BUILDING PERSONAL FINANCIAL FUTURES
FIVE PRINCIPLES TO ENSURE SUCCESSFUL TECH MIGRATION IN WEALTH MANAGEMENT
BUILDING PERSONAL FINANCIAL FUTURES JOURNAL EDITION #28
Suman Rao, Managing Director for the UK and Ireland at Avaloq, discusses the drivers behind why firms change technology vendors and the steps for a successful technology migration.
Wealth managers are under increasing pressure to implement the latest technology to remain competitive and keep up with evolving client demands. At the same time, unrelenting M&A activity in the UK is prompting firms to consolidate their systems – with acquired companies often having to migrate their operations to a completely new platform, but these are not the only drivers we see.
A growing trend prompting firms to consider technology migration is the discontinuation of support for core technology by vendors, creating vulnerabilities in operational resilience. Additionally, many firms find their growth ambitions hindered by technology constraints, such as a lack of automation or straight-through processing (STP), as well as limited back-office throughput.
The risk associated with key personnel is another critical consideration, as firms that rely on individuals with unique process knowledge are exposed if those individuals leave. Furthermore, while a best-of-breed approach – enabled by advanced integration technologies – has allowed firms to use multiple vendors, it also demands rigorous due diligence, leading many to favour fully integrated technology solutions. These market trends offer an opportunity for
firms to review their existing infrastructure and to modernize their operations. The key to success is getting the migration process right so that the firm can benefit from enhanced efficiency, improved service delivery and seamless integration of systems.
1. Prioritize flexibility to ensure systems can support current needs and future growth Before starting a migration project, wealth managers should assess their future business models and consider how their requirements may change over the long term.
Some institutions have simple business models that place minimal strain on their core systems, for example, meaning that a standard setup is sufficient. By contrast, wealth managers require specialized platforms that can handle more sophisticated investment products, crossjurisdictional regulations for advisory services, as well as bespoke discretionary mandates.
When migrating to a new platform, it is vital that wealth managers choose a flexible system that can adapt to evolving market and regulatory requirements.
2. Narrow the initial focus of the migration project During the planning phase, firms have to consider changing timelines, differing stakeholder expectations and unexpected expenses. While these can cause delays once the project has been launched, it is important to persist through these challenges to ensure a successful migration.
Financial institutions are often caught out at the start of the migration process by trying to handle too many requests at once, which increases complexity and can cause decision-makers to lose focus. To avoid this, wealth managers should concentrate solely on answering two main questions: which data needs to be transferred from the legacy system, and is the business ready for change?
3. Find the right balance between specialized and legacy systems Wealth managers can choose between single-provider and best-ofbreed approaches. The latter often comprises a combination of different systems or an enhancement of the company’s existing platform with specialized applications.
The decision between these approaches is dependent on each institution’s specific needs.
For example, many larger firms, including universal banks, look for a specialized system for their wealth management business while also wanting to retain a portion of their legacy tech for their less demanding retail business. This allows institutions to safeguard existing investments while also addressing the specific needs of wealth management clients.
From a data management perspective, it is worth bearing in mind that it is generally easier to process as much business as possible on a single platform rather than on multiple systems. Wealth managers should consider this early in their decision-making to ensure they select an approach best suited to their needs.
4. Take a proactive approach to data and process management The next consideration for wealth managers is how they intend to handle data migration from legacy systems, cutover management, data quality management, and data archiving. It is vital that wealth managers initiate the migration process by thoroughly documenting and cleaning up data and processes. By taking this proactive approach, wealth managers will be able to mitigate any issues that could cause migration delays.
Alongside this, with the success of a migration impacted by the wider organization’s openness to change, wealth management firms should aim to involve the entire business as early as possible to ensure all stakeholders are on board.
5. Collaborate with partners over the long term Long-term success involves detailed reviews of existing processes, stringent data management, and close collaboration with technology partners. Looking ahead, wealth managers should continue to assess their changing requirements, anticipate future changes to business models and nurture a culture of change within the organization.
This will ensure they can maximize the benefits of migration projects to foster innovation through easy integration of innovative third-party services, ensure constant compliance with ever-evolving regulations and improve operational efficiency for a lower cost to serve.
SUMAN RAO Managing Director for the UK and Ireland, Avaloq
Suman.rao@Avaloq.com
STRENGTHENING DEI FOR SUSTAINABLE GROWTH IN FINANCIAL SERVICES
BUILDING PERSONAL FINANCIAL FUTURES
INTRODUCTION
In September 2023, alongside the PRA, the FCA published its consultation paper (CP23/20) setting out proposals to enhance diversity and inclusion in financial services. The FCA Practitioner Panel committed to driving greater Diversity, Equity and Inclusion (DEI), aiming to better understand UK workforce demographics to sustainably widen the financial services talent pool and adopt inclusive workforce cultures.
Organisations have intensified their DEI efforts, incorporating non-financial misconduct into staff assessments in the past 12 months. The shift is evident across firms of all sizes within the financial services sector. Progress has been commendable, showing resilience and adaptability, yet the journey towards a truly inclusive and ethical workplace continues.
Reporting
The FCA has proposed requirements for firms to collect and monitor Diversity and Inclusion data. Addressing concerns about sensitive data collection through clear guidelines and transparent communication is crucial.
The FCA should empower firms to determine their own DEI approach, focusing on outcomes rather than rigid processes. This flexibility is vital for ensuring that the initiatives are effective and meaningful, especially for smaller firms that may find the administrative burden and associated costs challenging to manage.
Looking Outside the Workplace
DEI extends beyond workplace interactions into the investment world, where public DEI funds are gaining traction. These funds invest in companies showing leadership or significant progress in fostering a diverse and inclusive culture, resonating positively with investors as a modern investment strategy.
Integrating DEI principles with Environmental, Social and Governance considerations highlights the importance of good governance and corporate responsibility. This approach represents a strategic move towards cultivating sustainable, equitable and resilient assets.
What Should Your Firm Do Next?
The FCA emphasises the importance of fostering healthy workplace cultures that encourage contributions from all staff and promote constructive feedback. This focus not only creates a positive work environment but also mitigates potential claims of a lack of inclusivity.
