Banking & Financial Services. White Paper. Automated Advice Delivery Platforms: Simplifying the Investment Management Game

Transcription

1 Banking & Financial Services White Paper Automated Advice Delivery Platforms: Simplifying the Investment Management Game

2 About the Authors Srinivasa Kumar Yerchuru Srinivasa Kumar Yerchuru heads the Capital Markets practice within the Banking and Financial Services (BFS) unit at Tata Consultancy Services (TCS). With over 20 years of experience in the BFS domain, he currently spearheads large strategic programs across capital markets and key market initiatives. Yerchuru's areas of interest include blockchain technology, digital solutions for wealth management, and data commercialization. He holds a Master's degree from the Indian Institute of Science (IISc), Bangalore, India. Ganesh Raghavan Padmanabhan Ganesh Raghavan Padmanabhan is a Domain Consultant with TCS' BFS unit. He has nine years of IT solutions and consulting experience in the BFS domain. Padmanabhan's focus areas include the exploration of new industry solutions for capital markets. He holds an MBA degree from the S P Jain School of Global Management, Singapore and Dubai.

3 Abstract Technological advancements have led to the growth of fintech firms that are disrupting the competitive landscape of the financial services industry. By fusing technology with financial services, these firms are broadening client access to a host of self-service options. These include the use of automated advice delivery platforms and online tools to guide the client on where and how to invest, thus empowering them as sole decision makers and improving the overall investment process. While these advanced technology tools are sure to enhance customer experience and minimize client servicing costs, they pose a threat to the traditional wealth management business model. Evolving regulatory demands, margin pressures, emerging technologies, and market shifts are compelling wealth management firms to reinvent their business models and offer tailored products and services to customers. This paper proposes two service models that wealth management firms can adopt based on their broader strategy and vision, to significantly minimize costs while driving revenues.

4 Contents Introduction 5 Demystifying Automated Advice and Investment Management 5 First, the basics 5 Automating the financial advice delivery process 6 Regulations can t be ignored 7 Deploying Intelligent Advisor Platforms 8 How Clients Can Use the Automated Advice Delivery Platform 9 Conclusion 9

5 Introduction Private banking and wealth management firms have been subject to stringent regulations, especially with regard to taxation, transparency, and client protection. Profit erosion due to increasing cost-to-income ratios arising from higher capital requirements, liquidity management challenges, and rising costs of client retention and acquisition further complicate the situation. In addition, the rapid proliferation of emerging technologies like mobile, analytics, and artificial intelligence have compelled wealth management firms to establish continuous innovation strategies. The combination of these internal and external factors has driven firms to reimagine their business and service models. The industry started this transformation by expanding its consumer base from UHNWIs and HNWIs to clients from lower wealth segments. The steady shift in focus helped gain market share with the mass affluent and retail segments that hitherto had limited access to advisory services due to high advisor fees. This shift toward mass offerings, coupled with continuous market disruptions called for increased oversight to ensure client protection and transparency of investment performance, thereby raising the bar for service delivery. In response, wealth management firms started differentiating their services through multi-channel engagement models primarily governed by client segments. However, there exists a rising need for a service model that improves on broad, segment-based advice through a higher degree of customer-centricity within each segment, while optimizing Wealth management firms are being forced to rethink costs. how they can convince their Firms have started to embrace the automated advice and investment clients to choose the right management model, commonly referred to as the robo-financial advisor, to investment portfolio based attract the mass affluent and retail segments. This automated low cost on their defined objectives, advice delivery model simplifies the investment life cycle and drives instead of choosing individual investment investors to take decisions on their own. It uses next-generation strategies or asset classes. technologies to enable clients to make investment decisions, based on their individual investment objectives, the risks involved, and the time horizon they are comfortable with. Demystifying Automated Advice and Investment Management First, the basics Many financial intermediaries (fintech firms) have embraced automated advice delivery models to commoditize the basic financial advisory services provided by wealth management firms. Largely, they use online tools to offer personalized recommendations to clients, in the areas of financial planning, portfolio selection, and investment advisory. By offering such tools on client execution-only or client-directed platforms, these intermediaries have enabled investors to make their own investment decisions. 5

