In the wake of rapid technological advancements and looming regulatory challenges, large players of the British financial industry turn to innovation as a tool to preserve the margins high and keep the customers satisfied. However, the extent to which the multinational giants commit to letting their new offerings cannibalize their traditional businesses varies dramatically.

To begin with, there are companies embracing innovation in its entirety. A good example for this is Standard Life Aberdeen, which has recently sold its two-centuries old insurance business to finance its digitalisation strategy. A more conservative approach is to keep the traditional business running as usual, while committing to the innovation by either creating an in-house division aimed at establishing the automated advisory or performing innovation through acquisition of start-ups and their networks. Legal and General Investment Management (LGIM) and Aviva Investors have apparently chosen to adopt these approaches. Some other players, such as Lloyds Banking Group, prefer to abstain from committing to establishment of robotic investments services, as such an innovation may imply too much uncertainty. However, what is the best strategy to choose on the quest for long-term value creation?

Let us briefly digress to the notion of ambidexterity, which serves well in explaining such an ambiguous take on transforming the business. In recent innovation management research, the ambidexterity concept is defined as being able to effectively manage today’s business, while still preserving an ability to adequately respond to changing demands of tomorrow. The research consensus on managing ambidexterity seems to be as follows: create a new division dedicated to innovation activity, align it with the executive board agenda and company strategy, allow the traditional business to run as usual, while keeping an eye on how the innovative branch takes off. If it gradually becomes more successful than the older branch, it is time to let the older business make way for its innovative substitute. The reverse process may also take place. The logic behind the process is clear: going all-in with innovation may indeed pose a risk of trying to leverage a fad, while not pursuing innovative activities could jeopardise the company’s competitiveness. It seems like LGIM and Aviva Investors tend to innovate “by the book”, but with different levels of commitment: while LGIM establishes a robo-arm by itself, Aviva Investors bought in a successfully taking off start-up Wealthify.

There is, of course, no one-fits-all solution to innovation within the wealth management industry. These decisions are always the result of companies’ culture, history and competitive positioning. The going all-in on innovation strategy of Standard Life Aberdeen may be an attempt to create a new vision of a digitalisation pioneer for a recently merged giant. Currently prosperous companies may be more reluctant to give up on something that seems to work well enough for something new and uncertain. In contrast, the firms affected by unfavourable circumstances may be more driven to seek for a new way of doing business. Since the innovation is often a costly matter, the picture of these motivation mechanisms is getting even more blurred: although willing to innovate, a struggling company may not be able to afford it.

However, it is important to remember that prioritising the demands of large customers over making a bet on innovation often entails a gruesome cost. The cases of once-prospering HMV and the floppy discs industry will forever serve as a reminder of how easy a combination of conservatism and accelerating technical progress may take down a leader or even destroy the whole industry. Therefore, it may be a good idea to follow the example of the industry leaders and consider “going robo” at least to some extent.

References

New Model Adviser - Lloyds chief promises ‘very different’ advice arm 

New Model Adviser - Robo-advice important part of Standard Life Aberdeen strategy

New Model Adviser - Standard Life Aberdeen sells insurance arm to Phoenix in £3.2bn deal 

Money Marketing - The Big Interview: Standard Life’s David Tiller on why platforms are misunderstood 

Financial News - Helena Morrissey: Taking fund management digital at LGIM 

Financial Times - Aviva buys Wealthify stake after change of heart on robo-advice 

Financial Times Adviser - Banks reveal robo-advice plans 

The Guardian – Why did HMV fail?