulting firm showing a fairly even split in the diverging strategies.

Specifically, some firms have developed their own robo-advisors (29%) while others have picked up previously independent players (26%). In turn, a fair proportion of wealth management companies have opted to partner with external providers (29%). Going forward, EY’s George Triplow says the firm expects to see ‘a large number of asset managers and independent advisors partnering with skilled technology firms that are able to optimise robo-advisor technology much more efficiently than they could do in-house.” 

Overall, he concludes; “Strong client preference for digital channels and the pressure to grow revenue mean wealth and asset managers must rethink their strategies, operations and technologies. Adapting early to the new reality will open the door to profitable future growth opportunities. The leaders will be those who harness blockchain, automated-advice, artificial intelligence and robotic process automation. The recent focus on particularly for crypto in the region sets the scene for a dynamic landscape for institutions moving forward.”

Digital futures

As the digital landscape continues to rapidly evolve, with the impact to be felt across almost every industry, numerous consultancies in the Middle East have predicted the massive changes afoot for the region. The Head of Advisory for EY in the Middle East recently outlined why local businesses cannot afford to ignore AI and disruptive digitisation, while KPMG's head of Digital Transformation has spoken of the unprecedented opportunities presented by digital technologies. Meanwhile, a McKinsey has suggested that nearly half of all jobs in the Middle East today could be automated through existing technology.