WEALTH MANAGER S TAKE ON OUTSOURCING

WEALTH MANAGER S TAKE ON OUTSOURCING ABOUT THE STUDY This research study is based on a survey conducted by Wipro Technologies and FSO Knowledge Xchange (FSOkx) in late 2007 to understand: The changing face of the Wealth Management industry in the face of expanding opportunities, greater competition and more demanding customers. Wealth managers outlook towards outsourcing and visible trends for the future. RESEARCH METHODOLOGY The survey data was collected in two different phases (a live phase and an online phase) from 95 high level executives. These senior people were primarily partners or financial advisors working at asset management companies, full service brokerage firms, private banks and other financial institutions (refer appendix for details). WHITE PAPER Joint study by Wipro Technologies and FSO Knowledge Xchange

Table of Contents 1 INTRODUCTION 1.1 Trends in Wealth Management Industry Growth in High Net Worth Individuals Increasing competition in Wealth Management space Technology and Outsourcing dependence of Wealth Managers 1.2 Role of Outsourcing in Wealth Management 4 4 4 4 5 2 SURVEY FINDINGS 2.1 Key Research Findings Top Focus Areas for wealth managers Current State of Outsourcing Vendor Selection Parameters Timeline 2.2 Focus Areas for Wealth Managers Functional Focus Areas for Wealth Managers Organizational Focus Areas for Wealth Managers 2.3 Current State of Operations of Wealth Managers Efficiency of Existing Operations Efficiency of Existing Technology Operations 2.4 Parameters for Outsourcing Wealth Management Processes Top reasons to consider outsourcing for Wealth Managers Top concerns about outsourcing Wealth Management processes 2.5 Outsourcing Success Stories 2.6 Current State of Outsourcing of Wealth Management Processes Familiarity with outsourcing amongst respondents Outsourcing technology and operations already doing or plan to do so? Top outsourced activities Present and Future Timeline for outsourcing additional activities 2.7 Vendor Selection for Outsourcing Top criteria for vendor selection 5 5 5 6 6 6 6 7 9 9 9 10 10 11 12 12 12 13 13 15 15 15 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 2

3 CONCLUSION 4 ABOUT US 4.1 Wipro Technologies 4.2 FSO Knowledge Xchange 5 APPENDIX 5.1 Executive Profiles 5.2 Industry Representation 5.3 AUM and AUA Size 6 CONTRIBUTORS 6.1 Wipro Technologies 6.2 FSO Knowledge Xchange 16 17 17 18 19 19 20 20 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 3

1 Introduction 1.1 Trends in Wealth Management Industry Growth in High Net Worth Individuals Fuelled by an accelerating global economy, the wealth management sector continues to ride a wave of growth. Market capitalization growth and increase in Real GDPs the world over has increased wealth generation and subsequently, the number of High Net Worth Individuals (HNWIs) has seen a marked rise. According to an industry estimate, in 2006, the HNWI growth rate was over eight percent. This growth constitutes almost 10 million individuals globally. The wealth controlled by HNWIs grew to over USD 37 trillion. This represents growth of over 11 percent over 2005. The growth in the global economy was marked not only by the U.S. market but also by the European and Asia-Pacific markets. Though this growth is expected to be more measured in 2008, the annual growth rate of HNWIs will hover around an impressive seven percent. The wealth controlled by HNWIs is expected to be over USD 51 trillion by 2011. Increasing competition in Wealth Management space While the number of HNWIs presents an opportunity for wealth managers, it also signifies heightened competition. Clients today have more information and involvement in the management of their financial assets than previously. They demand more information from their wealth managers, better recommendations, and better market intelligence. They expect a high-level of personalization when it comes to service delivery, portfolio management, tax management and reporting. Technology and Outsourcing dependence of Wealth Managers The increase in competition means that wealth managers need to focus all their energies on advising their clients and providing customized services. However, facts suggest saying this is easier than doing it. The burden of handling administrative tasks can take up to two-thirds of a wealth manager s time. In other words, a typical wealth manager spends most of her time handling non-core activities! At a time when a client switches loyalties at the slightest incentive, wealth managers find themselves mired up in non-core operations. Outsourcing gives wealth managers the freedom to focus on their core activities and access to high-end expertise at reduced costs. What outsourcing gives these wealth managers is the freedom to focus on their core activities. Add to it other benefits such as access to high-end expertise at reduced costs without the trouble of managing an in-house team. Traditionally known for having a careful approach to technology adoption with its own uneven results, outsourcing enables wealth managers to also embrace innovation faster without having to build and manage a large IT team 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 4

