Quick Poll: Technology Vital to Addressing Wealth Managers Concerns

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1 OpenWealth Quick Poll: Technology Vital to Addressing Wealth Managers Concerns Transaction Services

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3 Quick Poll: Technology Vital to Addressing Wealth Managers Concerns 3 Quick Poll: Technology Vital to Addressing Wealth Managers Concern is the latest thought leadership from Citi Securities & Fund Services. This white paper addresses the current concerns facing our wealth manager clients. Conducted in the third and fourth quarters of The poll surveyed approximately 20 wealth managers in the U.S. Executive Summary Market volatility, shaken client confidence and the current state of the regulatory landscape are all creating headwinds for wealth managers. While these are seemingly disparate challenges, technology can play a key role in helping to overcome these challenges by improving efficiency, increasing transparency and facilitating the use of alternatives. Growth Is Job #1 Before digging deep into reporting technology and vendor satisfaction, we broke the ice by posing a big-picture question to wealth managers. When asked to identify their current greatest concern from a list of choices, 58% of wealth managers cited growth in revenue and assets under advisement. The state of the regulatory environment came in second with 21% of those surveyed highlighting this as their greatest concern. This figure may reflect the fact that most wealth managers have already taken steps to improve their compliance and risk management processes. Another 16% cited process automation and scalability as a key area of focus. Which of the following best describes your greatest current Wealth Management concern? State of the regulatory environment 21% Client retention 5% Process automation and scalability 16% Revenue and AUM growth 58% The large focus on growth shouldn t come as a total surprise. For several years, wealth managers have struggled with market headwinds: Gone is the near-surety of the equity performance enjoyed during the 1990s and mid-2000s, when annual double-digit equity returns were the norm. True, the S&P has rallied some 111% since the March 2009 lows, 1 but this rebound may be fleeting and likely to be reversed over time, given concerns over the currency crisis in Greece or continued concerns regarding fiscal policy in the U.S. Equally important, while the equity markets have rallied, not all advisors and their clients have participated. Many clients were scarred by the financial crisis, and, whether clientdirected or advisor-directed, have been slow to get off the sidelines. Some, fearing another collapse of a major bank or broker-dealer, moved a large portion of their funds into FDICinsured bank accounts. For wealth managers, the important takeaway is that the bottom line has been impacted, making growth a key priority. Technology Has Multiple Applications To address the key priority shown in the previous exhibit, 56% of wealth managers cite new enhanced technology as the critical tool to meet their objectives. Another 50% (multiple responses were allowed) highlighted the expansion of investment advisory sales and services as vital to meeting their goals. The high response rate for this factor in particular should be expected, since a similar number (58%) of respondents identified revenue growth as a major objective. Cross-referencing responses to the first two questions yields some interesting insights. The interest in using technology is widespread, and not just confined to those wealth managers who highlighted growth as their key concern. Half of the firms citing the importance of new technology are leveraging such tools to address process efficiency through automation, or to help adhere to regulations. Some other conclusions can be drawn from the responses. First, wealth managers will become reliant on service providers to achieve their goals: Adjusting for multiple responses, 68% of wealth managers have plans to deploy either new technology, market research or other service providers. Almost one third (32%) will use two or more such providers. 1 S&P Rallies Most in One Year as Lawmakers Pass Budget, Bloomberg, January 2, 2013.

4 4 Citi Transaction Services Which tools and/or services are critical in addressing your key concern? Which tools and/or services are critical in addressing your key concern? 60% 50% 40% 56% 50% 30% 20% 10% 22% 22% 17% 0% New enhanced technology Expansion of investment advisory sales and services Expanded use of market research, marketing or social media Greater use of third-party middle- and back-office service providers Greater use of clearing, brokerage, trust and custody services Wealth Platform Pain-Points Wealth managers paint a mixed picture in regard to the functionality of their current platforms. Specifically, 71% rate their investor reporting as effective, with just 12% rating it ineffective. Investor web access and navigation is also highly rated, with 59% of wealth managers calling it effective ; in contrast, the advisor-facing front-end s usability and functionality was dubbed effective by a slightly lower figure (47%), with 24% rating it ineffective. How would you rate the functionality of your wealth management platform? Effective Neutral Ineffective Investor reporting 71% 18% 12% Investor web access and navigation Household management and reporting 59% 29% 12% 53% 35% 12% Trust accounting 50% 44% 6% Modern front-end usability and functionality Ability to aggregate data across multiple providers Automated portfolio rebalancing Access to international ordinaries 47% 29% 24% 29% 41% 29% 27% 67% 7% 17% 50% 42% Stated satisfaction with householding solutions belies conflicting views on how those services are defined. For example, while 53% of wealth managers rate their current platform effective for household management and reporting, only 29% assign the same rating to their platform s ability to aggregate data across multiple providers. Furthermore, just 27% rate their platform effective in terms of automated portfolio rebalancing. If householding is loosely defined as the ability to report in aggregate on all of an investor s in-house accounts, then many wealth managers are happy. If, on the other hand, householding is defined as the ability to not only report on, but also trade in all accounts, including those held away, then few wealth managers are highly satisfied. Taken together, low satisfaction rates with the front-end and true householding capabilities further supports the high proportion of wealth managers viewing new technology as vital to reaching their goals. Planned Changes to Asset Allocation Data in the table below reveals that wealth managers are planning changes to their clients asset allocations in the next 12 months, particularly with respect to alternative strategies and vehicles. For instance, 38% plan to increase their allocation to commodities, which have the potential to hedge inflation risk, or to perform well should emerging markets lead the global recovery. One third of wealth managers plan to increase their use of hedge funds, and 30% plan to increase their allocation to private equity. So while much has been written about concerns over disclosure and fees in the alternative space, wealth managers seem to have either wrestled concessions from managers, or have embraced tools and technology to increase portfolio transparency.

