Etops Insights: 6 Trends that will change the Wealth Management Industry. Forever. December 2015

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1 Etops Insights: 6 Trends that will change the Wealth Management Industry. Forever. December 2015 By Michael Appenzeller and M. David Allen

2 «It s not about regulation, after all!» Introduction Two weeks ago the Swiss Federal Council dispatched the new Financial Services act ( FIDLEG ) and Financial Institutions Act ( FINIG ) to parliament. Another attempt to protect stupid investors from dangerous investments. Yet it will not heal the most important issue: In the age of technological disruption, negative real interest rates, generational shifts and a gapping pension issue, Wealth Managers must re-think their business model or risk extinction. Let's be frank: To a significant degree the newly proposed regulation is a nuisance. It will neither protect the end clients from anything nor benefit their investment performance nor the stability of the financial system. On the contrary it is likely to negatively impact all of these factors. In a market where clients can neither rely on interest rates or the (overvalued) equity markets to yield much, you won t need a dozen or more forms to protect the customer. Nor do you need the government to determine how exactly these forms will have to be filled out or even what the investor is allowed to invest in. In this white paper we will show that besides regulation another handful of key trends will shape the future of the Wealth Management industry. All of these trends are data centric in the end. In an industry that has fallen behind in technological innovation this opens a massive potential for disruption in the coming years. In no other industry is the potential as large to enhance human beings with technology and automation. It's time to embrace the change, re-tool the industry and allow the business model changes that are desperately needed. 2

3 A 60 Billion industry on pre-internet age systems 6 trends that will change the industry forever Due to the long stretch of relative protection under banking secrecy and tax evasion offerings, business models and technology have been neglected and treated as a necessary evil if at all. Today, this is rapidly becoming the central challenge of the wealth management industry. Security It s more critical than ever to tailor technology solutions to protect against evolving threats. Portfolio Complexity With the need for a broader set of risk/return classes and evolving services unique data aggregation, analytical and reporting needs will be evolving Generational shift The demographics of asset owners are changing with the younger generation looking for more added value from their wealth managers Regulatory Administration New technology will need to embed the increasing regulatory burden to enable humans to concentrate on the core tasks Modularization New solutions to Asset Management will evolve, enabled by technology and innovation User experience Users that use Uber, LinkedIn or AirBnB will expect the same user experience from their wealth managers in the future 3

4 1. Portfolio Complexity Traditional portfolios based on fixed income and equity don t work well anymore in today s environment. But existing tools to diversify into alternative and emerging asset classes are not developed sufficiently. As of autumn 2015 a conservatively invested income oriented portfolio will be showing a negative performance of 1.5-2% in Swiss Francs but a volatily of an average equity portfolio. Banks and independent asset managers still offer this for a hefty fee. The most successful long term investors on this planet show returns of above 10% for the same period. The likes of Harvard or Yale endowments have consistently returned over 10% over the last two decades. This was achieved by investing into alternative asset classes with an allocation of at times over 50% and by following a disciplined long term approach. Yet, for investors to invest more effectively in alternative asset classes they must aggregate data from hundreds of different data sources, filter and analyze that data, disect complex return allocations and liquidity waterfalls. This cannot be achieved with pre-internet age technology nor manually. Alternative Returns* 5-8 % + 7 % Expected returns of conventional asset classes (e.g. Equity Bonds) % Expected returns of alternative asset classes: e.g. Hedge Funds, long/short, Private Equity Hedge Fund Assets* + 22 % $ 3 Trillion $ 5 Trillion The Hedge Fund Market grows at an annual rate of 22 % *Eurekahedge, Fundbase, Etops analyasis, PwC Research 4

5 2. Generational Shift With changing demographics a younger, more tech savvy generation will no longer be satisfied with an expensive, average and a semi-annual oral update or simple static reports on pdf or paper As the younger generation of investors emerges, assets are tax declared and the wealth management market becomes more transparent and competitive. Clients will demand a higher level of service and transparency. Things like multi-device access so they can monitor their accounts anytime and anywhere will be a standard in the future. To be able to deliver the reporting depth needed on the device and frequency demanded by the investors is the quintessential challenge for advisors. Do you also have an app to follow my family s portfolio? Asked the son of a UHNWI at the quarterly portfolio discussion with the Wealth Manager No, but we can send you a pdf directly on mail. answered the relationship manager. 93% of ultra-high net worth investors use mobile devices to check account balances, while 64% use a mobile device to research investments.* Generation X and the Millennial Generation will inherit an estimated $41 trillion over the next 40 years.** This fact alone has the potential to tectonically shift the business in the industry to players that are ready and prepared to serve the next generation. Technology is the key to cope with that. * Charles Schwab: Gaining Perspective on Automated Investing 2015 **World Economic Forum: From the Margins to the Mainstream