1.2 Role of Outsourcing in Wealth Management Wealth Management outsourcing is still a rather under developed concept because traditionally wealth managers were not as cost conscious as other branches of the financial services industry. However, as competition grows awareness about how bad having cost inefficiencies can be for the company is growing. One of the primary reasons that have lead to adoption of outsourcing is that it is a cost saver for IT operations. It helps in reducing overhead costs for wealth managers thereby leading to economy in operations. Outsourcing is also essential in improving the operational efficiency whether it is overall efficiency or technological efficiency. This works on the principle that the best person to work on something is an expert. This is especially true because wealth managers work is getting increasingly complex with a vast and growing product breadth that is making technology interventions more complex. It makes more sense to let the technology experts handle that element of operations to ensure more reliability, speed and agility. Agility of operations can be defined as the ability to adopt newer technology at a fast rate to ensure that the operations stay on top of the technological innovation curve. Wealth managers trying to run operations may not be too keen to adopt new technology at a fast clip, but technology outsourcers would welcome innovations in technology. The most important role that outsourcing can play is free the wealth managers for focusing on their core work rather than being weighed down by non-core administrative and technological challenges thereby improving competitiveness 2 SURVEY FINDINGS 2.1 Key Research Findings Top Focus Areas for wealth managers Customer relationship management is the top functional focus area for wealth managers Critical back office functions like client statements and account aggregation are increasingly being considered for outsourcing. Operational efficiency is the highest priority item for wealth managers; however, business intelligence and analytics are also areas where organizations are focusing Current State of Outsourcing 80 percent of the sample is familiar with the outsourcing model and more than 50 percent already outsource some of their functions. The three main outsourced activities are Portfolio Performance Measurement & Reporting Portfolio Management Client Statements 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 5

The biggest incentive to outsource is the freedom to concentrate on core competencies and achieve higher operational efficiency along with cost-savings. More than half of the respondents believe that there is room for improvement in the way their existing back-office, middle-office and front office operations are handled. Almost 35 percent of the respondents also expressed their disappointment in the handling of their technology operations. Concerns regarding security, loss of control, and poor service delivery rank high on their minds when considering outsourcing. Vendor Selection Parameters Almost half of our respondents place economic and vendor expertise above all the other considerations during vendor selection. Timeline The merits of outsourcing are compelling to wealth managers and they plan to strengthen their existing outsourcing portfolio with additional activities in two to three years time 2.2 Focus Areas for Wealth Managers Functional Focus Areas for Wealth Managers Figure 1: Functional Focus 2008 Client Statements Account Aggregation 3% 4% Other Risk & Attribution Analytics Financial Planning Portfolio Performance Measurement & Reporting Asset Allocation Models 6% 7% 12% Channel/Distribution Strategy 13% Portfolio Management Lead/Prospect/Client Relationship Management 18% 20% 0% 5% 10% 15% 20% 25% 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 6

Functionally the wealth managers want to focus on Customer Relationship Management. This requires wealth managers to increasingly leverage technology to get access to innovative tools and systems, which creates competitive differentiation through an effective CRM. Close to 40 percent of our respondents indicate Portfolio Management or Client Relationship Management as key functional targets for 2008 (Figure 1). Areas like client statements and account aggregation form a critical part of the back-office operations. However, increased focus on cost reduction is leading wealth managers to explore the outsourcing option to service these requirements. Only 16% of our respondents have these back-office operations in their focus radar and a number of these would have already entrusted these to their outsourcing partners. Portfolio performance measurement & reporting is taking a large mindshare of Wealth Managers as clients are getting more and more demanding. Ad hoc reporting is also required now, as opposed to only scheduled reporting earlier. Organizational Focus Areas for Wealth Managers Figure 2: Organizational Focus 2008 Other Legacy Migration Network Architecture SOA 4% 5% 6% 7% Data Privacy & Security Application Development/Re-engineering Production Support Channel Integration Business Intelligence Operational Efficiency 11% 12% 18% 1 0% 5% 10% 15% 20% 25% 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 7

Close to fifty percent of our respondents have listed operational efficiency, business intelligence and channel integration as their top organizational focus areas. Business intelligence and analytics is important to leverage the treasure trove of customer information to enable features like integrated financial analysis leading fact-based, insightful decisions. Operational efficiency is seen as a serious issue because losing business and relationships due to small lapses is a real threat in a high competition business like wealth management. The wealth manager s time is thus consumed in ensuring that operational lapses do not occur, while at the same time focusing on actually managing the client s wealth. Wealth managers face a number of operational bottlenecks in their pursuit of improving operational efficiency. Data integrity (1) has come out as the major area of concern for wealth managers though reference data management (17%) is not too far behind with respect to being operational bottlenecks. Figure 3: Major Operational Bottlenecks Reconciliation of Breaks Other (Please specify) 3% 4% Price feeds 7% Order Management Performance Outliers 10% Client Reports Account Opening Reference Data Management 15% 16% 17% Data Integrity 1 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 8

