WHITE PAPER Three Forces Affecting Wealth Management Growth and Success in Europe

Transcription

1 WHITE PAPER Three Forces Affecting Wealth Management Growth and Success in Europe Objectway.com

2 ABSTRACT This white paper explores three influences impacting the wealth and investment management industry in Europe. Taken separately, each of these forces has proven to be a complex challenge for a majority of wealth management firms. When considered together, however, they can combine to create a perfect storm that can overwhelm a firm. On the flip side, these forces can also represent new opportunities for growth and success. Our goal in Three Forces Affecting Wealth Management Growth and Success in Europe is to inform wealth managers about these three advancing trends so that they can determine how best to address and harness the opportunities they bring. Firms that actively implement efficient solutions to these challenges are the ones that will be in the best position to serve their clients and grow and retain more assets.

3 Three Forces Affecting Wealth Management Growth and Success in Europe INTRODUCTION Today s wealth management landscape in Europe is changing more rapidly on more fronts than at any time in recent memory. Wealth management firms from the UK and the Netherlands to Switzerland and the Czech Republic have felt the vortex created by the interplay of three rapidly advancing industry trends: REGULATION, RISK AND COMPLIANCE Interpreting and practically implementing a web of European financial industry regulations has proven quite challenging for the typical private bank and wealth management organization. DIGITAL MOBILITY Mobile technology is quickly changing client expectations for interacting with their wealth management professionals and investment information. THE MOVEMENT TOWARD THE CLOUD AND BPO Because of compliance requirements and trends such as digital mobility, wealth management technology is moving too fast for some wealth management organizations to keep pace with these challenges using in-house solutions. Moving from on-premise to cloud-managed infrastructure or business process outsourcing (BPO) can reduce the impact. 3

4 Three Forces Affecting Wealth Management Growth and Success in Europe 1 REGULATION, RISK AND COMPLIANCE European regulatory reform has begun to completely transform the investment industry. Over the past several years, wealth management firms have faced a slew of changes resulting from MiFID, EMIR, CRD IV, structural change and Solvency II. Now MiFID II, along with these other regulatory initiatives, will bring further changes to the structure of investment markets and the business models of wealth management firms. 1 MiFID II, which builds on MIFID, has already begun rolling out and will continue to do so over the next two years. Why then are wealth management firms still struggling with the original MIFID introduced in 2007? Costs, qualified people, reluctance, and complexity to implement have all played a role. However, the two factors that have placed the greatest burden on wealth management firms are the complexity and associated costs of keeping pace with what for some feels like an onslaught of regulation. Many CIOs have communicated to Gartner the extreme difficulty in managing a changing environment where regulations directly or indirectly affect between 30% and 50% of their discretionary IT budget. Market Trends: Banking, Worldwide, Gartner 1 MiFID II: Time to take action, Wealth & Asset Management, Ernst & Young,

