Issue 3 March 2015
WMA JOURNAL In this issue
Financial Crime Technology The EU Managing Change
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How can technology help in this new era of fee management? The way fees are charged is changing across wealth management, drifting upwards. This article examines this transition and explains how technology can improve transparency, accuracy and efficiency for wealth managers, while helping their business scale. Fees are changing… Management fees reflect the underlying day-to-day effort that goes into maintaining a portfolio, from ensuring it is in line with investor objectives to more administrative tasks. These tasks include producing client packs, processing dividends and performing due diligence. Today, the way in which wealth managers make money is shifting. Historically, much of a manager’s revenue was dependent on fees levied on trades executed on behalf of the client. Fees were based on the value of a portfolio. But this did not necessarily reflect the amount of work that went into managing it. The fees were more directly related to the success of the fund manager or the market as a whole. But today’s wealth managers are increasingly moving towards fees that are fixed and periodic, rather than transactional. Fees are calculated using a number of different scales. Some based on the performance of the portfolio and some based on the number of dividends processed or the number of holdings administered. There are a number of reasons for this change. A key one is that transaction costs can create improper incentives for wealth managers and encourage unnecessary trades. It makes sense, therefore, for a manager’s revenue to be independent of these decisions to preserve objectivity. Another major driver is that periodic charges allow for a more predictable, consistent income stream. A good thing for anyone in today’s lean times, but especially helpful for wealth managers, given trading volumes on the whole are down on pre-crash levels. Periodic charging renders wealth managers less vulnerable to market cycles.
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Fees are going up… As periodic charging is becoming an industry standard, a number of factors are driving fees upwards. To start with, we are in a period of regulatory overload. Since the crisis, a wave of new reforms has come into force, aiming to bring greater openness to the financial sector. From the US-led FATCA, to the FCA’s focus on conduct risk and suitability, one common feature of these reforms is an increase in the administrative burden faced by wealth managers. A greater amount of data must be captured, reporting needs more regularity, and there are many new checks, controls, and balances. As a result, fees have been pushed up and will continue to rise. In addition to regulation, increased competition has put wealth managers under pressure to make bespoke fee arrangements with individual clients. Sooner or later, as pressure from the media and investors builds, we are likely to see a transition to performance-based fees. All this is making fee structures more complex, which is increasing costs. This is where technology comes in, enhancing transparency, accuracy and efficiency across the business.
Transparency, accuracy and efficiency… Numerous compliance measures have hit wealth managers since 2008. However, the regulation with the most obvious impact has been the Retail Distribution Review (RDR). Wealth managers are growing accustomed to charging clients direct, rather than relying on rebates and commissions from product providers, platforms and intermediaries. Breaking down charges into very specific costs for complete transparency has become the new norm. It is always more difficult for a wealth manager to do so when manual processes are involved. Technology can remove this headache by enabling wealth managers to share information, such as precisely how fees are calculated, with clients and regulators. With the use of technology even the most complex fees can be calculated more accurately, improving the likelihood that fees are paid on time. It also means that wealth managers can increase the frequency of charges and move from half yearly to monthly fees. This not only eases cash flow but is also fairer for the client. Transparency of fee reporting also helps firms to quickly make adjustments and easily audit them. While this type of software isn’t new, take-up within the wealth management space has been limited due to idiosyncrasies across different client arrangements. Older generations of software have been too rigid to accommodate this variety. However, recent technology is much more flexible. This means wealth managers can improve the accuracy of calculations and records, while offering the more complex and diverse fees that a post-RDR world demands. It’s in the efficient processing of complex and diverse fees that technology really comes into its own. A wealth manager with very straightforward fees may be able to continue to muddle through using spreadsheets. However, those with complicated fee arrangements – an increasing portion of the market – require a more advanced system. The importance of this possible improvement cannot be overstated. It is not at all uncommon for clients – even those with very complex fee structures – to find that switching from manual to automatic processes can reduce the fee calculation process from around a month to just a day. Once set-up, this translates directly in to reduced overheads, significantly improving the efficiency with which fees are processed.
Scalability… Technology benefits go beyond enabling greater transparency, accuracy and efficiency. Improved automation across the organisation can also help a wealth manager’s business scale. Managing fees in an automated, rather than manual way, allows wealth managers to look after more clients for the same time and effort. Resources can therefore be diverted to enhancing relationships with current clients and bringing in new ones. This means funds under management can increase without a proportionate increase in costs. Planning for future growth is important in light of recent UK pension reforms, due to land in April of this year. These reforms are likely to divert a substantial new chunk of wealth away from annuities and into the asset management space. Any wealth management firm that can forge flexibility, efficiency and scalability on the fees front now will position itself well for the coming influx. STEVE MARTIN, SENIOR BUSINESS CONSULTANT, DION GLOBAL SOLUTIONS
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