It is critical that you properly assess your Professional Liability and Directors and Officers’ Liability Insurance contract. Here’s a deeper look into the implications and how firms can manage associated risks:
Reputational
Damage and Employment Liabilities
Inclusive Culture and Reputational Risks
• Lack of inclusivity can harm a firm’s brand, customer loyalty and market position.
• A negative reputation can deter talent, especially in industries where inclusivity is a key value for employees.
Professional Liability and Directors & Officers’ (D&O) Insurance
• These policies can cover defence costs related to reputational damage and employment liabilities.
• Such policies are crucial as defence costs in these areas can be substantial.
Regulatory Expectations and Legal Risks
Diverse Leadership and Regulatory Scrutiny
• Regulators are increasingly focusing on leadership diversity.
• Non-diverse leadership may face claims of breaching fiduciary duties or other wrongful acts, particularly if these issues lead to shareholder actions.
Conduct Exclusions in D&O Policies
• Most D&O policies exclude coverage for intentional acts or wrongdoing.
• For DEI related allegations, these exclusions can be particularly relevant.
• Insureds must ensure that these exclusions require a ‘final adjudication’ before the insurer can
deny coverage. This means that coverage cannot be denied until it is legally determined that the insured’s actions were wilful or intentional.
Key Considerations for Firms
Fostering an Inclusive Workplace
• Firms should actively work towards creating an inclusive culture. This involves setting up policies and practices that encourage diversity and equal opportunities.
Policy Review and Legal Counsel
• Regularly review D&O and Professional Liability policies to understand the extent of coverage.
• Ensure that ‘conduct’ exclusions have language requiring a final adjudication for denial of coverage to prevent premature denial of claims.
Training and Awareness
• Invest in training programmes for employees and leadership on DEI principles and the importance of an inclusive workplace.
• Promote awareness about the potential legal and reputational risks associated with non-inclusive practices.
Monitoring and Reporting
• Implement systems to monitor workplace culture and identify areas for improvement.
• Encourage feedback and reporting mechanisms to address issues related to inclusivity promptly.
By adopting these practices, firms can take steps to align with FCA expectations whilst also safeguarding against potential legal and reputational risks. This proactive approach not only helps in mitigating risks but also contributes to building a stronger, more resilient culture within the organisation.
DEI Initiatives at Consilium
As part of the Aventum Group, Consilium is fully committed to promoting a diverse, equitable and inclusive workplace. We have taken proactive steps to create a culture that values the contributions of all individuals and supports sustainable growth through our DEI initiatives.
Our establishment of the Women in Leadership group empowers women in leadership roles, ensuring women are properly supported, encouraged and given the opportunity to take on leadership positions within the organisation.
We are also launching a Culture Committee, allowing our employees to nominate themselves as champions who can represent their colleagues’ voices and drive meaningful change within the
business. This initiative will enable us to continually refine our workplace culture and ensure it remains inclusive and welcoming.
Our commitment to raising awareness on critical social topics is evident through the workshops we host. These sessions cover subjects such as neurodiversity, menopause, respect at work, alcohol awareness and sexual harassment, ensuring our team is informed, sensitive and supportive of these issues.
We also take part in Group wide awareness days, including Aventum Culture Day, celebrating not only diversity at Consilium but varied heritages from across the Group, creating a space for everyone to share their stories, traditions and customs.
To support future generations, we have participated in the Lloyd’s Futures Academy over the past two years, offering structured work experience programmes to young people from diverse backgrounds. Recently, we established our own work experience programmes to further this effort.
At Consilium, our people are our most valuable asset. As a rapidly growing business with a global workforce, we are committed to introducing new DEI initiatives and continually seeking feedback from our employees. This ensures we provide a fair and equitable working environment for all, driving sustainable growth and success across the business.
DOMINIC PILGRIM, Partner,
Professional & Executive Risk Solutions
consiliumbroking.com
dominic.pilgrim@consiliumbroking.com
NAVIGATING THE PROMISE AND PERILS OF GENAI IN WEALTH MANAGEMENT
BUILDING PERSONAL FINANCIAL FUTURES
Despite the relative conservatism in the financial industry, artificial intelligence has been an element of modern financial firms’ tech stack for a couple of years. The wealth management sector is no exception – Morgan Stanley has collaborated with OpenAI since its early days, with the banks’ wealth advisors leveraging generative AI (GenAI) to navigate the knowledge base and streamline their customer meeting experience.
The large language models (LLMs) – models powering text-based GenAI applications - have well documented risks – they produce inaccurate outputs or lose track of discussions, and in wealth management, even small mistakes can have significant financial and legal repercussions. In this article, we explore how wealth managers can harness the strengths of GenAI while mitigating some of its core risks. We advocate synthesised applications containing the structured logic of financial models with the LLMs. That way financial firms can regain control over the outputs of their AI-powered services while leveraging the natural language processing technology.
The Current LLM’s Challenges in the Wealth Management Sector
The vast potential of the technology remains untapped by most. According to Andrew Lo, a professor of finance at MIT Sloan and director of the MIT Laboratory for Financial Engineering, AI can provide financial advice reflecting the domain-specific knowledge that humans demonstrate in passing the CFA exam and obtaining other certifications, providing a supplemental module incorporating finance-specific knowledge. Besides, given additional training, the models could adhere to the ethical and compliance standards required by regulators. The bias remained an issue.
However, wealth managers are far from handing over the financial decision-making to GenAI.
One of the primary advantages of LLMs is their ability to process the users’ questions and generate responses based on unstructured data. However, this strength comes with substantial risks, particularly related to the accuracy of the generated outputs. First, LLMs “hallucinate”produce convincing but incorrect outputs. Second, they experience difficulties in keeping discussions on track and remembering important details. In the context of financial planning, these errors could manifest in misinterpreting financial data, forgetting the details of customers’ financial profiles or losing track of an active customer journey. These mistakes can harm customer experiences as well as the institutions’ brands. Due to these risks, wealth managers must maintain a relevant level of control over the use of LLMs.
The Solution: The Synthesis LLMs and Traditional Applications
The solution lies not in abandoning these tools, but in integrating them thoughtfully within a broader ecosystem of applications. This synthesis can address the limitations of LLMs while leveraging their strengths, ultimately creating a more robust and reliable financial planning process.