5 HIGH COST OF COMPLIANCE No question, satisfying Europe s advancing regulatory program has clearly required wealth management firms to spend a large portion of their operations budgets, and is viewed as much more important than other business-critical priorities such as cost reduction and data security. 2 Suitability, know your customer (KYC) and related regulatory requirements will continue to have a major impact on wealth management firms operations and technology. MiFID II s suitability requirements mean that wealth managers must detail how the advice they give will meet the client s objectives. They will also have to demonstrate whether they will provide an ongoing assessment of suitability, and indicate whether the advice given is provided on the basis of a broad or restricted analysis of the market and range of financial products. 3 Moreover, If an advisor wishes to describe itself as independent, it will need to assess a sufficiently wide range of instruments from a range of providers, not just the firm s own products. Equally important, if an advisor offers products that have close links to the firm, these links will have to be disclosed at an early stage. 4 SUITABILITY VARIES BY COUNTRY To further complicate matters, the interpretation of suitability and KYC regulations varies from country to country across the European Union. In some countries, for example, the regulator insists on quantifiable measures to control client investments, while in others, it places more emphasis on maintaining client records and interaction history. In the UK, for instance, the focus is on documenting client interactions, in essence recording as much information as possible about the client so that the firm can demonstrate know your customer compliance. In so doing, the firm can justify the risk profile and client investment mandates. In many cases, clients choose their own risk and investment asset allocation mandate based on objective information provided by the wealth management firm. This absolves the discretionary manager of any responsibility from offering advice (in the opinion of some managers). In their view, with a fully maintained client record of interaction, the firm can prove that it is managing a client s money based on the information it has given to the client. In the Netherlands, on the other hand, the risk associated with an investment portfolio is more often analysed in terms of volatility. Normally, volatility is based on the standard deviations of portfolio asset classes and how these asset classes are correlated to one another. 2 Technology and Operations Trends in the Wealth Management Industry, WealthBriefing, MiFID II: Time to take action, Wealth & Asset Management, Ernst & Young, MiFID II: Time to take action, Wealth & Asset Management, Ernst & Young, 2014

6 The Dutch regulator publishes its AFM-approved asset classes with pre-calculated volatility measures. In this way, a firm can compare its client portfolio risk versus the published and approved risk provided by the regulator. Moreover, the regulator has an easy way to check that firms are managing client money fairly and suitably. CONVERGENCE WILL SIMPLIFY CHALLENGES, BUT IN THE MEANTIME By whatever means a wealth management firm is applying suitability today, the two extremes mentioned above will converge over time. Why? The main reason is that recording client KYC information leads to a better risk profile, and a good risk profile is only good if the portfolio stays within the constraints of risk associated with it. In the meantime, the result of this divergence of views has created two technology approaches. One has led to a dramatic increase in demand for structured onboarding tailored to wealth management industry processes and information recording requirements during client acquisition and review. The other approach is to implement quantifiable measures of risk and asset allocation to ensure that suitability is maintained and can be verified constantly and automatically across the firm s portfolios. Whichever approach your firm takes, your methods will need to converge in the future to accommodate the convergence that will take place in the industry. KEY TAKEAWAYS In summary, every wealth management firm should understand these three realities: Onboarding KYC means maintaining detailed records. Suitability, risk management, and asset allocation require checking investments. Compliance requirements are converging, merging onboarding with objective measurable risk/asset allocation assessment. In the words of the chief compliance officer at one Objectway European client, Wealth management firms that fail to practically apply record keeping and suitability checks face censure by the regulator, bad publicity and a blemish on their reputation as a trusted advisor. But there is also a great deal of potential upside to the compliance challenge, according to John Liver, Head of Global Head of Global Regulatory Reform at Ernst & Young LLP (UK): Firms that manage the regulatory agenda as part of their strategic evolution and maintain flexibility will capture market opportunities that elude those that view implementation merely as a compliance task. 5 5 MiFID II: Time to take action, Wealth & Asset Management, Ernst & Young,

7 Three Forces Affecting Wealth Management Growth and Success in Europe 2 DIGITAL MOBILITY Digital mobility, the second major force requiring examination, is not just driving major changes in wealth management; it is changing the way we interact with one another in every aspect of life. Smartphones and tablets continue to spread faster than any technology in the past century. By the end of 2016, 760 million tablets are expected to be in use globally, and roughly 1/3 of these mobile devices will be purchased by businesses. 6 BY THE END OF /3 Million tablets are expected to be in use globally. Of these mobile devices will be purchased by businesses. The mobile channel remains a high priority for banks and their customers, but banks are still struggling to use the channel effectively to drive revenue, cut costs, and improve customer engagement. 7 Indeed, while there is now considerable enthusiasm for mobility, most organizations still have substantial work to do to make mobility a core and beneficial element of their business. 8 6 The Connected Advisor: The Rise of Digital and Social Advice in Wealth Management, PriceWaterhouseCoopers, Aug Market Trends: Banking, Worldwide, 2014, Gartner, Mobility: Fueling the Digital Surge, Accenture Mobility Insights Report 2014, Accenture, 2014

