As a general term, digital transformation conveys a sense of fundamental change, which our industry is clearly experiencing. It’s also clear that the root of this change is anchored in invention, in technological advancement, and in digital innovation. But “digital transformation” as a catch-all term is flawed, and it’s time we retired it.
Here are four reasons why.
1. When people speak of digital transformation, they usually mean “digitization.” Mixing up these two terms hampers innovation.
The first and perhaps biggest issue with the term digital transformation is that people use it when they really mean “digitization,” the act of shifting from analog to digital. If your firm continues to hold client files in a set of filing cabinets, you’re still very much analog. If those files are now housed, largely in the same format, on a server or hard drive, congrats … you’ve done some digitization.
What you haven’t done, however, is gone through a digital transformation. Digital transformation would be if you decided to completely change how you collect client data in order to provide a better digital client experience. Instead of a virtual filing cabinet with names, addresses, and birthdates, you’ve decided to collect a pool of client data that includes information on browsing history and social media usage. That’s digital transformation ─ fundamentally changing how you operate and delivering value to clients in ways that wouldn’t be possible without digital technology.
The problem is, if you mix up the two terms, then digitization looks like the end goal. When that happens, the innovative thinking about what comes after digitization often doesn’t occur and you’re left with the digital regurgitation of the analog status quo.
2. Digital transformation is often spoken of in terms of finite change when it’s actually cyclical, and possible iterations of the process are infinite.
As a concept, digital transformation indicates a period of change. It means that there was a prior status quo that somehow changes and what follows is a new status quo. This is all fine — and likely describes the experiences of many asset and wealth management firms as they come to terms with rapidly changing technological advancement. However, this also gives the wrong impression that once a firm achieves this status quo, its digital transformation is complete. And therein lies the problem: digital transformation, as we now know, is cyclical. Any firm that has endured the pain of implementing a new technology platform knows the frustration that occurs when, a few years (or even months) later, it becomes obvious that some of the functionality that you just spent a massive amount of time and money on is already outdated.
3. Digital isn’t the only thing transforming the wealth management industry.
While the advent of digital technology has certainly changed the way wealth managers and private banks do business, technology itself isn’t what’s transforming the industry. Rather, the wealth management industry is facing a complete transformation of the underlying value proposition — from product-focused to service-focused. Many factors have played a role in transforming the industry; and many of these are supported by digital innovation ─ for example, automation, passive investing and ETF funds, algorithmic rebalancing, and tax-loss harvesting. But other factors shaping the changing wealth management value proposition are not linked to new digital technology. These include the growth of the mass affluent population, the massive increase in wealth worldwide, unprecedented monetary policy driven by the world’s central banks (and resulting negative interest rate environment and liquidity injections), the COVID-19 pandemic, and more. To lay the responsibility for the foundational shift from a product-based to a service-based value proposition at the feet of digital transformation misses the larger picture and risks not seeing the forest for the trees.
4. Digital transformation is often treated like a choice ─ it isn’t.
Lastly, digital transformation, as the term is commonly used, is treated like a choice. In fact, for many wealth managers, digital transformation has been seen as optional (and sometimes still is). Nothing could be further from the truth. There’s about as much hope of slowing down the technological revolution in our industry as there is that we all throw away our smartphones, shut down the internet, and go back to watching three television channels.
As technology continues to expand unabated, so, too, will client demands for new, different, and ultimately better wealth management experiences. Firms that don’t match these demands will be able to continue on their happy way for a time, serving clients who have little interest in using a dedicated mobile app. Eventually, however, firms that aren’t “digitally transformed” will face a fate similar to Eastman Kodak, which famously failed to respond quickly to the digital revolution.
But what term should we use instead of digital transformation? How about we don’t replace it with anything? Rather, as an industry, let’s start viewing the technological revolution and all the new innovations it has spawned as the new status quo and rapid, cyclical change as par for the course.
Then, instead of talking about digital transformation, we can simply discuss business as usual.
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