Application as the Interface: Leveraging LLMs for Chat Experiences
One way to circumvent risks associated with LLMs is to introduce an application layer as the gateway between the user and the LLM. In this approach, LLMs can then serve as the engine behind chat-based interactions, but not be directly exposed to the enduser. The application acts as a mediator, interpreting the client’s requests and using the LLM to generate relevant responses. This setup ensures that clients can harness the LLMs’ ability to quickly process and respond to complex queries—while minimising the risks associated with direct interactions with them.
Structured Memory: Maintaining Context and Accuracy
Another significant challenge with LLMs is their tendency to lose track of context over extended interactions. To mitigate this, the financial planning application layer should maintain a structured memory of important information, such as the client’s financial goals, risk tolerance, and previous interactions. By retaining a structured memory, the application can also verify the LLM’s output against known data points, reducing the likelihood of errors and ensuring that the advice provided is accurate.
Intent Recognition and Information Retrieval
The application should interact with the LLM to decode the user’s intent, leveraging the model’s
natural language processing capabilities to interpret complex queries. Once the application understands the user’s intent, it can take advantage of retrievalaugmented generation (RAG) techniques to search for relevant information across various sources, including PDFs, websites, and static or dynamic data repositories. This ensures that the LLM is not generating responses in a vacuum but is informed by up-to-date and contextually relevant information.
Example – Kate by Kidbrooke
We created Kate by Kidbrooke, a combination of our analytical platform, KidbrookeONE, and an LLM, to demonstrate how the introduction of an application layer and the integration of traditional structured financial models can effectively mitigate the downsides of LLM use in wealth management.
Kate by Kidbrooke operates by using an application layer as a mediator between the user and the LLM, ensuring that the presented outputs are accurate, timely, and relevant. The platform maintains a structured memory of client data and integrates live external data to provide up-to-date financial advice. By employing an orchestration layer, Kate abstracts complex financial concepts and ensures that LLM outputs are generated with maximum probability of being accurate and compliant before they reach the client.
This not only enhances the reliability of the generated financial guidance but also demonstrates how financial planning tools can effectively leverage AI while maintaining the necessary controls to prevent errors and ensure client trust.
Balancing Innovation and Responsibility
While generative AI promises to enhance efficiency, personalise client interactions, and process vast amounts of unstructured data, its adoption must be approached with caution. The potential risks—inaccuracies, loss of context, and compliance issues—highlight the need for a thoughtful and controlled implementation strategy.
By synthesising LLMs with traditional financial models and robust application layers, wealth managers can harness the power of AI while maintaining accuracy and reliability that their clients expect. Kidbrooke’s Kate exemplifies this approach, demonstrating how structured data management, live data integration, and an orchestration layer can mitigate the downsides of LLM use in financial planning.
As attitudes towards generative AI move beyond disillusionment towards productivity, those who can effectively integrate these technologies while
safeguarding their clients' interests will lead the way in the next phase of the continuous evolution of financial services. The future of wealth management lies in this careful balance between innovation and responsibility, ensuring that AI serves as a tool to enhance, rather than replace, trusted relationships at the core of financial planning.
FREDRIK DAVÉUS, CEO, Kidbrooke info@kidbrooke.com
CHALLENGES AND PROSPECTS FOR FUND LABELLING: INSIGHTS ON FCA REGULATIONS
AND SUSTAINABILITY STANDARDS
JOURNAL EDITION #28
BUILDING PERSONAL FINANCIAL FUTURES
The financial sector is witnessing a pivotal transformation with the introduction of the Financial Conduct Authority’s (FCA) Sustainability Disclosure Requirements (SDR). The new labels were first available for use on the 31st of July, and although asset managers face a myriad of challenges in securing the new labels, the 2nd of December deadline for the naming and marketing requirements approaches. This article explores the difficulties facing asset managers as they look to adopt the SDR labels, the reaction from asset managers and the FCA, and the role MainStreet Partners’ Fund Sustainability Due Diligence report
can play supporting firms with their ambition to meet the requirements.
The Struggle to Meet the 2nd of December Deadline
While it might seem that the FCA is slow to approve labels, the reality is more complex. There are three key factors contributing to the struggle funds face in receiving a label by the December deadline:
• Setting the Standard: The early adopters of the SDR labels will set the benchmark for others. Hence, the FCA may take extra time initially to ensure that funds with labels are comfortably meeting the rigorous regulatory requirements. This comprehensive challenge at the outset has led many asset managers to adopt a ‘wait-andsee’ approach, aiming to learn from their peers and avoid the potential ‘first-mover disadvantage.’
• Principles-Based Regulations: The SDR regulations are principles-based, and many
mainstream asset classes have yet to establish a consistent method to address these principles. Certain asset classes, such as property and infrastructure, are more structurally aligned with the regulation, making them better positioned to adopt the labels early. For instance, AEW UK Impact Fund, which invests in UK real estate assets, has come out as one of the first adopters of the label. Often these types of funds have already considered sustainability-related factors, for example energy efficiency and embodied carbon, upon construction and during the management of the physical assets. Moreover, it is easier to prove that capital from an asset manager has flowed into a project and resulted in change. For example, if an asset manager invests in a social housing project, the investor contribution can be tracked directly from capital injection to the housing of individuals, and thus the impact is clear. These factors are less tangible in the world of secondary market equity and bond investment.
• Role of the FCA: It is crucial to understand that the FCA’s role is not to approve labels but to challenge them where necessary. Many fund houses assumed their sustainable funds would easily qualify for a label, only to find that their approaches, though strong, did not align with the FCA’s expectations. This challenge is a vital part of the labelling process, ensuring that the regulation is adopted appropriately and that best practice standards are clear. Moreover, many funds based in the UK are having to amend the prospectuses of their funds which involves more administrative work than initially expected. Some asset managers believed that their existing legal documentation would suffice. This has not been the case. The resulting legal changes must be approved by the FCA creating more caution around attaining a label.
Reactions from Asset Managers and the FCA
Despite the challenges, there remains a strong appetite for SDR labels among asset managers. In Europe, the new ESMA rules for sustainable funds align exclusions with the Paris-Aligned benchmarks, while in the UK, SDR appears to be more flexible for actively managed sustainable funds. SDR is not prescriptive about the criteria needed to meet the regulation in terms of exclusions or benchmarking but is clear on the expected standards. This flexibility has attracted asset managers, with some factoring this into their decision to move into the UK sustainable funds market.
