Trends Shaping the Financial Services Industry

Regulations,

technology,

And

demographic shifts are forcing financial firms to redefine their customer relationships, products and services.

By Marc Silverman, MBA, CFP, ChFC

The financial-services market is continuing to undergo radical changes that are shifting the way business is conducted. From changing regulations to digital innovations, market shifts are forcing insurers to reinvent their strategies, services and processes to better meet the needs of consumers. Here are a few of the trends that are shaping the financial-services market today.

Regulations

Aimed at stopping the billions of dollars the government claims investors waste in exorbitant fees each year, the proposed fiduciary rule by the Department of Labor (DOL) has been defined as the most significant industry game-changing development since the tax reform of annuities in the early 1980s. Beginning in 2009, the DOL commenced a multi-year project to address the problems with conflicts of interest in investment advice. With a focus on strengthening consumer protection, the rule broadly targets how annuity businesses are written and the models for compensation of advisors providing retirement advice.

While the rule does contain several concessions, advisors will have litigation to fear if they can’t prove their retirement advice put the client’s interests above their own. Under the DOL fiduciary rule, the ability to recommend specific high-commission products may become more difficult, creating a ripple effect on retirement sales and advice.

The interplay between the government’s need to raise the compliance cost and the need of annuity companies to comply with the proposed regulation is expected to increase the budget allocation of firms that are adopting technology to help them. While the industry will not know the direct effects of the DOL rule until much later, it’s undeniable that life insurance and annuity firms have to evolve their advice models and daily operations. As a result, staying informed on the potential implications of changing regulations is a top priority for all providers in this market.

Technology

The deepening use of mobile phones for nearly every aspect of human life has caused financial companies to rethink their delivery of services in order to keep up with the needs of the market. The same has also been required by the increasing uptake of life insurance products by Millennials and mass-affluent consumers who are seeking the latest digital tools for automated, algorithm-based financial advice. The ability to offer unprecedented access and self-service on multiple devices will be a growing focus for life insurance consumers who are accustomed to getting what they want easily and effortlessly from their smartphones. As a result, insurers need to turn their focus on creating a business strategy for the digital age.

Furthermore, robo-advisors, which younger investors are more likely to have confidence in than their Baby Boomer counterparts, are posing a challenge to annuity businesses that continue to follow traditional models. According to a recent study, about eight percent of top advisory firms now offer some sort of robo-advice, with another 20 percent expected to do so in the next two years.1

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Robo-advisors can never replace traditional investment and financial planning, especially in more complex areas like long-term tax planning and business investing.

In spite of their many attributes, robo-advisors can never replace traditional investment and financial planning, especially in more complex areas like long-term tax planning and business investing. These demanding tasks require an in-depth review to create a financial plan that truly meets the needs of every individual investor. Preferring a “low-touch” level of engagement, younger investors will continue to place greater priority on technology. As a result, online wealth-management platforms that provide algorithm-based automated services will continue to become more common in the life insurance industry.

Combined with cloud and on-demand technologies, these advanced analytics are providing insurers with the instruments they need to re-engineer their front and back offices. Focused on providing more customers support, insurers will continue to seek strategic partnerships and acquisitions. However, digital innovation carries greater risks, which makes insurers more vulnerable to privacy breaches as they gain wider access to sensitive financial and health information.

Cyber risks

As annuity and other financial companies focus on digital and technologically innovative solutions to keep up with competition, an essential component will be the collection and storage of customers’ data on their websites. Leveraging social media and other digital technologies exposes life and annuity insurers to greater cyber risks, including fraud and data theft. Due to possession of sensitive data, cyber-attacks can also be politically motivated to disrupt organizations. Moving forward, financial professionals will want to closely monitor the growing digital connections between their systems and those of outside parties to ensure protection from serious financial, legal and reputational fallout.

As digital technologies continue to grow, established annuity insurers will experience greater competition from digital start-ups and new entrants looking to capitalize on market shifts, especially as innovation in financial services moves from the banking and payments sector to the insurance sector. Challenges will also come from non-traditional sources offering innovative digital solutions.

The rise of the Millennials

However, the biggest competition will be fueled by the changing attitudes and practices of consumers. Millennials are the single largest demographic group today. Companies that are reluctant to embrace the innovation that Millennials seek will have a difficult time acquiring and retaining them as customers. Insurers will need to focus on the preferences and demands of this emerging class to capitalize on the shifting insurance landscape. Fastmoving insurers will need to focus on redefining their customer relationships, products and services to address new market dynamics.

1 Investment News, Robo-Advisers Want To Plan Your Clients’ Future, 2015

Marc A. Silverman, MBA, CFP, ChFC, formed Silverman Financial in 1989. A 32-year MDRT member with five Court of the Table and 22 Top of the Table honors, Silverman has a diversified client base, including public corporations, closely held businesses, individuals, trusts and estates.