5 Quick Poll: Technology Vital to Addressing Wealth Managers Concerns 5 Please state the expected change to your clients allocations over the next 12 months. Increase Stay the same Decrease Commodities 38% 54% 8% Equities 35% 41% 24% Hedge Funds 33% 56% 11% ETFs 31% 63% 6% Private Equity 30% 70% 0% Fixed Income Securities 27% 40% 33% Mutual Funds 25% 56% 19% Real Estate 8% 75% 17% Just under one-third (31%) of wealth managers have plans to increase their use of exchange-traded funds (ETFs). This comes at an interesting time for the industry: On the one hand, price wars and product closures suggest consolidation for the industry. On the other hand, according to Strategic Insight, ETFs have garnered $44.8 billion in net flows YTD October 2012, while active U.S. equity and hybrid funds bled $85.1 billion. 2 Advisors continue to view ETFs as an effective tool to actualize a short-term investment theme, identify longterm beta or equitize cash while transitioning managers. For all these planned changes to their asset allocation, a fair number of wealth managers seem to be standing pat. For six out of eight strategies listed in the table above, at least 54% of wealth managers report no planned changes in their allocation. In the other two instances fixed income and equities 40% and 41% of wealth managers expect to keep the same asset allocation. This data suggests that many advisors are awaiting some clarity with regard to the fiscal cliff and the sustainability of the economic recovery before repositioning their clients portfolios. A Link Between Growth and Alternatives? Cross-tabulating this asset allocation data against the other survey responses reveals some intriguing findings. For example, focusing on the firms who are planning on increasing their exposure to alternatives (commodities, hedge funds, private equity or real estate), 89% of these firms also identified revenue and AUM growth as their greatest wealth management concern. Conversely, among the firms who did not identify revenue and AUM growth as their greatest concern, 88% aren t currently using alternatives at all. What can we glean from these figures? We caution that the data in the two instances could be correlated, rather than causal; nevertheless, it seems to suggest that there is a link between the increased use of alternatives and a focus on growing the business. At a minimum, the data shows that those not currently using alternatives have identified the current state of the regulatory landscape, process automation and scalability, and client retention as key concerns. Final Thoughts A key takeaway from Citi s autumn 2012 quick poll is that technology, be it deployed in-house or via a service provider, is vital to helping wealth managers increase revenue, reduce costs and increase efficiency. Returning to the use of alternatives, it could be the case that those wealth managers not using alternatives today might change that stance over time, if given the right tools to address their concerns over regulations and process automation. For more information on how OpenWealth can help wealth managers meet their business challenges, please contact Brian Corkery at (617) or brian.corkery@citi.com. 2 Strategic Insight Monthly Industry Review, October 2012.

6 6 Citi Transaction Services About Citi OpenInvestor SM Citi OpenInvestor SM is the investment services solution for today s diversified investor that combines specialized expertise, comprehensive capabilities and the power of Citi s global network to help clients meet performance objectives across asset classes, strategies and geographies. Citi OpenInvestor provides institutional, alternative and wealth managers with middle-office investment administration, fund services, custody, investing and financing solutions that are focused on their specific challenges and customized to their individual needs. For more information, visit openinvestor.transactionservices.citi.com. OpenWealth OpenWealth seamlessly aggregates household-level data across wealth management platforms, investment managers and third-party custodians, and offers award-winning unified managed household capabilities for a front-to-back solution that eases key operational and administrative burdens and lets managers focus on building relationships and growing their business.

7 Quick Poll: Technology Vital to Addressing Wealth Managers Concerns 7 About the Author Benjamin Poor Manager of Market Intelligence, Citi Investor Services Benjamin Poor leads Citi s thought leadership initiative, providing market research and analysis designed to assist clients of Citi Securities and Fund Services in their strategic planning and understanding of market trends. He has 17 years of experience researching the asset management industry, including manager due diligence, as well as retail and institutional distribution. Prior to joining Citi, Benjamin served as Director of Cerulli Associates Institutional Asset Management Practice. His research responsibilities focused on asset management, including institutional and high net worth channels. Benjamin was the lead author of High Net Worth Update, Global Multimanager, Hedge Funds: The Market for Absolute Return, and Institutional Products and Services for The Cerulli Report series. He also frequently served as a subject matter expert at conferences and for the financial press.

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