Forced to contend with regulatory changes and an increasingly competitive environment, the wealth management industry has had to take notice and emerge more cost-effective and responsible. Having been dealt the difficult task of streamlining a traditional operating model – while at the same time improving client engagement and personal service – wealth management has been subject to innumerable changes. It is this delicate balancing act that has seen technology take centre stage and firms satisfy changing client behaviour.
Even the onward march of the digital age and the unerring spotlight of regulatory scrutiny has failed to topple an industry that has been caught in a financial storm. Last year wealth management in the retail sector posted its sixth consecutive annual increase in assets under management and productivity, with assets up 11 percent and revenues up six percent on the year last, according to PriceMetrix’s State of Retail Wealth Management report. Dating back to 2009, the upward trend is proof of the industry’s ability to negotiate sometimes-challenging market conditions, marking the beginning of a new era for global wealth management.
Less had been more
Previously the industry has been buoyed by fundamentals, the most notable being strong economic growth in emerging markets, booming equity markets and, crucially, a rise in HNWI ahead of GDP. It would appear, however, that as a result of increased regulatory and pricing pressures, firms are more selective about who they bring on board, choosing to serve fewer and, on average, more valuable clients.
Previously the number of clients per advisor in 2012 came to 159 – falling in 2013 to 156. Nonetheless, average household assets throughout the same period increased to $562,000 from $490,000, mirroring the same pattern in household revenue, which was up to $3,670 from $3,300. The number of HNWI with $2m or more in investable assets also increased by 19 percent in 2013 to 7.7 percent, an increase of 6.5 percent on the year previously and 5.7 percent in 2012. The findings illustrate where the focus lies for managers today, as they look to HNWI to compensate for heavy losses inflicted by way of regulation, increased IT spending and sky-high client expectations.
Whereas assets under management are back to their pre-crisis highs, and, in the case of most emerging markets, far and above what they were previously, the pressures on revenue and profits are far greater. Revenue growth and profitability – when put alongside equity market returns – is seriously short, and highlights the importance of transforming operating models if firms are to remain competitive.
The circumstances have seen technology emerge as the go-to solution for many of the prevailing issues, and without it, many firms would likely struggle to keep pace with new and established market players – not to mention rising client expectations and regulatory pressures. As a result, firms are upping IT spending and integrating data, channels, people and processes as they do so. One joint report co-authored by Wealth Briefing, Weatherill and Advent Software entitled Technology and Operations Trends in the Wealth Management Industry shows the extent by which firms are beginning to see technology as a pillar of effective wealth management. The report shows that 60 percent of respondents have or will invest up to $5m on technology a year over 2012, 2013 and 2014, around 10 percent will then be investing between 10 and $20m annually, and another 10 percent will invest over $10m.
Those asked in the survey also said that the biggest technology-related challenge they faced was compliance with present and future regulatory requirements, with transparency at a distant second. Meeting regulatory challenges, therefore, accounts for the biggest share of spending, above even cost cutting and security. “Client expectations with regards to technology are fundamentally changing – not only driven by how digitised the banking industry is, but also their experiences in other industries,” says Sid Azad, Partner and Financial Services expert at Strategy&’s London office.
Adapting to the unknown
One area in which technology has emerged as an important differentiator is in reporting. Customisation and autonomy in particular are key areas of focus, as clients increasingly demand that they have anytime anywhere access to their assets. Here digital channels are crucial in building integrated wealth management platforms, capable of withstanding the changes – regulatory or otherwise – that come the industry’s way.
The focus on digital strategy and the development of new wealth analytics tools has also given rise to new market entrants, whose understanding of the digital space sets them apart from established competitors. “The new players are significantly more configured for the digital age than the traditional players are,” says Azad. By automating various back-end processes, these technologically savvy newcomers can eliminate hefty back office costs and still deliver a comprehensive and always connected service to their clients.
“The new players are also better at putting clients in control of their portfolios and helping clients co-create their propositions rather than being offered the standard two or three propositions. These new players are often able to offer better price points due to a more nimble and technology enabled operating model,” he adds. As such, a digital strategy for those in wealth management is no longer a choice but a necessity if they are to satisfy clients, streamline operations, cut costs and increase compliance across the board.
Much like the rest of the financial services sector, wealth management has come up against a host of regulatory hurdles of late. One Strategy& report, entitled Global Wealth Management Outlook 2014-2015: New Strategies For A Changing Industry, shows that in Europe, regulations have driven up costs by five to 10 percent for wealth management firms, becoming the single most expensive operational consideration on the books. Although the new regulations have been introduced to protect against corruption and mismanagement, no other factor has troubled firms to such an extent.
“Greater transparency on fee and performance is resulting in a fairly fundamental shift in client expectations, and therefore their wealth managers,” says Daniel Diemers, Partner at Strategy&’s Financial Services practice in Europe and the Middle East. “Historically, clients have often not been fully informed and appreciative of the various charges built into their underlying investments, and therefore how they could influence management fees by changing their portfolios.”
Firms must now make public their tax arrangements, forcing many into rethinking their offshore strategies, and making improvements to client disclosure in order to protect against mis-selling. What’s more, new pricing laws should serve to significantly lower costs for clients in the near future, narrowing already slim profit margins further still. “Regulatory changes and lack of clarity on future regulatory pressures is one of the biggest concerns of wealth managers,” says Diemers. “We believe that regulatory compliance has already added at least 10-15bps onto on-going costs-to-do-business due to a significant need for remediation and the constant flow of work to adhere to new regulations.”
Clients, whose appetite for transparency has increased most notably since the financial crisis took hold, have also fuelled the regulatory changes. As opposed to previous years, clients are demanding full disclosure across the board and the option to make informed executive decisions on how their assets are managed. “While regulations are contributing to a more transparent and competitive private wealth management landscape to a certain extent, an even bigger driver of transparency is the emergence of nimble, fully transparent wealth and asset management technology platforms,” says Azad. “These platforms are setting new standards for transparency which traditional players are being forced to match. We expect this trend will continue and traditional players will need to fundamentally change their operating models to achieve a significantly lower cost structure so that they can compete in a more transparent environment.”
Regardless of consistent annual growth in assets under management, traditional wealth management firms are only now beginning to adjust to a transformed industry. By putting client- centricity ahead of profitability and focusing on solutions ahead of mere services, industry leaders are redefining the foundations and bringing an increasingly sustainable and responsible shape to wealth management.
To mark this transformation, World Finance recognises those leading the way and making clear changes in the wealth management space.