The FCA want SDR to succeed and is open to providing further clarification for those seeking it. Sacha Sadan, the FCA’s Director of Environmental Social and Governance, has publicly said that the FCA understands the challenges faced by asset managers and is committed to helping the industry progress.
Neill Blanks, Managing Director of MainStreet Partners, highlights the industry’s sentiment: “From our conversations with asset managers, it is clear that there has been a lot of pushbacks from the FCA thus far in terms of meeting the labelling requirements. Even investment houses considered at the ‘dark green’ end of the spectrum have found it a rigorous process, with the FCA expecting more evidence through KPIs and detailed sustainable investment policies.”
We believe the purpose of SDR is to protect consumers from greenwashing and raise the bar on sustainability claims. It is purposefully difficult to get a label, but from the asset managers we have spoken to, they generally appreciate SDR for its robustness.
The Role of the Fund Sustainability Due Diligence Report
The MainStreet Partners’ Fund Sustainability Due Diligence report plays a significant role in helping firms meet the requirements of SDR. Although the Model Portfolio Service (MPS) rules are not yet finalised, and the deadline for adherence is still under debate, MainStreet Partners is in discussions with MPS providers on how to support them as they prepare. Our Fund Sustainability
Due Diligence report helps fund buyers set absolute sustainability measures through a robust, evidence-based research process. We have the expertise to measure, track, and report on the sustainability characteristics of funds, meeting the increasing demand for detailed sustainability due diligence.
Anticipating an Uptick in Label Approvals
While it is too early to say anything definitively, we anticipate an increase in label approvals towards the end of the year. The initial slow pace is expected to pick up as the first movers set the standard for the rest of the market to follow.
Some segments of the UK investment industry, including Fund Selectors, Discretionary Fund Managers, MPS, and Fund of Funds providers, will need help navigating SDR as these segments have received less specific guidance. They face the challenge of establishing asset-specific, robust sustainability measures for each of their underlying funds. This has resulted in differing approaches when planning for SDR. For example, some managers felt they needed to perform a ‘lookthrough’ to underlying securities and set a standard of sustainability for each security. This theory was debunked by the FCA’s reiteration of the need to treat funds as assets.
In conclusion, the journey towards adopting the FCA’s SDR labels is fraught with challenges but also filled with opportunities. Asset managers who take proactive steps now will be best prepared
to meet the December deadline and benefit from the increased credibility and transparency that these labels bring. MainStreet Partners is committed to supporting the industry through this transition. Our expertise in sustainability due diligence provides the necessary tools and insights for asset and wealth managers to meet the stringent requirements of SDR and other regulatory frameworks and move forward with confidence.
By addressing these challenges head-on, the investment industry can enhance its sustainability practices and better serve the growing demand for responsible investment options.
JACOB KASASKA, Research Associate at MainStreet Partners info@mspartners.org
BREAKING THROUGH THE BARRIERS OF PORTFOLIO EFFICIENCY
BUILDING PERSONAL FINANCIAL FUTURES
Hedge funds can often challenge the conventional notion of the efficient frontier, pushing these limits to potentially achieve higher risk-adjusted returns for portfolios.
Hedge funds are not an asset class, but rather a collection of heterogeneous investment strategies which can be utilised to gain exposure to a variety of non-traditional risks. They have the potential ability to simultaneously diversify equity market beta and interest rate duration risk. As such, hedge funds are uniquely qualified as a true diversifier, warranting a strategic long-term allocation rather than being viewed as a shortterm tactical opportunity.
The very unconstrained nature of hedge funds and dispersion of risk profiles across the universe means these strategies can be positioned to serve nearly any role across the risk/reward spectrum. Regardless of the application, Mercer believe hedge funds have the potential to offer three core benefits:
1. Diversification: from systemic risks which dominate traditional portfolios, equity market beta and interest rate duration.
2. Asymmetry: less constrained mandates and a broader toolkit, which allow trade and portfolio construction that emphasise upside asymmetry, ultimately in pursuit of consistent compounding returns.
3. High-quality return profile: an improved Sharpe ratio, lower beta and positive alpha compared to a 60/40 portfolio.
At Mercer, we mostly position hedge funds as a risk reduction mandate, targeting annual returns of cash plus 3% - 4% over a complete market cycle, and importantly, through a return profile that is complementary to the rest of your portfolio without sacrificing return potential.
Selecting the right managers
We believe there are three primary guiding principles that can help lead to investor success in managing a hedge fund allocation while still allowing for flexibility to meet objectives.
1. Multi-dimensional diversification is crucial for achieving better portfolio level benefits in the allocation.
2. Investing with limited constraints allows hedge funds to deliver a unique return profile, thanks to their unconstrained nature and broader toolkit. Adding constraints within the allocation can hinder the ability to achieve objectives.
3. It is critical to invest with a clear and well-defined mandate, where goals are agreed upon and can be measured over time.
When constructing a hedge fund portfolio, it is important to prioritise manager selection first and foremost, across a diverse group of strategies. The first step should be to identify skilled, top-tier managers who have a competitive advantage and are likely to achieve future success. These factors should drive allocations within each strategy as opposed to seeking managers to satisfy predefined strategy targets. An asset allocation should be established to include a diverse blend of strategies, risk exposures, and approaches that complement each other and the broader portfolio. It is important to note that not all managers should be equally weighted in the portfolio. Position sizing plays a crucial role in hedge fund portfolio construction, as it allows for multi-dimensional diversification, relative risk weightings, conviction expression and ultimately room for error when done properly.
Lastly, we caution against narrow portfolios or shortcuts in any part of the process. In our experience and backed by third party research, a well-rounded hedge fund allocation and one that achieves the proper level of multi-dimensional diversification mentioned is likely to consist of 12-15 underlying manager allocations. A level of prudent concentration in position sizing can further help balance the benefits of concentration (maximizing the value proposition of manager selection) and the benefits of diversification (minimizing the impact of manager mistakes), while avoiding the risks of concentration and overdiversification.