6 There is a wide spectrum of such personal financial planning tools available today. While basic solutions offer sample predefined portfolios based on the client's risk appetite, advanced models offer more options for customization and personalization. They capture a client's specific investment goals and recommend best-fit strategies for asset allocation. Most automated solutions assess the client profile to make investment recommendations and also help identify suitable investment options. The solutions then link the client profile and risk tolerance to the asset allocation recommendation engine. This engine in turn links to the client's trading account and integrates with the external trading platform. Clients can therefore choose their own investment strategies instead of the traditional approach of seeking advice from wealth management investment professionals. Automating the financial advice delivery process We have observed that, in general, asset allocation recommendations tend toward collective investment schemes (also known as mutual funds) or Exchange Traded Funds (ETFs) and Exchange Listed Instruments (ELIs). This is probably because the risk associated with these products is aligned to the profile and risk tolerance of majority clients. The other reason why only selected products are available on automated advice delivery tools could be the fact that products like structured products and derivatives require subjective assessment, and therefore need the manual intervention of a financial advisor. Figure 1 is a high-level depiction of how an automated advice delivery platform works. Client Channels and Modes of Delivery Personalization 1 Client Onboarding Account Aggregation Client Accounts Goal Management Client Profilng Reporting Scenario Analysis Digital Access Financial planning Asset and portfolio allocator Portfolio modelling Order management system Indexing Performance management Portfolio management Execution Product selection Portfolio models Alerts & Notifications 5 Automated rebalancing Diversification Automated deposits and transfers Tax loss harvesting Legend: 1. Client Management 2. Planning & Modelling 3. Allocation & Execution 4. Monitoring 5. Automated Advice Figure 1: Automating the Financial Advice Process (Source: TCS Internal) 6

7 Aside of offering investment recommendations, analyzing risk trends, defining product risk based on market conditions and clients' risk profiles, and educating investors on market developments, such a platform helps with the following: Customer data management: The platform obtains information about clients, their investment objectives and goals, and assesses their risk tolerance level. Some firms update client information using event-based triggers configured in the platform and also scan their social media profiles. Most firms continue to assess and update the client profiles based on clients' activity on the platform and their individual trading patterns. Planning and modeling of investment strategies: Asset allocation strategies are provided along with standard portfolio models for clients to choose and execute based on their investment goals and objectives. Allocation and execution of investments: The platform enables the creation of new portfolios and supports trading activity, by linking trading accounts and transferring orders to the in-house or proprietary trading platform (brokerage) for execution. It checks and monitors the risk and returns from the existing portfolio, and compares them with clients' investment strategies and goals. Automated portfolio rebalancing: The platform has portfolio rebalancing capabilities when the underlying base model portfolio changes, or clients change their profiles, or a periodic review of an existing portfolio requires changes, such adjustments to the portfolio are brought about automatically on confirmation by the client. Subsequently, the changes are executed and clients receive respective notifications. Client communication: The platform allows frequent interaction with clients by way of timely reports and alerts through mobile notifications and s. The portal of the platform enables the monitoring of portfolios. It also provides information to define and set preferences like prohibition of action on unauthorized recommendations, and pre-approvals for automated execution of trades. Regulations can't be ignored Automated advice delivery platforms, like all financial services platforms, need to comply with industry regulations. These include: n Compliance with the suitability obligation, where the platform should have some mechanism or matching algorithm that links the client's risk tolerance and investment preferences with product ratings, while providing automated advice and execution outputs. n Establishment of necessary internal controls to adequately supervise the integrity of the solution, and the use of tools, methodologies, and algorithms, as well as to satisfy basic privacy concerns (such as the ones related to Anti-Money Laundering guidelines and identity thefts). n Ensuring process transparency through improved communication with all stakeholders, informing clients about the risks associated with automated recommendations, and performing frequent tests and reviews of recommendations. 7

8 Deploying Intelligent Advisor Platforms To build automated advice engines, firms will need to invest in enhancing their digital channels using Big Data and analytics tools, to create algorithms and computing systems that deliver accurate results. Investing in building an automated advice platform will help wealth management firms improve client experience by providing timely personalized recommendations. The platform will also increase firms' productivity by using limited resources and reduce operational costs by eliminating manual intervention. Client Collaboration Account Management Service Requests Financial Advisor s Mobile App Client s Mobile App Portfolio Management Online Portal Financial Planning Investment Performance Automated Advice Engine Customer information (internal & external) Personalized advice delivery engine Investment algorithm & analytics engine Aggregated portfolio information Rules engine Investment research database Client s goals and objectives mapping with segmentation Product performance & risks Peer performance & portfolio Wealth Management System Figure 2: Proposed Automated Investment Advice Platform (Source: TCS Internal) As can be seen in Figure 2, firms need to build an automated advice platform with indigenous algorithms that will continuously screen opportunities to provide better returns to investors. The algorithm engine should incorporate data analytics tools that integrate with internal systems like client information, portfolio management, and the firm's research database. The platform should also include a rules engine that enables the algorithm engine to identify the right investment opportunities taking into account any restrictions based on pre-defined rules. The platform should then use external information to process and benchmark the performance of such a portfolio against other clients' portfolios, and simulate the results under various market conditions. Based on these computations, the final recommendation should then be transferred to an online collaboration channel web portal, , or mobile app. The same recommendations would also need to be recorded in the core wealth management platform where the other relevant client and/or financial advisor related actions, like execution and portfolio monitoring, can be performed. With such a platform, wealth management firms can offer timely investment advice to clients, suited to their requirements and preferences. They can also increase their customer base by reaching out to diverse segments including retail, mass affluent, and Millennials. The improved process transparency and the fact that clients will be more in control of their investments, will help wealth management firms greatly enhance customer experience. 8