6 3. Modularization With the active/passive debate in full swing, investors will demand solutions from their advisors that are resembling institutional core/satellite portfolios. It is likely that attractive returns can only be made outside mainstream investments today and for the foreseable future. Technology enables access to formerly exclusively insitutional asset classes AND does so at lower costs. Asset classes like SME and P2P lending or also venture capital or hedge funds are prime examples for this. On web based platforms like AngelList, slicedinvesting.com or Fundbase.com access to formerly exclusive investments like venture capital or hedge funds are being democratized. $ Minimum investment amount to be allowed into most blue chip hedge fund Minimum investments slashed $ Minimum investment into high quality hedge funds on the leading hedge fund market place Fundbase.com Cutting intermediaries yields Advisors and investors will need to connect to the modern and emerging asset classes and platforms and find new ways of integrating these in a core/satellite approach. % 9% Average returns of hedge funds % % % 13%+ Expected returns on Fundbase.com 6

7 4. User experience With the digital and mobile technology ubiquitous in our daily lives, wealth managers must embrace an increasing number of clients used to digital delivery of services. Pure so called Robo advisors won t very likely replace human interaction any time soon. Their overall impact in terms of AuM is still minimal and they struggle to market their offering especially to HNWI. High client acquisition cost and low average assets per client are some issues they face. But today s technology can definitely be used to deliver to the client a more seamless and efficient experience. Being surrounded by a modern technology every day he will want to have a digital experience with his wealth advisor too. The ongoing technological revolution puts client service first. The Wealth Advisory industry will also have to follow this path. Robo advisors in the US managed around $20 billion in However, in Switzerland, this amount was only around 20 Million*. Almost 49% of HNWI consider to have to have a portion of their wealth managed by an automated advisory service. Over 71% of HWNIs are expecting a largely digital wealth management relationship in the next five years...** Technology is here to enhance professionals and deliver superior results and client service. *CNBC: Is the Future of Robo-Advisors Bright or Bust? And own calculations; TrueWealth, the largest robo advisor in Switzerland has less than CHF15 Million of AuM **Capgemini: World Wealth Report

8 5. Regulatory administration To weather the regulatory storm successfully, advisors and investors must first master data and connectivity, then automate regulatory formalities based on that. Whilst we have shown in this report that there might be more strategic concerns than regulation, regulation is still there to be managed on a daily basis. The multitude and continuing inflation of regulatory directives, formalities and documentation requirements to check the boxes, fill out, put on file and report has reached a level where manual processing is not possible anymore for most advisors. By using appropriate technology wealth managers prevent regulation from becoming the centerpiece but a condition met instead. 159: Number of Directives to follow for a regulated Swiss fund manager. CHF : estimated extra costs per average wealth advisor caused by proposed new Swiss regulation*. 97: Number of paragraphs of the MIFD II regulation. The bars are high for a technology solution as it needs to integrate bank, investment and client data in a way to make regulation an after-thought in the daily business. *zhaw: School of Management & Law: Regulierungskostenanalyse zum Finanzinstitutsgesetz (FINIG)

9 6. Security In an increasingly digital world, data has become the new oil. This digital oil is created on the most sophisticated technology. Yet in the financial services world most players still work on cluttered and last century architecture, leaving them vulnerable. Cyber attacks have become a huge and sophisticated shadow industry. These attacks target the methods and technologies that we use in our everyday digital lives, from browsers, , and data storage solutions, to complex CRM packages. Thousands in Switzerland, Japan, and Sweden are targeted by the Retefe banking malware ITRC: In 2014, there were data breaches reported in the US alone In 2014, JPMorgan Chase had 76 million accounts compromised, spending millions in remediation costs Wealth Managers today still rely on a set of last century technology that may not have received any security scrutiny in years, except from attackers. Identity theft and privacy invasion are common occurrences as the information becomes more spread out, and more difficult to protect. Last century software is insecure by design, as providers built products and attempted to add security later as an afterthought. Modern software needs to incorporate security approaches from the beginning, and be kept up to date while you are sleeping, to permit trust in the security of sensitive data. 9

10 Technology to empower human talent Our vision Technology in wealth management is not about replacing human expertise and experience, it is about, empowering human talent to provide the best advice and service and to achieve an attractive performance for their clients. At Etops, we are building the independent investment engine to enable wealth and asset managers to focus on clients and become more successful, scalable and profitable. Together with our clients we were looking for the technology, solutions and/or services to live up to today s investor needs. We found nothing. So, we decided to build it. Contact us to become part of the future of wealth management. Etops was founded on that premise. Etops Headquarters Bahnhofstrasse Pfäffikon SZ Switzerland Phone: About Etops Etops is the leading independent partner of choice of renowned family offices, multi family offices, wealth managers and sophisticated asset managers for business critical middle office, reporting, system solution outsourcing, data management and business projects. As of September 30, 2015 Etops clients managed assets in excess of CHF 20 billion. Etops is headquartered in Pfaeffikon SZ/Switzerland with offices in New York/USA and Bratislava/Slovakia. 10