Alpha environments
The post-Global Financial Crisis (GFC) era reminded us that the alpha environment and the effectiveness of alternative strategies are heavily influenced by capital markets, government policies, and the macroeconomic environment. The implementation of zero interest rate policies after the GFC, extended during the pandemic, disrupted the investment landscape, and created a risk-on environment. Investors were compelled to take on higher risks, directionality, and beta, in a belief that “there is no alternative” (TINA). These policies induced herd behaviour, dampened the business cycle, and reduced correlations, dispersion, and volatility across global markets. As a result, traditional assets experienced one of the most prosperous periods in history, while diversification strategies were ultimately punished.
However, the current and foreseeable future environment is vastly different. Significant changes in the macro environment, geopolitical risks, and global policies have shifted the headwinds faced by hedge fund strategies to tailwinds. We are witnessing the end of TINA through increased volatility, higher dispersion, dynamic correlations, and pockets of dislocations, all against a backdrop of higher interest rates. We believe hedge funds are well-positioned to take advantage of the extensive opportunity to generate alpha in today’s rapidly evolving landscape.
Making the call
When wealth managers are new to investing in hedge funds, they often begin with an outsourced discretionary approach. As they become more experienced, they may opt for a more hands-on approach, such as an extension of staff solution which can be tailored with custom levels of control, oversight, and operational complexity. Experience, comfort level, and resources ultimately determine direction of implementation. Regardless of the approach, given the complexity and nuances of managing the allocation through a portfolio within a portfolio approach, Mercer suggest wealth managers closely partner with their advisor on their hedge fund allocation. In our experience, a close partnership can help ensure the programme stays on track while providing comfort of dual oversight and contributions. We touch on these approaches below.
Discretionary
For wealth managers who recognize the benefits of hedge funds but have limited expertise, resources, or time, a discretionary solution is ideal. This approach offers access to top-tier managers, strategies, and diversification typically found in institutional settings.
Extension of staff
For wealth managers who have experience of hedge funds, it may be beneficial to consider an “extension of staff” approach. This approach is ideal for those who regularly review their alternatives portfolio and are comfortable using a wide range of investment options. With this approach, wealth managers can maintain control over key investment allocation and implementation decisions while receiving support in the form of new manager ideas, best practices in portfolio construction, indepth analysis of investment strategies, and access to research through desktop tools.
SEBASTIAN MACIOCIA Director of Wealth Management, Mercer
sebastian.maciocia@mercer.com
BUT IT’S A COMPLEX PASSWORD!
BUILDING PERSONAL FINANCIAL FUTURES
A task we regularly perform when doing a penetration test is a password audit. For this we extract the password hashes (essentially an irreversibly obfuscated version of the password) from your Domain Controller and, using nothing more complex than brute-force password guessing, try and obtain as many plaintext passwords as we can. (Into the technical details for a moment here: as the password hash is irreversibly obfuscated what we do is take a candidate password and generate its hash, then compare that against the list of hashes we extracted. If we get a match, we know the candidate password was correct.)
On an average engagement this will yield about 3035% of the passwords in the domain. And we didn't even have to try that hard.
But we've enabled the password complexity settings for our systems!
Sorry, that's not always going to help. Mostly because people are predictable.
In our experience, if you tell people they need to have a symbol in their password, a reasonable number just add "!" to the end (go on, admit it, we won't tell anyone!). Or, if you make people add a number, they'll either add a 4-digit number (often the current year, or the birth year of their first child, or the last time their favourite sports team won a trophy!) or do something like replacing an "e" with a 3 or "s" with a 5.
But guess what? We know that's what people do, so we do it too.
When we're generating our big list of candidate passwords, we'll apply a set of manipulation rules. These will add an "!" to the end of every password,
add all the numbers between 0 and 9999, replace "e" with 3 and "s" with 5 (and "s" with "$" - don't think you're getting away with that one!) and hundreds of other changes based on what we expect people to do. Of course, this gives us a huge list of candidate passwords, but we don't mind that, because we can hash our candidates and compare them against the list of extracted passwords at the rate of 50 *trillion* password guesses per hour using our hash-cracking server. So, whilst you’re watching EastEnders, we’ve stolen access to about a third of your user accounts.
So, where do the candidate password lists come from?
Usually, we’ll create a candidate password list by combining two sources - firstly a database of passwords that have been leaked in previous password breaches. There are many such lists readily available online and they’ll feature the common words people like to base passwords on (names, sports teams, variants of “password” and “secure” and “letmein”, the text you get from drawing a pattern on the keyboard etc.).
Secondly, we’ll generate a password list based on what we know about you as a company - what your main services are, where your offices are located, the names of the key staff (you’d be surprised how many people use their password to make a comment about their boss!) On average this will give us a list of between 25 trillion and 50 trillion passwords. Are you 100% confident your password isn’t on that list?
OK, so what should we do?
The UK National Cyber Security Centre have some advice on this; they suggest training your staff to create passwords based on three randomly chosen unrelated words - this will make the password relatively long and also, if you’ve really picked the words randomly, unlikely to be in any breach databases.
And we’d agree with that, but we’d take it even furthertake your three random words and then do something random to them: deliberately mis-spell something, add a random character or two, throw in a word from another language, choose a non-dictionary word (obscure place names are often good, just maybe don’t choose Llanfairpwllgwyngyllgogerychwyrndrobwllllantysiliogogogoch in Wales or you’ll still be trying to login at lunchtime!) Be unpredictable.
To make sure your users are following the advice you give them, we’d also recommend running password audits regularly, and contacting users whose passwords you can guess. These are relatively easy to do internally or, of course, we’d be happy to run one for you.
And finally, consider asking your IT team to integrate weak password checks into your systems - these can be used to stop users from picking predictable passwords in the first place.
Let’s try and drive that average guess rate down.
DANIEL POLLARD, Lead Cybersecurity Consultant, Mitigo Group pimfa@mitigogroup.com
CONSUMER DUTY: ONE YEAR IN, WHAT LIES AHEAD?
BUILDING PERSONAL FINANCIAL FUTURES
Linda Gibson, Head of Regulatory Change, BNY Pershing EMEA, reflects on the last 12 months of the Consumer Duty in effect— from the seismic cultural shift it’s brought to the growing role that data will play as firms continue to deliver outcomes for consumers.
FCA and reply to the consultation either directly or via industry associations.
The cultural shift has (and continues) to take place
Creating a customer-centric culture also remains pivotal to the successful implementation of the Consumer Duty, with senior managers responsible for driving behavioural change across a workforce with the help of a corporate narrative that routinely puts consumers at the forefront.
This isn’t a simple tick-the-box regulation –evolution and adaptation is key
While it’s been one year since the regulation came into force, the Financial Conduct Authority (FCA) set out its case for continuous improvement with the Consumer Duty, urging firms to learn and improve as they listen to customer feedback and evidence their efforts to deliver good outcomes in line with regulatory expectations. Firms should therefore recognise that, twelve months in, we’re still in the early days and there will always be an expectation that they continually enhance operations for the benefit of customers.
Also, in the same way that firms will be expected to continually assess consumer outcomes, the FCA will evolve its expectations. However, firms should not sit back and wait for updates from the FCA. As consultations have established, the regulator wants regulation change to be collaborative, with the road to compliance paved in the most efficient way. A good example of this is the FCA’s call for input in July on potential areas of complexity, duplication, confusion, or over-prescription with retail conduct rules and guidance. This is a call for action and an opportunity for the industry to help the
However, firms must remember that a cultural shift cannot naturally percolate from the top down. It instead requires ongoing learning and, at times, positive reinforcement that rewards a customer-centric mentality and approach to work.
A key outcome: the importance of data
While evolution, adaptation and a cultural shift all require behavioural change from the individuals implementing the Consumer Duty, a more physical change is also required in how organisations use data.
The FCA has consistently reiterated its desire to become a data-led regulator, using management information (MI) and additional sources of insight to drive its outcomefocused approach to regulatory change. However, just as the watchdog is using data to plot progress against its three-year strategy to achieve better outcomes for consumers and markets, so should the firms collating data for the primary purpose of being Consumer Dutycompliant. These insights, for instance, can help unlock internal efficiencies and generate a better understanding of how their organisation operates.
However, as outlined in the FCA’s insurance multi-firm review of Consumer Duty, there is work to be done on the data front. The findings of the review concluded that most of the approaches taken by firms to monitor customer outcomes required some data improvements. While focused on the insurance sector, this evaluation is likely applicable to other areas of retail financial services where firms are aiming to deliver clearly defined consumer outcomes, using meaningful metrics and data to measure them.
The road ahead
What firms can learn from all of this is that the road ahead will be paved with data. In practice, this will require firms to continuously evolve the way in which they gather and analyse MI and client feedback, and how they assess the technological capabilities helping to drive outcomes for consumers.
In addition to the ongoing and growing relevance of data, the latter part of this year will also provide a moment of self-reflection, when the FCA samples the first annual Consumer Duty reports and shares feedback on good and poor practices with a view on the approaches being taken by firms to deliver good outcomes.
With all this in mind, from this point forwards, firms should be doubling down on their efforts to create internal efficiencies from the requirements laid out in the Consumer Duty. They should look for ways to streamline resources and leverage the customer feedback and management information that has now been collated one year in. And, importantly, where synergies and inefficiencies cannot be created, firms should begin to think of alternative solutions, including operational outsourcing to ensure core business functions – that deliver good client outcomes - can be prioritised.
LINDA GIBSON, Head of Regulatory Change, BNY Pershing EMEA Linda.Gibson@pershing.co.uk
DO CELEBRITIES HAVE A LEGITIMATE ROLE IN
BUILDING PERSONAL FINANCIAL FUTURES
Financial advice comes in many forms, not all of them legitimate. Getting good advice is vital, and the debate on the boundary between advice and guidance rolls on. Proper, regulated advice comes at a cost to the consumer, and for those people who can’t afford it, or simply don’t want to pay, who do they turn to?
Social media is a significant part of today’s culture, particularly for younger generations, so it should come as no surprise that recent research from Intuit Credit Karma found that more than a third (36%) of Gen Z use TikTok for financial advice. This medium and its use of celebrity endorsement has been successful in generating sales in other industries such as fashion, beauty, music and travel. A strong digital brand is inevitably going to become increasingly important to all industries, financial services included.
Managing social media accounts can be tricky, especially when fake adverts and accounts are rife. Recent statistics highlight just how serious the problem is with a Freedom of Information request submitted by Good Money Value to the National Fraud Intelligence Bureau (NFIB) revealing the largest number of scams reported in 2022 were on Instagram (1,857) and Facebook (1,193), both owned by Meta. In third place was YouTube, with 231. The total loss in 2022 of almost £75 million was nearly six times higher than in 2019, but it’s worth remembering that these figures only relate to the cases that were reported. The scale of unreported scams is difficult to quantify, but we do know the problem is growing.
So how does the industry bridge this gap, to reach an online audience appropriately, without falling foul of the FCA’s requirements for financial promotions?
Regulated advisors bring expert awareness of the financial promotion rules and so are ideally placed to improve the current situation. Regulated firms have a part to play to help spread awareness and improve financial literacy by using influencers who do comply with regulations.
It’s important to remember there’s a big difference between giving financial advice and improving financial education. Financial education might include helping people to navigate financial jargon, budget, calculate a tax liability, understand the power of compound returns or the risks associated with different asset classes. Education should cover the basic foundations that enable a person to make more thoughtful and informed decisions. Investment advice is likely to include recommendations, which would require knowledge of individual circumstances and is unlikely to be appropriate for a mass social media audience.
Large firms have big marketing departments which can take care of the social media side of things and ensure the content being put out is compliant and has all the appropriate messaging and warnings.
Many firms are still very traditional, and advisers may not feel particularly comfortable with social media use, or immediately think of using it as a tool to help others understand their finances. While they probably know how to use it personally, many wouldn’t know where to start when it comes to posting targeted content to improve financial literacy or attract clients.
For some advisers running smaller firms, social media and appropriate ‘finfluencers’ can be difficult to utilise. Hiring celebrities demands large marketing budgets that smaller advisers are unlikely to have. They are also unlikely to have dedicated social media specialists who can support this activity.
Despite these challenges, firms should use social media and advisors should elevate their social media
presence to become ‘finfluencers’ in their own right. Social media can be a force for good in helping to educate a difficult to reach audience about their financial affairs. The industry must adapt if it wants to reach the next generation. Social media is the way forward - it’s not going to go away.
Tips to get started:
1. If you are new to using social media to boost your own profile and educate your audience, spend time observing other people and brands you admire to see how they approach things.
