Nassim Nicholas Taleb, a brilliant scholar, mathematical statistician, former option trader and risk analyst, is an iconoclastic researcher whose work concerns problems of randomness, probability, and uncertainty. Among his contributions to the universe of ideas, we can include the popularisation of the notion of Black Swan: an unpredictable event, typically one with extreme consequences, often inappropriately rationalised after the fact with the benefit of hindsight.
It would be tempting to see the COVID-19 crisis and its unforeseen consequences as one of these black swans, or at least, if we cannot share this vision, we can try to utilise Taleb’s fascinating proposition for reacting to this crisis: that of antifragility.
Antifragility is the art of reacting and taking profit from stressors, volatility and unpredictability; it is turning a hazard to our advantage. It is a concept that reverses the common notion of hazards, turning them into an opportunity to make us better, even if initially it may make us feel awfully vulnerable. Antifragility is an idea that goes beyond the notion of resilience, of “to bend but not break”, because it implies a further step. While being resilient means resisting the storm in order to remain the same once the storm is over, being ‘antifragile’ means that not only are we undamaged by shocks, but we even improve, having developed what Taleb defines as “the ability to gain from disorder.”
Can this idea help us in the current COVID-19 storm? What we are facing is a global crisis, a multi-faceted phenomenon bringing the world into uncharted waters, the repercussions of which are not just sanitary, but also humanitarian, social, political and economic. In the financial markets, it has marked the end of an extended bull run that started in 2009.
The wealth management business
In a relationship-driven industry, wealth managers have been facing difficulties in the short term due to the high-touch nature of their business. In a scenario where physical situations such as face-to-face meetings are avoided, it may be difficult to maintain client engagement, to bring new clients on board or increase the Share of Wallet (SOW) with existing clients. However, wealth management firms can manage to turn social distancing and travel restrictions into an opportunity to build new competences, and to develop new ways for providing products and services.
Some say that we are living a double-trigger acceleration: the digitalisation process was already imposing a quick transformation to wealth management players, forcing them to update operational models, competences and ways of providing services. The COVID-19 pandemic has provided further stimulus to the ongoing trends, enforcing a definitive change, driven by the ‘perfect storm’: an unprecedented crisis on both the demand and the supply side that has brought about a financial crisis.
Unlike airlines or restaurants, wealth management firms have continued doing business even during lockdowns, managing their clients’ investment needs
These seismic circumstances have affected both investors and wealth management firms. Investors have suffered from the impacts on their portfolios because of market drops and record levels of volatility. Concurrently, wealth management firms have shifted towards transactional revenues, partially replacing recurring revenues that originated through assets under management. These shrank along with market performance, and the surge in brokerage fees from panic-driven trading activity has masked the underlying trend of falling revenues.
Reactions by players in this scenario may be very different. They might be fragile when faced with the shock because they are not properly equipped, or they can show resilience, finding alternative solutions to maintain their standard degree of functionality while the stress increases. Our business’ current reaction to the COVID-19 crisis is a robust reaction to an acute stress: it is enduring to some degree and carrying over, by operating according to the same general playbook.
Unlike airlines or restaurants, wealth management firms have continued doing business even during lockdowns, managing their clients’ investment needs and providing advice services, by observing the social distancing rules via the available technology. However, a robust and resilient business by definition goes back to its initial state once the external shock is over. The alternative solution is antifragility, which leads us to gain from chaos: only the players who manage to ride the wave of disruptive change quickly, to develop new competences and accelerate existing propositions, or acquire new ones, will have an advantage over competitors.
Antifragility is a competence that, today more than ever, needs to be acquired and developed. We must take advantage of the current circumstances to work on it and find our way to put it into practice.
At BNL BNP Paribas Wealth Management, our route to antifragility passes through making the most of the dramatic change in the trajectory and direction of industry trends observed in the wealth management business following the COVID-19 pandemic. This crisis has uncovered the limitations of existing business models, based on the centricity of the physical relation with the private banker, and has imposed the need to radically reimagine them.
While some wealth management secular trends have been altered or even halted by the current global health and economic conditions, other trends have registered sharp accelerations. Social distancing has forced us to quickly find solutions to ensure continuity of transactions and to improve data knowledge through scalability of existing digital solutions. The search for alternative ways to dialogue remotely (conversational banking), the utilisation of artificial intelligence in support to post-sales, a greater utilisation of big data both to evaluate commercial appetite and to better qualify advisory activities, provide just a few examples. Our being antifragile also means coping with five key attitudes we have been observing in relation to our clients:
1) Closeness: Need for increased opportunities for contact. This need can be satisfied by emphasising digital channels to reliably continue regular engagement between investors and advisers, even by teaching clients how to get the most benefit out of digital communication channels and tools to promote remote proximity.
2) Curiosity: Clients are more curious, they are more interested both in scenario analyses and investment typologies. In highly uncertain times, clients place greater reliance on their advisers, who must provide them with their best insights.
3) Cautiousness: The crisis has affected clients’ psychological profiles. They now have a greater need for security, not just for themselves, but also for their families, their wealth and their entrepreneurial activities.
4) Horizon: We have observed a tendency to shift towards longer investment horizons.
5) Belonging: We observe a stronger sense of belonging and social responsibility for clients’ communities and their countries.
We are convinced that some of these changes in clients’ needs and preferences, although brought about by the crisis, will not be temporary, but will constitute a structural shift, requiring a strategic reset of firm operating models.
Adding extra value
We need to transform our business models in order to provide an intensified client experience allowing multiple points of remote interactions based on digital channels, by providing mobile touchpoints with ‘anytime, anywhere’ access, while granting customised and timely communications with investors. The ultimate value added will depend on the ability to provide expertise through any means rather than an over-reliance on geographic proximity and physical interactions.
We need to consider technology as a value driver, and integrate it into every part of the value chain, from the on-boarding process with tools such as video conferencing and biometric authentication, all the way through to digital trading and reporting. We need to quickly reinvent advisory and relationship management by means of technology, while personalising the content and advice experience delivered across channels. The current uncertainty, market corrections, and high volatility have proven the value of financial planning and professional advice to investors. This will accelerate the trend towards more comprehensive financial planning and advice at the heart of the relationship between private investors and their wealth managers.
We need to use advanced analytics and data science to better understand and guide customers’ investment decisions, using data and analytics to fine-tune customer, product and pricing strategies to meet customer expectations.
Adopting a philosophy
We need to develop holistic coverage models to provide personalised experiences that go beyond simple investment advisory and adopt a philosophy of total wealth management, by taking advantage of synergies that may be activated within universal banks. By doing so we can create value for clients by providing access to different kinds of products and services like wealth planning, real estate, and lifestyle experiences.
Value propositions to clients will need to progressively evolve towards a perspective of “Impact Investing,” with a focus on investments that can produce a positive impact while offering interesting risk/return opportunities for clients. We must learn to serve a more informed generation demanding cleaner, greener investment portfolios and investment strategies that focus on environmental, social and governance principles.
The wealth management industry is a highly interconnected ecosystem where all the players (asset managers, banks, securities exchanges and technology partners) have to be involved to turn the paradigm upside-down and observe the context, understand the new latent needs, challenge our certainties and use creativity to develop new ways of working. Only those that will shift gears and deliver on the potential of these opportunities will likely establish or expand market leadership. We must all prepare for an industry that will look significantly different. Only in this way will the next storm not take us by surprise but instead leave us better than before. In the words of the Austrian writer, Karl Kraus: “Chaos is welcome, because order has failed.”