Advisors take note: Clients are starting to judge their investment providers not only against other financial peers, but also against the likes of Google, Apple, Amazon and Uber.

And so far, the assessment is a bleak one: Broker-dealers “lack a digital strategy and implementation plan, while investment advisors have a shortage of digital talent,” finds a new report by Roubini ThoughtLab, Wealth and Asset Management 2022: The Path to Digital Leadership.


In other words, on a digital report card, broker-dealers and advisors would largely receive failing grades.

That’s unfortunate because for both broker-dealers and advisors, the payback offered by digital tools can be enormous. Plus, there are real costs to firms that decide to lag behind as stodgy tech dinosaurs.

Broker-dealers that have implemented new technology, have witnessed the following gains attributed to digital tools over the last year, according to Roubini:

· 12% increase in profits,
· 12% increase in productivity,
· 3% increase in AUM, and
· 3% increase in revenue.

Meanwhile, financial advisors have seen gains of 7% in revenue, 9% in profits, 5% in AUM and 11% in productivity.

There are also steep penalties for falling behind. When you look at the difference between the financial results of firms that are digitally advanced versus beginners across the entire wealth industry, the so-called “laggard penalty” works out to $79.2 million per $1 billion of revenue (or 7.9%). Broker-dealers are paying even steeper costs, amounting to a 14% tax for failing to advance toward digital maturity. And for financial advisors and family offices, the penalty is more like 5%.

Of course, potential losses aren’t only measured in dollars. Firms must also consider the costs of failing to capture digital natives, millennials and Generation Z.

The report estimates that in 2017, average revenue through digital channels across all firms stood at around 20%. But given the rapid rate of growth, look for that number to double by 2022. That is to say, 40% of broker-dealer revenue will be generated through digital channels in the next five years.

(Bloomberg News)
(Bloomberg News)

What drives performance? Here are the top four factors that drive revenue gains:

Information services: Many firms have focused on data management and access, which tends to impact every dimension of the business, from marketing and prospecting to advisor support and client service. Firms that invested early in cognitive computing and artificial intelligence have seen the biggest gains.

New product development: New digital technologies also help wealth management firms bring new products to market. These new products are often simplified, customizable and help differentiate firms in meaningful ways.

Marketing and customer service: Digital technologies are reshaping the way wealth management firms engage clients. New tools for engagement mean more opportunity to build loyalty, more compelling cross-sell interactions and creative ways to define your brand.

Strategic planning and implementation: Finally, new digital technologies tend to improve business agility. Leveraging data insights, wealth firms can be much more proactive and respond faster to changing market conditions. Digital technologies, in other words, make it easier to develop a vision and see it to fruition.

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Perhaps the most compelling finding from the Roubini study is that ROI increases as firms progress toward digital maturity. Study respondents were classified according to the stages of digital maturity, from those who are just beginning to digital leaders that employ fully integrated systems.

The analysis showed that digital transformation creates a virtual circle of growth. As companies advance toward digital maturity, overall costs typically decline due to greater efficiencies and productivity gains, as well the ability to leverage scale. These gains tend to outweigh higher technology expenses. Investments over time tend to compound returns.

On average, broker-dealers see 6% ROI when moving from the beginning to transitioning stage, but they see a 10% ROI when they move from the transitioning to the maturing stage. ROI effectively doubles as firms pursue greater investment.

Of course, for many wealth managers, it’s still difficult to make that initial upfront investment. Some firms, however, are finding it easier to take the leap after they reconfigure the calculus: It’s not simply a matter of missing out on potential gains. Firms that don’t pursue digital transformation actually stand to lose.

Ultimately, the evidence is mounting and persuasive. Pursuing digital maturity isn’t really a choice like it was even a few years ago. If you follow the money, only one option is viable: Take the digital leap.

Salvatore F. Sodano

Salvatore F. Sodano

Salvatore F. Sodano is vice chairman of Broadridge Advisor Solutions.