2. Try commenting on, liking and sharing content you feel is relevant to your own audience
3. Once you feel more confident, try posting your own content, but remember this can’t be financial advice, and needs to include the necessary disclaimer to remain compliant with FCA rules.
4. Mix it up and keep things interesting by using a range of formats. These could include infographics, charts, polls, articles and videos. Test different approaches and see what works best.
5. Some basic kit including a ring light and microphone can improve the quality of video content and make your posts appear more professional.
6. Use relevant hashtags and tag other stakeholders and organisations in to extend the reach of your posts.
7. Posting good quality content regularly will help you build up a following.
8. Remember social media is a two-way conversation, so make sure you respond to comments and questions promptly.
ANGELA TONER
Partner, RSM UK https://www.rsmuk.com/
WEALTH MANAGEMENT IS GEARING UP FOR ITS IPHONE MOMENT…
Here at Seccl we think the wealth management industry is on the cusp of massive transformation. An iPhone moment, Blockbuster moment, Kodak moment – whatever you choose to call it, it’s set to be momentous, and the fundamentals of our sector are about to be transformed by advances in technology and the cost, customer experience and efficiency benefits these will drive.
converge to suddenly transform our market beyond recognition – creating opportunity and jeopardy in equal measure.
In our new paper we’re setting out our key predictions for this new era in a bit more detail –exploring some of the most striking dynamics that are unfolding within the UK wealth management market (and society at large), what the near future could look like and explore what it might mean for you…
As with all predictions, we’re bound to be wrong about plenty. But about one thing we’re pretty sure. Things are going to look very, very different quite soon.
Here are some thoughts from me and you can download the paper here. I hope you find it thought provoking and useful.
innovation was being rolled out: the Nokia 3310.
Over the next few years, 126 million of the wonderful things would be shipped to a generation of Snake addicts, who still hold it in cultish affection long after it was laid to rest in 2005.
That something could be game-changing in 2000 and obsolete in 2005 goes to show just how rapid and constant is the process of innovation within consumer technology.
These innovations exist in their own time and context. They’re born. They push things along, transforming experiences for good (if not always for better) and raising expectations of the customers who use them. And then they die – made irrelevant by the very progress they helped to inspire.
‘You would say that’, you might think. ‘In fact, you’ve been saying it for a while. Why should we believe you now?’ Well, change has a habit of creeping up on us. As Hemingway’s character responded when asked how he went bankrupt: ‘Two ways. Gradually, then suddenly.’
Over the next few years, the significant dynamics that have been bubbling away for some time will
Wealth management: a 3310 in today’s iPhone world
In 2000, when the brilliant Ian Taylor and Mike Howard were launching Transact and giving advisers control like never before, over at the other end of the technology market another iconic and much-loved
The same, however, can hardly be said of our technology infrastructure here in the UK financial advice and wealth management markets.
Our world has transformed since 2000, but the software that underpins financial advice has barely changed at all. It’s stuck in a time warp and, let’s face it, is no longer good enough.
It’s frustrating. Systems that don’t connect. Data that’s a mess. Platform upgrades that only lead to a downgrade in service. And repeat.
And it’s fragmented. A paper form here, a Docusign there… a valuation from a platform, a separate login to a different client portal… a cashflow plan from another provider altogether and a suitability report written in Word.
In a world where even high street banks can create smart and intuitive online experiences, this sort of nonsense is increasingly unforgivable, undermining the brilliant offline experience financial planners provide.
Why are planners lumbered with a 3310, when their customers expect the latest iPhone?
Old habits die hard…
For the answer, just look at the economics of our sector. Platforms generally charge 20 to 30 basis points (often plus those hidden margins on cash), but the actual cost of the underlying technology and operations is something in the region of midsingle-digit basis points
So where do the other 15 to 25 basis points
go? Well, to meet the costs of the corporate apparatus that bring this tech to market. I’m talking, of course, about the platforms themselves.
They have their own substantial costs to recoup. Vendor management. Wraparound services. Big operations teams to paper over the cracks of technology that doesn’t work properly, alongside large sales, marketing and customer service teams who work hard to make sure advisers don’t notice.
But importantly, these businesses aren’t just cost centres. They’re commercial enterprises, with their own profit margin to protect – whether to meet public market expectations or to maximise profitability ahead of a planned exit.
As a result, their margin – which clients are the ones paying – aims to be way more than the cost of the thing they’re actually selling. The benefits of scale are not flowing to customers, who instead are being overcharged for something that’s no longer fit for purpose.
Even amongst the underlying software vendors there’s an alignment problem. Whether due to aged technology or legacy business models, it’s not uncommon for half of their revenue (and 100%+ of their profit) to come from implementation and ‘change management’ costs. They are incentivised to make this is as difficult
as possible, a position often made worse by dismal procurement and inadequate vendor management.
Viewed through this lens, it’s no surprise that technology projects take so long and cost so much. It’s a feature, not a bug. In fact, it’s the whole damn business model.
The tipping point has passed…
When platforms were first emerging on the scene in the early 2000s, they existed to put financial advisers in the driving seat – allowing them to serve their clients with more and more personalised financial plans, and wresting control from the all-dominant life companies in the process.
Today, that control has pretty much gone, replaced by an all-too-familiar focus on the short-term bottom line, regardless of the impact on advisers or their clients. This has become particularly pronounced on the back of ownership changes and
the ability to leverage inertia to generate outsized margins on cash. It’s kind of back to where we were 25 years ago – and it’s not ok.
Where infrastructure was once a catalyst for change, now it’s a constraint to it. But like all constraints, they can only withhold so much before the pressure breaks…
DAVID FERGUSON, CEO of Seccl
Download the paper here.
CONSUMER DUTY –INCREASING INCOMES BY IMPROVING OUTCOMES.
How to make Consumer Duty both a regulatory and commercial success….
JOURNAL
EDITION #28
BUILDING PERSONAL FINANCIAL FUTURES
Quite rightly, all firms, whether providing investment management, services or advice have been laser-focused on designing, delivering and evidencing good outcomes under the Duty. However, if done successfully, now is the optimum time for firms to maintain momentum and turn this focus on the commercial value, as well as the outcomes, that the Duty can generate.
Consumer Duty: The prize is huge if we get this right.
