BEST PRACTICE CLIENT-CENTRIC SERVICE. Advances for custody and nominee platforms in the wealth management industry

Transcription

1 Advances for custody and nominee platforms in the wealth management industry

2 The Global Financial Crisis made a significant impact on the wealth of many investors around the world and triggered a number of regulatory changes including the removal of investment product commissions and increasing disclosure. As a result a number of key trends are emerging in relation to the role of wealth managers: 1. investors are demanding more transparency over their investments; 2. increasingly investors want tailored investment portfolios and services; 3. wealth managers have to be clearly value adding to justify fees; and 4. investors are increasingly price sensitive, and price pressure is leading to leaner margins The combined effect of these trends is that: 1. the emerging business model for the servicing of mass affluent investors and above by wealth managers is the provision of tailored portfolio based investment offerings as opposed to the provision of packaged fund based products. With such offers wealth managers can demonstrate value add in a transparent fashion; 2. the impact of thinning margins drives the need to reduce the number of layers of administration and operations between the investments and the client, targeting at the duplicate layers of custody often associated with managed fund based products (ie one layer for the fund, and one layer for holding the units in the fund); and 3. there is an increasing need for rapid and accurate data around client portfolios to be made available in order to be fed into wealth managers portfolio decision making tools, so that they can promptly react to client requests, changing markets or changing investment research A diagram depicting the fundamental shift from a product distribution based operational model to one of a portfolio based model is shown on the following page in Figure 1. 01

3 Client Product Advice / Sales Client Investor Investment Platform (with Subregister) Product Manufacture Investor Investment Platform (with Subregister) Product Custody / Security Services PORTFOLIO SERVICING MODEL PRODUCT SALES MODEL Figure 1 Summary of Rationalisation of Components in Supply Chain What is the role of custodians and investment platforms in the emerging new model? With the desire for cost reduction and process rationalization, the role of custodians and investment platforms under the portfolio model are converging, with the end game being to support wealth managers with overall pricing competitiveness and operational efficiency via a single layer of sub-registry (i.e. the aggregation of individual client holdings to a single omnibus holding) performed by the natural base custodian. Many custodians do not have the operational infrastructure, business model or desire to interact with individual investors. Rather they seek a wholesale relationship with wealth management providers (ie advisory and wealth management groups). This illustrates the need for a separation of the roles of custody as an asset holdings service from the administrative supporting roles in order to present custody services to investors. 02

4 A diagram outlining the indicative separation of roles between custody services provider and wealth manager is shown below. Scope of Wealth Manager Operations Client Custody Services Agreement between Custodian, Wealth Manager and Client Client Recruitment Document Signing Know Your Client Depositing Funds / Securities Client Decision Making Trade Allocation to Sub Accounts Order Placement and Execution Account Acceptance Custody Sub Account Opening Custody Account and Sub Account Data Trade Matching and Preparation of Multiple Sub Account Settlement Custody / Wealth Manager Services Agreement Custody Services (With SubReglster) Scope of Expanded Custody Services Figure 2 Emerging Operational Model for Custodians and Wealth Managers 03

5 What will be required of custodians to support the new model? On the assumption that many custodians mainstream operational model is that of supporting fund managers operating unit trust based funds, a number of key operational and systems enhancements may be required to support the multiportfolio operational model: 1. the introduction of a capability to individually record segregated investor specific custody sub accounts that hold ring fenced holdings for each individual client investor; 2. the processes, procedures and operations to consider the operation of subaccounts (ie which sub-accounts to market trades get placed into); 3. the IT infrastructure to support the provision of sub-account individual holding units and asset values to external wealth managers in a structured data format; 4. the introduction of a capability that facilitates settlement of bulk trades on behalf of a wealth manager s client base, and allows the wealth manager to proportion, or allocate, which client sub-accounts ultimately participate in the final settlement of that trade; 5. the processes and procedures that clearly allocate the different roles and responsibilities of the custodian and the wealth management group, particularly in the areas of: 1. account vetting, checking and approval 2. custody sub-account set up 3. trading responsibility and authority 4. settlement and obligations 5. account closure or transfer of securities; and 6. the executive support to develop and operate such a new model 04

