Issue 2 • summer 2014
WMA JOURNAL Working for the Investment Community & their Clients
TECHNOLOGY
Wealth management technology Where are we and where do we go from here? Introducing the concept of the Wealthstack Technology is part of the job of a wealth manager, and without it we would be lost – even if it doesn’t always seem to be the case. This article will examine what we use technology for and the key issues in the market that are driving change, and suggests a way in which we can all turn technology to our advantage.
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he evolution in the use of what used to be called computers – remember them? – in the wealth management industry has grown out of three basic things that we do as a business. We look after clients, we create and maintain accounts for them, and we either enact or help clients to enact transactions on those accounts. These 3 key components – clients, accounts and transactions – form the basis for a number of applications in this industry. They used all to be housed in the ‘back office’, but when the back office systems could not react quickly enough to the need for the type of calculations that portfolio managers required to monitor and rebalance accounts, there grew a need for portfolio or account management systems, which ran on personal computers able to run these calculations quickly. Finally, and in my opinion quite belatedly, we have started to look at clients and to store and analyse the data that we hold on these clients. All of this evolution has been driven by two overlapping factors up until now – the capability of the computing and the regulation that financial institutions are driven by. The WMA lives on regulation, so I will not dwell on that in this article, but focus on technology. However there are now a growing number of additional factors that are driving change. These are: • Client demands – The amount of information available to clients through the growth of the internet has meant that www.thewma.co.uk
the requirement to provide more and more relevant information to clients has grown. Clients are able to scrutinise data better, and are more demanding. There is a concept of the Millennial Generation or Generation Y, who are people who were born with the internet, and cannot imagine anything else. A survey in America found that of that generation, 97% of them own a computer, 94% own a smartphone, 76% use instant messaging and 92% multi-task whilst instant messaging. This Generation Y vision of a good working relationship with their client manager is to logon to their iPad, video conference or chat for real time advice, backed up by accurate and up-to-date information before making a decision and signing off on it and then getting back to their next meeting or their snowboarding. The need for communication is not just restricted to Generation Y, the older generation have not on the whole got their money by luck – they are intelligent and need to engage with a trusted advisor, and have more idea of what a trusted advisor is. • Wealth management is flavour of the month. In any universal bank, the last few decades have been a roller coaster. For many years the growth of the housing market meant that retail banking and lending were the star departments in the bank, and the majority of the spend on IT and resources went in that direction. Then
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Pressure to grow means that organisations are also looking for the new shiny toys and to use technology to their advantage
the trend shifted to investment or casino banking, and the shift in spend went with it. All through this period, wealth management was the poor relation, with very little being spent and there was an attitude of ‘mend and make do’. Today this is different – both retail and investment banking have hit the skids, and many banks are retrenching in these areas. This has meant that wealth has become much more prominent, and the traditional monetary returns – which looked pretty ordinary in the past – are now much more attractive. However the legacy of under-investment is apparent in the industry, and there have been many more multi-million pound transformation projects in this industry in the past 5 years than in any time since Big Bang. • There is an arms race in place as a result of wealth management being the flavour of the month, with many organisations recognising that profitability comes with size. This has led to a lot of M&A activity, and this in turn has led previously inert organisations to reviewing their technology. Pressure to grow means that organisations are also looking for the new shiny toys and to use technology to their advantage. It has also meant that there is a vast number of new entrants – both in the traditional way – a client manager leaves a big corporate with all his clients and sets up a boutique – but also the big supermarket or insurance brands wanting to get some of the action. Some of the technology barriers to entry that were around before have been broken down, and I shall explore what those are later in the article. Focusing on technology for any period of time is difficult since the pace of change is extremely rapid. What is also apparent is that the tools and the ease in which new applications can be created using these tools mean that there are many areas where buyers need to beware. WMA JOURNAL
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TECHNOLOGY
The growth of the internet, the rise of apps and the advent of data mining tools mean that previously opaque systems and processes are being exposed, and in the cruel light of day are being found wanting. Clients want to get access to data because they can for every other aspect of their lives – travel, restaurants, banking and books are all industries that have been changed by the internet. You can also get access to data that has been hidden in systems by the use of data mining and discovery tools. At the same time, the amount of data generated has increased exponentially and the ability for people to make sense out of data becomes harder. Some of these new technologies have led to new entrants who have seen how they can leapfrog their competition. An example is the new online propositions such as Nutmeg which uses the internet to capture client details and sell them a discretionary product without ever meeting them. A recent PWC report indicated that the D2C market grew by 30% last year. There are a number of new technologies that will help wealth managers create new propositions or enhance existing ones. These digitally-enabled propositions include self18 WMA JOURNAL
TECHNOLOGY
