Issue 3 March 2015
WMA JOURNAL In this issue
Financial Crime Technology The EU Managing Change
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Closing the Expectation Gap: Technology Innovation and Staying Relevant in Wealth Management Cloud computing is facilitating the kind of strategic technology innovations that wealth managers need to stay relevant - as an offering to HNW clients and as a profitable busines . The wealth management industry stands at an inflection point where traditional differentiators and competitive advantages are under severe pressure. Challenger brands are forcing market incumbents to take a long, hard look at their business models as the gap between the likely winners of the future and those that will fall behind widens. Against this backdrop, an industry previously vaunted as predominantly a “people business� is turning to technology to cope with a raft of operational challenges and a client base that is more demanding than ever before. Necessity always being the mother of invention, minds are having to open to the possibilities presented by new technologies and strategic approaches to IT. Wealth managers of all types are making bold moves with disciplines such as business process outsourcing, hosting and cloud bursting, particularly the many challenger brands or spin-offs whose budgets cannot justify establishing an in-house IT team, building difficult-to-maintain proprietary systems or buying on-premise servers. Some may have had their hands forced to an extent, but it is likely that these wealth managers will soon be reaping significant rewards from being at the vanguard of what we may term the front-to-back digitisation of wealth management.
The years since the financial crisis have seen a dramatic shake-up of the industry. It now looks very different indeed, even compared to just a few years ago. M&A activity has been frenetic and big names have fallen by the wayside while new entrants have come thick and fast. It also now feels very different – particularly for technology vendors. Technology innovation was perhaps once viewed with a degree of suspicion, but now even non-IT executives are seeing it as a saviour. The increased regulatory burden has prompted huge technology investment across the industry. But technology spend is now about far more than helping wealth managers stay on top of a complex web of new international regulations. Firms are seeking significant efficiency gains, which will help them offset spiralling compliance costs, but they also need to be delivering the kind of slick, value-added service clients today expect. Put simply, their new mantra is to do (much) more with less and, as a result, they are more open to considering new technology solutions - like cloud computing and thirdparty software platforms - than ever before.
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The need to wring more value out of everyday business processes is pressing. Scorpio Partnership’s latest barometer of profitability in the wealth management industry found that the average cost/income ratio across the sector was 83 per cent in 2013, up from 80 per cent the year before . There were certainly encouraging signs in terms of growth (firms logged an average rise of 11.3% in assets under management) yet it appears that efficiency gains remained elusive for many. Perhaps the reason behind this is the industry’s past reluctance to pursue operational and technology excellence as vigorously as other sectors. While this may have been sustainable in the boom times – when wealth management was a relatively high-margin, low-maintenance business with very much “stickier” clients – the industry now has to up its game across the board in terms of operational efficiency and technology innovation.
Appetite for change Wealth management firms know they need to change how they do things, in many cases quite radically, to retain their competitive edge. Traditional institutions are being schooled by new entrants like self-service investment platforms to know that the traditional wealth management model is far from unassailable. As uncomfortable as these lessons might be for existing players, many would agree that the appetite for technology innovation they have created across the sector is a very positive development. There are myriad challenges facing the wealth management industry today, but these can really be reduced to two key issues. The first is maintaining profitability in the face of rising costs; the second is staying relevant to a client base that has changed dramatically in terms of its needs and wants. These are big challenges for which there are no easy answers, yet better use of technology will clearly be the bedrock of the solutions wealth managers seek. Wealth managers looking to innovate will find plenty of inspiration in today’s market – and not just with the new entrants. After decades of widespread underinvestment, a huge amount of IT spend is going on. Indeed, according to CEB TowerGroup, 14% of wealth managers anticipated spending $20-100m on technology last year , while 12% foresaw spending a massive $100m or more (even more significantly, 57% expected further increases over the next couple of years). Behind the scenes, several of the world’s largest institutions are completely overhauling their IT infrastructures. Meanwhile, client-facing enhancements are ubiquitous as the industry reshapes itself to meet the challenges of the new digital age. From apps that allow clients to carry out transactions on the move, to customisable reporting portals and social media communication platforms, there are exciting front-end developments happening at even the most traditional players (and they are obviously putting this front and centre in their PR). Yet if we look closer at this flurry of innovation, a highly fragmented picture emerges. Technology enhancement may be an industry-wide movement, but it is not manifesting evenly – not even within each individual wealth manager. This is as we might expect, given the margin pressures they face. Firms are making investments where there is greatest need or where they expect the greatest (and quickest) return on their investment. As such, many wealth managers are focusing their technology investments on systems that will help them cope with the heavy regulatory burden and minimise business risks, while also putting the brakes on the associated costs. The increasingly hard-line stance taken by regulators - on taxation, suitability and KYC - means that no firm can afford to stint on their compliance capabilities now.