8 In the wealth management segment, specifically, there has been a fragmented response to providing the industry with a cohesive approach. Some of the large banks have invested heavily in mobile technology for their retail business, and this has flowed into their wealth businesses. However, in general the industry has been slow to adopt mobile technologies. Excuses such as it s not secure and our clients don t understand it were put forward early on, but are now largely disappearing as the momentum of demand forces the firms to provide mobile applications for clients and advisor communities to varying degrees. ESSENTIAL FOR CLIENT RETENTION Indeed, clients using smartphones and tablets have discovered that they can use them to do much more than make phone calls and browse the Internet. Tasks that previously required a visit to the bank or phone call to their portfolio manager can now be accomplished with a mobile app. These developments have led to increasing demand for more interactive and immediate information about client portfolios. For example, clients are asking their wealth manager: Why can t I see my latest valuation on my phone or ipad? And why can t I buy or sell some shares? The rationale is simple. If they are now regularly reviewing their bank account and making payments with their mobile phone, why can t they look at their investments and buy a few shares? Along with these mobile apps, clients are demanding greater self-service investment capabilities. Of course, it s not just clients who want real-time mobile investment information. For wealth managers trying to stay one step ahead of their clients, mobile support has rapidly become a necessity. Advisors now require mobile access to client information and real-time market data for client discussions and alerts when changes are made to client portfolios so that they can provide timely advice to clients. IMPACT OF DIGITAL MOBILITY ON FINANCIAL PERFORMANCE As if these considerations weren t motivation enough, consider the impact of digital mobility on a firm s overall financial performance. In a recent Accenture digital mobility survey, early adopters of mobile technology, characterized as mobility leaders, saw a significant bump in their financial performance. These companies, around 10 percent of the survey sample, were more likely than others to say they posted exceptional financial performance. For example, just under half of these mo- 8

9 bility leaders (49 percent), compared with only (29 percent) of others, said their company s overall financial performance was far above the industry average. 9 KEY TAKEAWAYS The rapid advance of mobile devices in all aspects of daily life has put pressure on businesses across the board to adopt digital mobility applications. The wealth management sector is no exception. In short: Smartphones and tablets are being used by wealth managers and investors with increasing regularity for collaborative reporting and buying and selling shares. These mobile devices are also seeing wider use for collaborative financial planning. The out of office experience the ability to access portfolio information anytime anywhere is proving to be a powerful lure for a wide swath of investors and will likely have an outsized effect on client retention. Mobility leaders are recording better financial performance than mobility laggers. Our clients and partners across Europe tell us that the mobile technology train has started to move and is picking up speed. If wealth managers don t get on it fast, they will be left behind and begin to lose their clients Luigi Marciano, Chief Executive Officer, Objectway Financial Software 9 Mobility: Fueling the Digital Surge, Accenture Mobility Insights Report 2014, Accenture,

10 Three Forces Affecting Wealth Management Growth and Success in Europe 3 THE MOVEMENT TOWARD THE CLOUD AND BPO The steady barrage of new regulations, together with fast-moving innovations such as mobile apps, has made it difficult for some wealth management firms to effectively adapt their in-house systems to keep pace. Moving from on-premise to a cloud-managed infrastructure or business process outsourcing (BPO) solution can reduce the impact and potentially the cost for these organizations. In a recent WealthBriefing study, the majority of respondents said that outsourcing is less developed in private banking/wealth management than in other financial services sectors. The data shows that relatively few firms are choosing to outsource various business functions even though those functions are obvious candidates for it. 10 THE COST OF KEEPING CURRENT Implementing change always involves upfront cost, in most cases a significant cost. Larger firms can more easily absorb such costs, but increasingly wealth management firms of all sizes are pressed to increase margins. Usually increased demand fuels higher margins and consequently the additional cost is covered. However, wealth management does not have dramatic year-on-year demand increases. Rather, its growth is more modest and predictable. 10 Technology and Operations Trends in the Wealth Management Industry, WealthBriefing,