service – i.e. getting clients to do some of the processing that you currently do such as maintaining their own records – and utilising rich media such as videos or data visualisation to drive clients towards communities. The creation and maintenance of communities is going to be key to the attractiveness of the firm to the individual. Peer-to-peer validation such as TripAdvisor is very important to the new generation of user. This used to be done face-to-face, perhaps down the golf club and now this technology is how you recreate the chumminess of a golf club online. Vanguard in the US has created a wealth management community using Facebook of over 50,000 people. However, in a regulated environment, this community building is difficult to do on
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There are a number of new technologies that will help wealth managers create new propositions
open platforms such as Twitter or Facebook. This is where come of the new breed of software such as corporate social platforms comes in. These corporate social platforms allow the wealth managers to create walled gardens where they can converse with their clients, segment those clients, or allow the same clients to self-segment. It meets the current need to check with clients on a regular basis and this client communication channel is compliant, analysable and invaluable for wealth managers. The power of the internet also means that the traditional ‘quant’ who sits in the back room surrounded by research and printouts can now be replaced by algorithms. Algorithms are programs that are looking out for conditions and monitored variables to fall within particular parameters and apply some form of action. We have always had limit orders – this is taking limit orders to the point of tracing correlation across a series of factors and placing trades accordingly. The ability for machines to show these correlations and patterns in pictures – known as data visualisation also means that these previously impermeable insights are available to all. These techniques can be used www.thewma.co.uk
to monitor portfolios over a wide range. Many wealth managers could supervise a large number of client enhanced portfolios through such technology only having to intervene when there are exceptions. As I described earlier, in the core of wealth management we need to focus on client, accounts and transactions and this has led to systems providers who focus primarily on each of these areas – client management is usually referred to as CRM, account management is portfolio management and transactions are usually processed by a back office system. What has also happened in the past few years is that many of the suppliers from each of these ‘heartlands’ have tried to expand into each of the other areas, with the universal result that they have create integrated yet mediocre systems in areas which are not their area of expertise. Those that have stuck to their expertise however have then had to integrate their systems – usually with antiquated inflexible systems that were not built with integration in mind. There is a time lag with all of this. The old back office legacy systems were built as specialist systems, front office systems were www.thewma.co.uk
built to compensate and were based on PC technology, and when the technology matured to allow for the internet they all tried to bolt on functionality. My suggestion is that they ‘stick to their knitting’ and integrate. This has proved a problem in the past, but now the move towards a common interfacing approach has meant that that is not the issue it used to be. This integration also needs to encompass the new trend of technology – the predilection in the manufacturers of hand held devices to create every size of machine from 3 inches wide to 15 inches wide – which in turn makes it very hard for the creators of software to get it right. There are platforms that are referred to as portals which give software providers a framework in which to publish their programs. I am seeing that in this market there is an emerging shift towards the concept of best of breed, with powerful integration between the systems using standard web services technology, and infrastructure. What does that mean for the wealth management industry? It means that as long as the companies agree on a common mechanism for exchanging data, Wealth Management companies can
benefit from the excellence that the specialist companies in each of the ‘heartlands’ bring to the party. I would characterise this as being a Wealthstack. This is in contrast to the trend of creating monolithic ‘fully integrated’ offerings in the market. In software terms, big is not better – since it creates too many interdependencies which means that there is uncertainty as to where errors are in the programs since the number of places it could be are legion. This leads to contingent testing over long periods of time. Many of the monolithic program manufacturers think little of asking their clients to spend 2-3 months testing the software in user acceptance testing every time there is an upgrade. The Wealthstack approach is that where components change, they are tested as sub-units, and as such the errors can be easily traced. The key components of the Wealthstack are the core components of CRM, Portfolio Management and Books and records or IBOR. But it should also be seen as encompassing portal technology, client communication through corporate social platforms, the use of data visualisation in the depiction of patterns in data, the ability to mine data to establish these patterns to assist with operations and fraud, the interaction with multiple channels to create a seamless customer experience, the introduction of data feeds to let clients make more informed decisions and plan their future. I anticipate this list will grow, but with the overriding view that integration and program to program communication is key. The Wealthstack allows software companies to provide strength in their specialist area – which could include CRM, portfolio management and back office as well as the more specialist areas such as tax, risk, reporting, management information and so on with the comfort of knowing that integration to each other is a given, and that the hardware and operating environment is the same. In many companies this is increasingly becoming a Microsoft stack. I will be exploring the Wealthstack in a series of seminars being held in association with the WMA. These start on the 26th June with demonstrations of the new technologies, including corporate social platforms and data visualisation. Please see the WMA Members’ Website area for more details.
Steve D’Souza Managing Director, Sales Kinetics WMA JOURNAL
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NEW LOGO TO COME
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