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Surveying the landscape for wealth management and the role that technology can play, Régis Burger, Head of Middle East & Africa, Julius Baer, says that a hybrid model is emerging, with human connections at the core of the wealth management business, but with digitalisation and innovative technologies playing an important role in enhancing the overall client experience.

The bank itself has accelerated its digital transformation journey because of the Covid-19 pandemic, with recent examples of innovation including its digital on-boarding solution, the launch of a secure WhatsApp communication channel and the digital distribution of expert publications, says Burger.

“We are especially proud of our state-of-the-art Digital Advisory Suite (DiAS) which acts as a fully integrated solution, ensuring a seamless end-to-end advisory process for relationship managers, providing them with a holistic overview of client situations and identifying opportunities for engagement,” he says.

Régis Burger, Head of Middle East & Africa, Julius Baer Image Credit: Supplied

“DiAS has also won several awards including at the Global Private Banking Innovation Awards 2020 where it was recognised in the Outstanding Wealth Management Technology implementation – Front end category.”

Another successful project Burger highlights is Spark, the group's in-house built structured product optimisation engine which harnesses big data and analytics. This latest add-on to the bank’s trading platform enables the construction and optimisation of tailor-made products from a wide universe of underlying industries and markets, he said.

Changes ahead

The Swiss wealth manager is projecting major changes for the wealth management industry and the banking sector, with its latest report Future of Finance: Banking at a Crossroads.

The report outlines that the banking sectors in the US and Europe are yet to fully recover from the Global Financial Crisis of 2008, while today universal and retail banks are facing headwinds in areas such as regulation, the need to invest heavily in IT, and challenges in the form of faster moving fintechs, neobanks and even Big Tech. As they look to ramp up their digital services and provide differentiation, wealth management is naturally a focus area.

Nevertheless, there are some significant differences between the focus of retail banks and private banks, which offer a more sophisticated range of services.

In private banking, the complexity regarding advising clients and processing investment transactions has increased to such an extent in recent years that it is no longer possible for a relationship manager to keep track of everything using the traditional resources. This is where technology can be a massive help. Julius Baer sees a symbiosis between personal advice and technological support as not just a success factor for dealing with this complexity, but also as the ideal future model for private banking.

Decentralised finance

One trend that has grabbed attention is the rapid growth of decentralised finance (DeFi), where financial activities take place on a blockchain and are not controlled or managed by a central authority. Those activities include peer-to-peer borrowing and lending, decentralised exchanges (DEXs) where users maintain custody of their assets and settlement is instantaneous, synthetic assets and insurance. “One of the truly fascinating aspects of DeFi is that the potential use cases are practically only limited by one’s own imagination,” says Carsten Menke – Head of Next Generation Research at Julius Baer.

Carsten Menke, Head of Next Generation Research at Julius Baer Image Credit: Supplied

Interoperability is another feature. “A major promise with DeFi is the potential for so called ‘money legos’. Money legos are technology stacks that allow different applications to fit into other projects, just like lego blocks,” says Menke.

The promise of the technology has been shown by its rapid growth: roughly one year ago, there were basically no funds locked into DeFi and now it is a multi-billion market ecosystem. Nevertheless, there are some significant downsides: numerous projects or smart contracts have been hacked, resulting in considerable losses for investors in some cases. “The generally irreversible nature of blockchain transactions make code vulnerability particularly frightening,” says Menke.

“We are not convinced that these issues are just teething troubles of smart contracts that are going to diminish over time as the underlying pieces of employed code will go through more auditing phases and become more mature overall.”

The overarching ambition of DeFi is to replace the established centralised financial system. What would be a revolution should rather become an evolution, according to Julius Baer.

“At the moment, there is the totally unregulated world of DeFi and the highly regulated world of traditional finance. Looking ahead, we expect this to become a more level playing field as regulation of DeFi will increase, eventually leading to an integration of both worlds, which will make the financial system more efficient and more resilient,” says Menke.

Robo advisers

Digitalisation and technology are steadily changing the world of wealth and investing, but close examination shows that in some cases tech-enabled products can promise more than they deliver. Robo-advisories have seen solid growth since their advent of 2008, but Julius Baer has reservations about some key aspects of their implementation. “Although robo-advisers sound technologically sophisticated, the reality is that they are often not much more than a simple investment questionnaire in a fancy dress,” says Menke.

The profile generated for an investor as a result of the questionnaire may not accurately predict the level of risk best for that person. Another weakness in the model is one that can be a limiting factor across the broader landscape for digitisation of wealth management, namely the importance of a personal connection between client and adviser. And demand for personal advice from advisers rises during periods of market turbulence. “In such times of crisis, when a decent part of their wealth has disappeared, people do not just want to see a message the performance was something like two standard deviations below the market trend – they want to see a human face and hear a human voice showing empathy for their situation,” says Menke.

Nevertheless, Julius Baer expects that intelligent machines may play a bigger role in other aspects of the investing and trading segment of retail banking and wealth management in the future, such as trade recommendations that are generated by pattern recognition of client trading behaviour. “If Google can already tell what I will be searching for after I have written only the first couple of characters, then my bank or online broker should be able to guess what I might potentially be trading before I enter my login details,” says Menke. “A client who often trades in options for Exxon Mobile and Royal Dutch Shell might appreciate it if her trading platform of choice would inform her when, for example, options on British Petroleum are trading at a historically low premium compared to history.”

Digital currencies

Whereas paying with cash used to be one option alongside paying with card or wallet, the pandemic has also increased demand for contactless payment options. And while there are arguments against a cashless society, convenience is one of the chief advantages of electronic payment options. Though the trend varies country by country – Sweden and South Korea and the UAE are seen as trailblazers, globally it’s set to continue to accelerate into the future, believes Julius Baer.

One topic that comes up in discussion of visions for cashless society is whether cryptocurrencies have a role to play. The report does not anticipate bitcoin will ever become a form of legal tender accepted around the globe, instead central bank digital currencies (CBDCs) “have a very high possibility of changing the face of legal tender”, says Menke.

China is one leader in the CBDC space, but it’s by no means alone: a 2021 survey by the Bank for International Settlements found that 86 per cent of all central banks are researching the potential for CBDCs.

CBDCs can come in two main forms – retail and wholesale. The retail version – where a CBDC has the potential to replace both the current account and the credit/debit card – could make most retail banking operations obsolete, while the wholesale version would see CBDCs supplied to banks, “similar to the current fractional reserves banking system but with a very fresh coat of paint”, says Menke.

“Although we project that CBDCs are the future of money, we expect to see a version that incorporates existing financial institutions into the mix rather than a retail CBDC solution that would completely and utterly disrupt the market – at least in the case of most developed market economies,” says Menke.

For more details on future of finance concerning digital assets, click here to listen to Julius Baer’s podcast.