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Wealth managers held back The need to focus technology spend on the most business-critical areas is one reason why enhancements are happening in a rather piecemeal fashion generally. However, there is another (arguably bigger) factor holding many wealth managers back on technology: the legacy and integration issues that continue to dog the industry. A great deal of firms are using a combination of different systems - some in-house, some off-the-shelf and others which may have been inherited through acquisitions and were never properly integrated. Hamstrung in this way, it is little wonder that wealth managers are not enhancing their technology capabilities as aggressively as they must surely wish to be. Many a chief technology officer must be wishing that they could simply start afresh, but ripping out existing IT architecture is simply not an option for the vast majority of wealth managers. Those new entrants which are blazing a trail on technology have had the inestimable advantage of having started with a “blank piece of paper” at a time when cutting-edge, yet cost-effective, new technology solutions are more accessible than ever. For such players, approaches like cloud computing have not so much lowered barriers to entry, as demolished them. But what of the majority of wealth managers, for whom legacy and integration challenges still loom large? Root and branch technology overhauls can be prohibitively expensive and, moreover, a serious distraction from the actual business of being a wealth manager. What is more, many firms will have already invested so much in crafting and customising systems to meet their unique needs that simply writing these off could be too painful. Psychologically and practically, cutting the Gordian knot is not an option; disentangling it gradually will be a more appealing choice for most wealth managers. Happily, there is a corollary to the digitisation of the wealth management industry: the “coming of age” of the technology vendors serving it. Technology providers now understand wealth managers’ needs better than ever before and the relationship between the two is far more collaborative and consultative in tone. Crucially, technology developments also mean they have become far more able to apply the same principles of client-centricity and flexibility which wealth managers themselves espouse. Vendors know they must provide open systems that can “talk” to others easily, so that their clients can have free choice in how they configure their IT infrastructures. The cloud was born for this kind of open architecture integration, allowing wealth managers to continue to leverage past IT investments and cherry-pick further enhancements gradually. The word “solutions” is arguably overused in the technology sector, but it is now more appropriate than ever given the flexible approach to implementations cloud computing allows. Cloud-enabled vendors are providing pragmatic, real-world answers to the wealth management industry’s most pressing problems. 4
A five-year window There should certainly be a real sense of urgency. KPMG recently warned wealth managers to start fully leveraging the innovation and disruptive technologies seen in other financial services sectors without delay, since the “window of opportunity to establish marketplace leadership will remain open only for a relatively short period – perhaps five years, at most”. The choices available to clients, and their willingness to switch providers, means that staying relevant to them is paramount, the consultancy said. Wealth managers are increasingly exhorted to ensure they remain relevant to clients if they are to gain (and retain) their competitive edge. This may seem like a statement of the obvious, but actually, what constitutes “relevance” continues to change at a dizzying pace. PwC’s Asset Management 2020: a Brave New World is one of the most instructive pieces of recent research to emerge on this theme. It predicts seismic demographic shifts in the client base, with corresponding changes in demand for products and services. More importantly, it identifies a significant expectation gap between clients’ needs and firms’ offerings which disrupters can and will capitalise on. Brand prestige means far less today. We only have to look to the instant messaging platform WeChat’s salvo on the Asian wealth management market to see that actually quite credible competitors are coming from all kinds of unexpected places now. This expectation gap is multi-faceted, but easily understood if we see wealth management services as clients do – in the context of all their other financial and consumer experiences. Taking such a view, we see other sectors creating expectations, which wealth managers must now race to meet. Thanks to the big-data behemoths of this world, clients expect a huge degree of bespoking as standard; given the cutting-edge innovations retail banks are rolling out, they are right to expect these from their wealth manager. For functions such as mobile account access and customisable client portals to become scarcer further up the wealth scale simply makes no sense. 5 @WMA_UK
Staying relevant Closing the expectation gap through technology is not just about matching up to the slick client experiences offered by other sectors, however. Instead, it cuts to the heart of the wealth management value proposition itself. Enhanced client reporting is a powerful example here. Where clients once had to wait patiently for a weighty (and probably dated) valuation report to land on their doormat, now they can be offered 24/7 live reporting - via the device of their choice - which can be customised to show precisely what they want to see. It might even be the case that “being relevant” to many clients today might be about the environment and e-documents over reams of paper. Granular, intuitive, customisable reporting modules will both empower and reassure the client. Even more importantly, they allow the wealth manager to demonstrate very clearly where their investment expertise has delivered value. With clients scrutinising fees more closely now, such capabilities are key. Client-orientated technology is going to make all the difference to the bottom line, improving wealth managers’ ability to attract and retain clients by servicing them at the highest standards cost-effectively. Yet for all the reasons previously outlined, many firms are wary of significant capital expenditure on enhancements that are considered non-essential. Happily, the advent of cloud computing, increased collaboration between technology vendors and greater openness to innovation from regulators are going a long way towards solving this conundrum. Wealth managers once built in-house because they believed an off-the-shelf solution could not possibly meet their needs. Now, they know that they can pursue a truly open-architecture approach to their technology, bolting on whatever they need from whichever provider they prefer. Similarly, not so long ago, wealth managers were limited to the data storage and processing capabilities of on-premise servers (with all the inefficiencies and expense that entails). Today they can access pay-as-you-go computing resources through the cloud, which allows them to give clients and their advisors 24/7 access to performance data, on any device they choose. What’s more, regulators are beginning to really smile on innovation as they seek better outcomes for consumers. The quest for added value and relevance is one of the primary drivers of change in the wealth management industry today. Attaining them calls for technology innovations, which really do represent cost-conscious, flexible and future-proof solutions for a sector where competition is really starting to heat up. According to CEB TowerGroup, gaining competitive advantage is the biggest benefit wealth managers see themselves getting from cloud computing . Given that PwC confidently predicts that the cloud computing market will have grown fivefold from $41bn in 2011 to hit £241bn by 2020 , it seems that wealth managers are not alone in seeing the cloud - and all the other innovations it allows - as key to their future competitiveness. For many wealth management organisations, leveraging cloud-based solutions may be the only way they can adapt fast enough to keep meeting clients’ expectations and to preserve margins healthy enough to make it worth the effort - in short, to stay relevant and close (rather than fall into) the expectation gap. NICOLA COWBURN, VP, GLOBAL MARKETING, SIMCORP CORIC
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