9 How Clients Can Use the Automated Advice Delivery Platform Automated advice will provide an opportunity for wealth management and private banking firms to improve client-centricity by offering superior and personalized services irrespective of the client segments. Here are two ways that such a platform can be used by clients: Option 1: A do-it-yourself (DIY) platform for the retail and mass affluent segments. This will enable clients to directly interface with the automated advice platform. They can view and monitor the performance of their existing portfolios or perform a new transaction based on their preferences and risk appetite. The platform can also perform auto-rebalancing of the portfolios considering the client's choices of auto or manual rebalance, and the conditions and frequency set for rebalancing. Option 2: A Recommendation platform that can be modified using a collaboration tool for the HNWI and UHNWI segments. This option will have a mechanism to facilitate collaboration between clients and financial advisors. It will allow clients to input requests through mobile or online channels that will be routed to the concerned financial advisors. The financial advisor will then forward the request, along with the client's investment objectives and other critical information, to recommendation engine. This engine will execute a preset algorithm, applying all the relevant data to deliver actionable insights that will help make informed investment decisions. The financial advisor will then advise the client accordingly, based on the insights obtained from the engine. Conclusion Generally, it takes more than five to six business days for a financial advisor to provide the best-suited advice to an investor after a meeting. This is regardless of whether it is an onboarding meeting with a new client or a servicing meeting with an existing one. The reason for the delay in delivering advice, and in executing the client's decision once it is taken, can be attributed to manual processes. Today's cut throat business environment requires financial advisors to provide prompt and accurate advice in near real-time. This is evident in the success of the existing roboadvisor platforms that deliver superior client experience by giving critical insights that empower clients to make the right investment choices. To address this market need, wealth management firms have to reimagine their advice delivery models and adopt automated advice delivery platforms. Today, several fintech firms provide such automated advice and investment solutions. Traditional wealth management and private banking firms have to act fast if they want to stay relevant. They should develop a coherent value proposition and alter their business and service models to offer an advanced, secure, automated advice and investment solution to their clients. We propose that firms enhance their existing infrastructure by incorporating concepts like analytics and business process management (BPM). We believe that such advanced, technology-backed platforms will offer a win-win opportunity to wealth management firms, helping them retain existing customers and attract the digitally-savvy Millennials. 9

10 About TCS' Banking and Financial Services Business Unit With over four decades of experience in partnering with the world's leading banks and financial institutions, TCS offers a comprehensive portfolio of domain-focused processes, frameworks, and solutions that empower organizations to respond to market changes quickly, manage customer relationships profitably, and stay ahead of competition. Our offerings combine customizable solution accelerators with expertise gained from engaging with global banks, regulatory and development institutions, and diversified and specialty financial institutions. TCS helps leading organizations achieve key operational and strategic objectives across retail and corporate banking, capital markets, market infrastructure, cards, risk management, and treasury. TCS has been ranked #1 in the 2015 FinTech Rankings Top 100 of global technology providers to the financial services industry, by both, FinTech Forward (a collaboration of American Banker and BAI) and IDC Financial Insights. TCS has also been recognized as a 'Leader' and a 'Star Performer' in Everest Group's 2015 PEAK Matrix report for Capital Markets Application Outsourcing (AO), as well as a 'Leader' in the 2015 PEAK Matrix report for Banking Application Outsourcing (AO). Contact Visit TCS Banking and Financial Services unit page for more information bfs.marketing@tcs.com Blog: Drive Governance Subscribe to TCS White Papers TCS.com RSS: Feedburner: About Tata Consultancy Services (TCS) Tata Consultancy Services is an IT services, consulting and business solutions organization that delivers real results to global business, ensuring a level of certainty no other firm can match. TCS offers a consulting-led, integrated portfolio of IT and IT-enabled infrastructure, engineering and assurance services. This is delivered through its unique Global Network Delivery ModelTM, recognized as the benchmark of excellence in software development. A part of the Tata Group, India s largest industrial conglomerate, TCS has a global footprint and is listed on the National Stock Exchange and Bombay Stock Exchange in India. IT Services Business Solutions Consulting All content / information present here is the exclusive property of Tata Consultancy Services Limited (TCS). The content / information contained here is correct at the time of publishing. No material from here may be copied, modified, reproduced, republished, uploaded, transmitted, posted or distributed in any form without prior written permission from TCS. Unauthorized use of the content / information appearing here may violate copyright, trademark and other applicable laws, and could result in criminal or civil penalties. Copyright 2016 Tata Consultancy Services Limited TCS Design Services I M I 03 I 16 For more information, visit us at