The wealth management industry is booming. There were $89 trillion assets under management at the end of 2019. But when it comes to growth, many firms still struggle. And this is mainly due to customer acquisition cost.
Kitces reckon customer acquisition cost in wealth management is around $3,119 per client. With competition ever more stiff — and sky high customer expectations — keeping new clients long enough to make this back (and turn a profit) is increasingly difficult.
So why is client acquisition cost so high? And what can wealth managers do to address the issue?
What increases customer acquisition cost in wealth management?
Wealth managers face two big challenges when it comes to acquiring new clients:
- Finding a way to stand out in an extremely crowded market
- Creating a smooth onboarding process
In 2020, standing out is easier said than done.
Robo-advisors, micro-investment platforms, crowdfunding platforms, and other tech companies deliver high quality service at a fraction of what traditional firms charge. And this means the latter have to find ways to differentiate themselves without competing only on price.
But tech companies have challenges too.
With 9,000 investment startups globally in January 2020, it’s an extremely competitive space. But customer awareness — in the US, only 8% of households have used a digital investment platform — is still low. And if you target customers who make lower-value investments, it takes longer for lifetime value to exceed acquisition cost.
The fact that wealth management is a regulated industry complicates matters further for everyone. According to Kurtosys’ Digital Marketing Survey, 78% of digital marketing executives in wealth management feel regulation makes marketing harder and drives up costs.
The Amazon effect
It goes without saying, but getting noticed is only step 1. Once you’ve persuaded clients to give you a go, you have to do due diligence. This is often where many customers change their minds.
Due diligence is essential, but it’s also tedious. Customers are used to effortless, friction-free digital services. So they resent lengthy forms, paperwork, and waiting around. As a result, across the UK and EU, the application abandonment rate in financial services is 38%.
Regtech company Signicat’s CEO Gunnar Nordseth puts it this way: “…everyone is innovating and consumers’ expectations are continually increasing. Financial services providers need to run fast just to maintain the position they have.”
When less is more: the benefits of carving your niche
If technological disruption has made customers harder to please, it has also made them easier to reach. Wealth management is more accessible to average investors than ever before. But, to attract them, you need to get smart about how you position yourself.
If you want to stand out, it’s nearly impossible, like in the old days, to be everything to everybody. The tech companies who become leaders are those who focus on one segment of the market at a time.
This isn’t to say you can’t evolve. Or create new products and expand into new areas. In fact, once you’ve established yourself, it’s important to find ways to move quickly to more segments and scale, which has its own challenges.
But narrowing your offering, at least to begin with, helps make you more memorable and keeps client acquisition costs down.
Smart newcomers always go this route. They take a segment of the market that isn’t served well and figure out a way to make a success of it. This is easier and, so, less costly for marketing. And it’s also easier and less costly for app development.
Lowering customer acquisition costs with tech
To develop a solid strategy, hit the right notes with your target customers, and lower customer acquisition cost, you need the right insights and tools. And that’s where tech comes in.
Here’s how tech can help lower client acquisition costs for wealth management firms.
Better market analysis
The more you know about your customers, the easier it is to:
- Understand what type of relationship they want with you
- Identify behavioural trends
- Make improvements that give your products a competitive edge
AI and data analytics programs make it easier (and quicker) to parse this data and put it in your hands so you can make better decisions. Unsurprisingly, 43% of digital marketers in wealth management think AI and machine learning will have the biggest impact on financial marketing in the coming years.
Traditional financial services firms have the most to gain. As things stand, they have more data than any other industry. But legacy technologies, silos, and other priorities mean they’re only using around 0.5% of what they have.
But with tech companies, and robo-advisers in particular, struggling to break even because of small portfolios, they stand to gain from access to better data too. This holds especially true when it comes to understanding how customers prefer to communicate.
People often think digital journeys are only for young people. But that’s not the case. Facebook, for instance, is now more popular with over 55s than under 55s.
At the same time, young people don’t necessarily want digital-only services. Context matters. A 25-year old with $500 will be fine investing online. But if that same 25-year old wanted to invest $5 million, they’ll probably want to speak to someone face to face first.
Faster, smoother user experiences
According to a UK study, 82% of customers expect financial services firms to be at least as good at digital as Amazon, Netflix, and other tech giants.
Yet, onboarding takes 33% of wealth managers over four weeks to complete. This is often at eye-watering cost — major financial institutions spend up to $500 million a year on Know Your Customer (KYC) checks.
Robo-advisors, crowdfunding platforms, and other tech firms have it even trickier. Customers expect digital apps to be simpler and quicker to get up and running. But tech firms still need to get KYC right.
Tech can cut the time it takes for KYC by as much as 90%. That’s a staggering 5.4 million hours saved each year, at a value of over $1 billion.
On an ongoing basis, tech also helps cut costs. From better fraud detection, to more tailored investment advice and even gamification, it can strengthen your reputation, lighten staff workloads, and help deliver a smoother experience that increases customer loyalty.
It’s time to put tech to work
Whether it’s finding ways to stand out from the crowd, getting noticed by the right people, or onboarding new clients quickly and smoothly, wealth management firms are facing towering costs.
With over a decade of experience designing powerful, user-friendly tech for the fintech industry, Star can help you tackle these challenges head on and catch the wave of opportunity the 2020s will bring.
Fabian brings to Star extensive expertise that includes over 25 years of experience in capital markets post-trade, payments, market infrastructures, and corporate innovation & strategic partnership development. He was also the Managing Director, Global Head of Securities and Treasury Markets, Innotribe, the SWIFT Institute and Partner Management at SWIFT.