6 What opportunities are available to custodians to strengthen their position in this market? As wealth management market competition increases, driven ultimately by consumer price pressures, there will be an increasing need for wealth managers to focus on core competency of servicing clients, and the need to achieve business scale. The need for such focus makes an outsourced custody function attractive. Ultimately many predict that the next stage in custody platform evolution will be for custodians to secure client loyalty by providing differentiating services and progress further into the business operations of wealth managers. One key opportunity area for this is the provision of integrated portfolio management technologies within the custody platform service suite. The key benefits of provision of a combined custody / portfolio management capability tracks the growing trend of providing data (content) and associated decision support tools (capability to put the data in context) from a single provider. The content being the portfolio holdings from the custody platform and sub-accounts, the capability being the integrated portfolio management, and even CRM, technologies to help wealth managers with their businesses. COMPONENT APPROACH INTEGRATED APPROACH Client CRM / Client Technology Client Integrated Technology Solution Software supplied to each Wealth firm Technology CRM / Client Technology Software supplied to Wealth Managers via custodian Integration Project for each firm Investment Platform with Custody and Sub-register Investor Investment Platform (with Subregister) Investment Platform with Custody and Sub-register Investor Investment Platform (with Sub register) Single intergration project Figure 3 Diagram showing transition of traditional component systems approach to integrated user interface approach to blend platform, portfolio management and customer management functions. 05

7 The technology requirements to enable this type of business and operational model, creates a new challenge for portfolio management technology development. The starting requirements include: 1. multi-tenancy to support many separate and segregated environments for each wealth management firm; 2. web based technology architecture to support distributed user access across many different firms 3. a broad array of portfolio management and decision making techniques to support the diverse and varied approaches undertaken by wealth management groups. Capabilities such as model portfolios, models of models, client overlays, multiple asset classes, multiple currencies etc will be essential starting points; 4. Open architecture and Integration flexibility to tightly integrate and synchronize with data from custody systems; and 5. Ability for any desktop interfaces for wealth managers and their clients to be rebranded and re-skinned in order to be suitable for different wealth management firms and their clients Key measures that will differentiate technologies in this area over each other will include: 1. Ability for portfolio management technology to support a scalable wealth management portfolio operation (in order to deal with inevitable margin pressure) 2. Flexibility of licensing approach to achieve cost advantages for wealth managers 3. Whether wealth managers can in turn use the same technology base to service their clients supporting their branding and service styles 06

8 Conclusion The changes outlined in this paper represent both opportunities and threats to the existing wealth management supply chain participants. Custodians and securities services providers who provide additional value add capability can provide benefits for a wide range of industry participants: 1. Wealth Managers benefit as they are provided with a one stop shop complete outsourced investment platform containing custody / settlement / asset servicing integrated with portfolio management tools. This provides specific benefits of: 2. Eliminating the need for complex and risky custody to portfolio management software integration projects; 3. Providing portfolio content in context where wealth managers need it, ie in the process of managing portfolios; 4. Taking away the need for selecting, licensing and maintaining portfolio management software, and the integration and reconciliation with external custody providers 5. Custody and security services businesses benefit as they can provide a compelling and differentiated service offering to their clients: 1. Attract and retain clients; 2. Increasing overall revenue and margin; 3. Further embedding into their clients business operations to better retain clients; and 6. Possibly defining a new bar of service standard that could provide significant first mover opportunities to an industry undergoing rapid change 7. Software Providers can benefit via increased market coverage and penetration To this end, many expect that new and collaborative relationships will be formed between industry participants to best take advantage of this opportunity. 07

9 About Financial Simplicity Financial Simplicity is a wealth management technology provider specializing in solutions to support mass tailored portfolio manufacturing including IMA SMA MDA and UMA programs. Financial Simplicity excels in the disciplines of modeling, construction and compliance for wealth managers and service providers globally. Financial Simplicity offers purpose built portfolio technologies designed to extend investment platforms to meet the new needs of wealth management businesses. Financial Simplicity s Enterprise Edition technology was conceived, designed and proven to support custody and security services platforms extend their business operations with portfolio management functions, powering hundreds of millions of dollars globally. For further information contact Financial Simplicity at: sales@financialsimplicity.com.au Tel: