A new report has laid bare the potential opportunity cost for financial services firms that underinvest in technology.
A study of 1,503 companies across the industry carried out by research firm Roubini ThoughtLab found that the average firm could suffer an opportunity cost of $676 million (£503 million) for being a digital laggard, or what it deems the ‘laggard penalty’.
Full-service businesses are set to pay the highest price with an average penalty of $1.5 billion, with the figure at $1.2 billion for asset managers, $209.8 million for investment advisers, and dropping to $41 million for private banks.
The estimates are based on a calculation that covers not only the financial benefits of digitising functions, but also the opportunity cost of falling behind, including losing future business, particularly younger potential clients.
The report found that this risk was not as widely recognised in the industry as Roubini ThoughtLab expected, however.
‘For most investment firms, going digital delivers a favourable revenue and cost outcome,’ the report stated.
‘The biggest surprise was retail and private banks, which both expect low or even negative returns on their digital investments. These firms expect a higher cost of technology investment than other firms, and often see going digital as more of a defence than a growth strategy.’
LPL Financial chief wealth strategist Matthew Peterson said: ‘The younger generation wants to be with a firm they view as a technological leader even if its services aren’t materially different.’
‘They like the wow factor of having an “enhanced digital experience”. The younger cohort doesn’t want to be involved with a stodgy firm – a dinosaur.’
Kevin Russell, proposition director at SEI, agrees that continual investment in technology is crucial.
He said: ‘Our investment in technology is what drives the business forward; it is very much seen as an investment rather than a cost.
‘We have been talking internally about spending in excess of £100 million a year in terms of developing our wealth platform between the US and the UK businesses.’
Russell notes that a lot of the UK portion of this spend will go towards building and improving tools to change the way the firm interacts with clients online, notably developing client portals and video conferencing.
However, the real developments he believes wealth managers need to make to avoid being hit by the so-called digital laggard penalty are in enhancing and developing their client value propositions.
‘If you do it well, it obviously makes improvements in efficiency and control that is a necessity given the drivers within the Financial Conduct Authority’s asset management review.’
This sentiment is backed by Steven Dorval, head of advice and innovation at financial conglomerate John Hancock, who said: ‘Digital transformation can make you both more efficient and more relevant to your existing customers and distribution channels.
This is backed by the Roubini ThoughtLab research, which found that four functions driving the largest revenue increase from digital transformation are information services, new product development, marketing and customer service, and strategic planning.
However, for smaller firms, WH Ireland’s head of wealth management Roderick Buchanan says that one of the main concerns is ensuring that the money is spent in the right place and targeted.
‘The difficulty in my mind is that technology is moving so rapidly. What you envisage using and delivering tomorrow is probably going to be very different to what is actually delivered in a year’s time,’ Buchanan said.
He believes that the way to avoid this is to invest in technology that meets a specific need rather than taking a scattergun approach.
‘Apple was incredibly lucky with the iPad, whereby they produced a product, then went and found a market. In our business, you have to define your target market first, then find the need for that target market and, of course, you have to not only deliver on their needs for today but for tomorrow as well.’