11 ,9% DECREASE IN NUMBER OF PORTFOLIOS MANAGED: UK WEALTH MANAGEMENT INDUSTRY +10% INCREASE IN PRETAX PROFITS: UK WEALTH MANAGEMENT INDUSTRY +1,5% INCREASE IN PRETAX PROFIT MARGINS: UK INVESTMENT MANAGERS +1,9% +1,1% +18% +3,9% +5,5% INCREASE IN PRETAX PROFIT MARGINS: UK FULL-SERVICE WEALTH MANAGERS In the UK, for example, the number of portfolios managed in the wealth management sector decreased 0.9 percent on average across the sector in 2012 and increased 1.1 percent in 2013, with full service wealth managers seeing a gain of 3.2 percent. 11 And while absolute pre-tax profit across the wealth management industry grew 10% in 2012 and 18% in 2013, profit margins grew by much less. Investment managers saw their pre-tax profit margins increase by 1.5 percent in 2012 and 3.9 percent in 2013, while full service wealth managers increased their profit margin by 1.9 percent in 2012 and 5.5 percent in FUTURE-PROOFING WEALTH MANAGEMENT SOLUTIONS Within these confines, firms have to react to the rapid increase in demand for digital mobility and other technology advances, and also address challenges such as how to use social media to support and help market their business more effectively. These are sea-change events that demand immediate attention and a resulting cost. In addition to the advantages that come with future-proofing their mission-critical wealth management systems, wealth management firms also cite greater freedom to focus on their core business activities as a key benefit to outsourcing. 13 Efficiency improvements and cost reductions, not surprisingly, rank high on the list of advantages of BPO. Finally, nearly one third of wealth managers say that replacing fixed costs with variable costs is a benefit to BPO. It should come as no surprise that cloud services and shared services are largely driven by the need to reshape the cost structure of the IT budget UK Wealth Management Industry Report 2014, Compeer Limited, UK Wealth Management Industry Report 2014, Compeer Limited, Market Trends: Banking, Worldwide, 2014, Gartner, Techhnology and Operations Trends in the Wealth Management Industry, WealthBriefing, 2013

12 THE RISE OF SOPHISTICATED CLOUD-BASED SOLUTIONS We have seen large firms and smaller firms react in different ways to these pressures. But the underlying trends are similar. They include a greater openness to outsource IT infrastructure and operations along with more acceptance of standardized cloud-based products. Even some of the larger firms have taken gradual steps to move their infrastructure and business support applications outside to be managed by application provider data centers. Traditionally the software within these firms was installed on servers purchased and supported onsite by their IT groups. Now more firms have opted to allow the software provider to manage and support required system hardware from its data center and for the firm to use the solution via the Internet. In these instances, the software developer is now the complete service provider. Other service providers take it a step further by offering business process outsourcing managing all of the wealth management firm s business operations externally. In addition, small and midsize firms are now more likely to use solutions out of the box, in other words, the same standard configurations that everyone else uses. The market for standard solutions was defined by horizontal software products such as Microsoft Office and Salesforce for CRM. However, vertical applications such as wealth management software has matured to the point where similar standards can be applied and offered to firms at a low cost. This development is a major advantage when you consider that, prior to this, sophisticated portfolio management systems were the sole province of the larger firms. DECREASING RESISTANCE The prospect of implementing sophisticated off-the-shelf wealth management solutions has traditionally been perceived as a risk and even a threat by many IT departments. However, CIOs and IT groups are increasingly warming to this possibility. After all, their firms gain access to new technology advances, while they become trusted advisors and consultants for their employers. This trend represents a key shift in the wealth management industry. In previous years, Gartner surveys documented considerable interest from financial services organizations in cloud-based solutions that did not materialize into deals. In 2013, however, a number of these cloud services deals have actually been signed, especially on the infrastructure-as-a-service (IaaS) front. 15 In 2014, we have seen this trend accelerate as demand for cloud-based, IaaS or software-as-a-service (SaaS) solutions have begun to take off. 15 Market Trends: Banking, Worldwide, 2014, Gartner,