To make a genuine success of the Duty, firms should consider not only regulatory alignment and embedding of the Duty, but also embrace the
considerable commercial upsides that the Duty can generate. These components form a package. Imagine them as a three-legged stool, with each required to deliver a solid platform – without one, the stool tips over:
Align to FCA expectations
Finalise implementation
Respond to FCA findings
Anticipate FCA supervision
CONSUMER DUTY SUCCESS
Fully Embed the Duty
Deploy into target operating model
Embrace Data, Technology & Tooling
Evidence cultural alignment
Explore Commercial upside
Strategy and Business Model opportunities
Drive product/ proposition innovation
Operating cost and control reduction
1. Alignment to FCA expectations
• Finalise implementation. There will be an expectation from the FCA (sooner rather than later) that firms have fully implemented all residual activity from their implementation plans - and can evidence this. This will allow firms to reach a definitive and final position on implementation. In KPMG’s professional experience, these are more likely to be IT (data and MI) upgrades, culture enhancements and/or any remediation activities. (e.g. on ongoing advice service provision)
• Respond to FCA findings. The FCA has been proactive in sharing its initial findings on implementation of the Duty with a range of good and poor practice findings on different topics – and we know that more are coming. Firms will need to use these to benchmark and recalibrate their approach to meeting the various requirements. Given the sector-agnostic nature of the Duty, this should include consideration of findings from other sectors. For example, the FCA’s feedback on outcomes monitoring in the insurance sector that are equally applicable to this sector too. As such, we expect approaches to evolve, especially in the short term, as firms address FCA findings.
• Anticipate future FCA supervision. Unlike any other regulatory change, the FCA has been proactive in terms of pre-announcing its areas of interest and focus. Sheldon Mills has also announced that FCA will publish a Grid detailing and timetabling further FCA reviews on components of the Duty. Therefore, firms should re-acquaint themselves with the Dear CEO and portfolio letters to anticipate specific further challenge on key topics that the FCA has not already acted upon. From this, firms should develop the evidence required
(addressing any shortfalls as they find them) to respond appropriately to FCA information or evidence requests.
2. Fully embed the Duty
• Deploy into the target operating model (TOM). This will require firms to ensure their target operating model supports the successful transition of the Consumer Duty from a project or programme basis to a state where the TOM is updated to ensure that it is embedded across all customer journeys, into CRM/back-office systems and across all relevant departments. Only by effectively embedding it, will alignment to the Duty be long term, dynamic and sustainable.
• Embrace data, technology and tooling. Given the pace at which firms have implemented the Duty, firms are now turning their attention to embracing and deploying technology and tooling to move from a tactical approach to a more strategic, elegant, efficient and effective one. For example, this could include implementing a ‘voice of the customer’ platform to formalise and improve insights received from your clients. Linked to the above, it will also make adherence to the Duty more enduring.
• Evidence cultural alignment. KPMG professionals are also seeing significant activity to benchmark and evidence cultural alignment, as well as any further enhancements or improvements required or being progressed to ensure that delivering good customer outcomes is part of the firm’s embedded culture and purpose. This includes engaging with both employees and clients to genuinely evidence alignment of the firm’s culture and purpose to the Duty.
3. Explore commercial upsides
Finally, there are the commercial upsides of the Duty which, to date, have not been significantly explored by firms. ‘Just’ meeting and embedding changes driven by the Duty will represent a suboptimal outcome and potentially a poor return on investment from all the costs and effort to get to this point.
• Strategy and business model opportunities. Having embedded the duty, there is an opportunity for firms to re-assess their strategy and business model to drive towards a culture of customer centricity. This can be achieved by, for example, redesigning the target-state customer journey, investment management approach, advice proposition using insights from the experience of implementing the Duty. This has the potential to increase revenue, retention, client satisfaction and attract new clients, whilst reducing costs.
• Proposition innovation. The richer data set and more forensic analysis of your investment, wealth management and/or advice proposition features (including their price and fair value), and how they perform via outcomes testing will identify opportunities. These could include proposition/offering rationalisation as well as new product or service innovation, identifying previously hidden opportunities and customer needs. Redesigned, insight led customer journeys will help firms reimagine existing products and services or create new ones based upon a deeper understanding of customer outcomes.
• Operating cost and control reduction. Finally, when fully embedded there is a significant opportunity for firms to reduce costs, either by reducing operating costs or reducing controls to reflect the more customer centric nature of the firm. This allows control functions to be repurposed into more proactive and supportive roles –rather than reactive remediation or identification of detriment activity.
Conclusion
KPMG in the UK’s view is that Consumer Duty success can only really be achieved once the three legs have been fully considered and addressed. It would represent a significant missed opportunity if firms focused solely on aligning to FCA expectations and/or embedding the Duty without recognising the opportunities that it presents.
All our other articles on Consumer Duty are accessible on our Consumer Duty hub.
PHILIP DEEKS, Head of Regulatory Insight Centre, KPMG
Philip.Deeks@KPMG.co.uk
WOULD YOU LIKE TO CONTRIBUTE AN ARTICLE?
Alongside updates from PIMFA, the Journal includes several useful inputs from our associate member firms. These articles are an excellent opportunity to gain interesting insights into the wider industry and to learn more about PIMFA associate members. If you are an associate member and you are interested in contributing to future editions of the Journal then please contact:
Nigel Ross-Scott, Copywriting & Publications Manager (NigelRS@pimfa.co.uk)
COMING SOON:
PIMFA’S VULNERABILITY LEARNING PROGRAMME
UNDERSTANDING CUSTOMER
VULNERABILITY –A GUIDE FOR FIRMS
WOMEN’S SYMPOSIUM
Event Name:
PIMFA Women’s Symposium
Event Date:
22 & 23 April 2025
Venue:
PIMFA is delighted to announce the return of the Women’s Symposium for 2025
De Vere Grand Connaught Rooms, Holborn, central London
Build relationships with this community: host a personal development or investment and relatedfocused workshop
Create awareness of your organisation: consider the many opportunities for networking, marketing and corporate branding at the event
Align your firm with thought-leadership introduce dynamic, topical speakers and content that challenge thinking, raise awareness and encourage delegates to think outside the box.
We are currently putting together the agenda, and liaising with event sponsors – if you would like to get involved, or suggest a topic or concept to explore, please reach out – our friendly team will be happy to give you the latest.
contact us at events@pimfa.co.uk to get in touch.