13 Firms that need greater control of their infrastructure and operations, and that have the staff, budgets and inclination to keep their systems up to date will be less compelled to move to a cloud-based or BPO solution. If indeed all these factors are in place, a well-managed, in-house, on-premise wealth management system can prove to be a unique and significant competitive advantage. But for other firms struggling to keep pace with regulation and new technology trends there is a clear business case for considering a cloud-based or BPO solution. KEY TAKEAWAYS Old values are changing fast as objections to business process outsourcing dissolve especially for small and midsize firms. Among the things to keep in mind when considering the rapidly changing wealth management technology space is: When it comes to cloud-based and BPO solutions, IT departments are evolving into expertise and consulting departments. Standard-based data centers have helped to overcome the security obstacle standing in the way of BPO adoption. Cloud-based software-as-a-service offerings enable wealth management firms to future proof their systems, focus on their core business activities, and reduce overall system costs. The bottom line is this: There is clear and compelling evidence to suggest that firms that standardise their IT infrastructure and solutions and make use of the cloud or BPO will lower their costs and stave off the recurring problem of system obsolescence. 13

14 CONCLUSION There is no question that the three industry trends profiled in this paper regulatory compliance, digital mobility, and cloud-based and business process outsourcing have advanced to such an extent that they are now among the three most powerful influences being felt by wealth management firms across Europe. Instead of being viewed as three-unrelated trends, it is easy to argue that the outsourcing movement is emerging as a solution to the cost and complexity of regulatory compliance and digital mobility, among other technology trends. But what about the relationship between regulatory compliance and digital mobility? Can digital wealth apps help improve compliance needs? There is evidence to suggest that they will have a growing positive impact. Suitability and KYC requirements will certainly benefit from the ability to document conversations and keep records wherever the advisor and client happen to be. Better compliance management and digital mobility solutions can also have a considerable positive effect on gaining and retaining clients. This is also true of outsourcing to the extent that it makes it easier and more affordable to keep up with regulatory changes and technology trends, while enabling the firm to focus on its core business activities serving clients rather than continually enhancing in-house systems. The good news is that today there are excellent solutions to each of these challenges. Whether the need is for an in-house system, cloud-based service or BPO solution, wealth management firms have more options than ever to solve the challenge of keeping up with regulations such as MiFID II and technology trends like digital mobility. The firms that meet these challenges head on by implementing solutions to effectively address them are the ones that stand to reap the greatest rewards.

15 CONTACTS To learn more about the themes and technologies discussed in Three Forces Affecting Wealth Management Growth and Success in Europe, please contact: David Wilson Director, London Peter Schramme Executive Vice President, Brussels Alberto Cuccu Executive Vice President, Milan ABOUT THE AUTHORS For more than two decades Objectway Financial Software has been helping wealth management firms tackle compliance and technology challenges like those discussed in Three Forces Affecting Wealth Management Growth and Success in Europe. Founded in 1990, Objectway is the leader in Italy and one of the top European players in the development and deployment of wealth management software solutions for the financial services industry. The company s flagship product, Objectway Financial Suite (OFS), is the trusted choice of leading financial services companies across EMEA. From offices in Italy, Belgium and the UK, Objectway s 400 employees support more than 50,000 investment managers in 13 countries who manage more than half a trillion euros in wealth. For more information about Objectway visit To learn more about Objectway s cloud-based solutions, visit

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