2.3 Current State of Operations of Wealth Managers Efficiency of Existing Operations Figure 4: Efficiency of the existing operations Above average 18% 17% 17% Average 25% 23% 30% Front Office Below average Extremely well 7% 12% 12% 10% 15% 15% Middle Office Back Office N/A 27% 32% 33% Unacceptable 3% 3% 2% 0% 5% 10% 15% 20% 25% 30% 35% Efficiency of Existing Technology Operations Figure 5: Efficiency of existing Technology operations N/A 25% Extremely well 3% Above average 20% Average 27% Below average 18% Unacceptable 7% 0% 5% 10% 15% 20% 25% 30% 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 9

One of the primary reasons why outsourcing has found favor amongst wealth managers is its ability to deliver a higher level of operational efficiency. Most wealth managers we surveyed believe that they could do with some improvement in the way their organizations handle operations. Disappointment with operations is palpable, especially in case of back-office operations. More than 40 percent of the respondents term their existing setup as average quality or below. Results from our survey (Figure 1) suggest that this disappointment extends across the board, be it middle office or front office operations. The dissatisfaction for technology operations is even higher. Fifty-two percent rate it average or lower. More than 40 percent of the surveyed wealth managers felt the need for improved operational efficiency in their front, middle and back-office operations Operational efficiency is going to be the differentiating factor between competing wealth management firms in this increasingly competitive market. In such a scenario, the high level of dissatisfaction with operational and technological efficiency is a cause of grave concern. 2.4 Parameters for Outsourcing Wealth Management Processes Top reasons to consider outsourcing for Wealth Managers Figure 6: Top reasons to consider outsourcing Other 1% Price fi see no reason to outsource wealth management operation 6% Leverage offshoring for standardized business processes and IT Increase timeliness of market information 4% 7% Increase operational control and implement 24-hour operations Access resources skilled in technology implementation and management Focus on primary business and improve business results/shareholder ROI Reduce wealth management operating costs and leverage economies of scale 10% 18% 22% 32% 0% 5% 10% 15% 20% 25% 30% 35% The respondents echo these reasons. Primary reasons for outsourcing that come out of our study are lowering wealth management operating costs (especially in case of non-critical back office and technology operations), simultaneously increasing focus on primary business and increasing focus on core competencies to improve efficiency. Respondents also think outsourcing is a source for enhancing skilled resources and increasing operational control (Figure 6). 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 10

It s evident from the results that Wealth managers are realizing that leaving technology to the experts would make more sense than struggling with it themselves as requirements are getting increasingly complex. The time and effort saved could help in focusing on their core business. Top concerns about outsourcing Wealth Management processes Figure 7: Top fears or concerns No concerns about outsourcing WM processes 5% Poor supplier relationships e.g., technology platforms Risk of the vendor's business failure 1% 1% Poor quality and service delivery Security of databases and transactions 23% 25% Vendor's lack of knowledge about our processes Vendor's inability to match performance standards 15% 14% Vendor's inability to adopt fund assessment standards 0% Control, security and business continuity risks Risk to intellectual property 6% 11% 0% 5% 10% 15% 20% 25% 30% Our study reaffirms the fact that concern about Service Level Agreements (SLAs) are not without substance. Poor service delivery and data security are the most important factors affecting an outsourcing decision (Figure 7). This underlines the need for a sound outsourcing governance structure before any work is outsourced. The onus is on wealth managers to define objectives, quantifiable performance measurement metrics, service delivery standards, conflict resolution and ownership of Intellectual Property. Another critical area for wealth managers is to handle the outsourcing transition well. A significant number of concerns revolve around the service provider s ability to adapt to the client s native processes and standards. Having a test phase through which the service provider can be eased into the client s processes addresses this concern. To regulate the performance standards, wealth managers need to adopt performance monitoring tools and scorecards and conduct regular audits. The two primary reasons to outsource are lowering wealth management operating costs and increasing focus on the primary business. 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 11

2.5 Outsourcing Success Stories The success of outsourcing is reflected in the optimism of wealth managers. It may not be the only strategy for improving efficiency, but most wealth managers recognize it to be one of the most efficient ways of off-loading basic functions that allow higher focus on core competencies. Decision-makers believe that outsourcing can effectively manage non-critical back office and technology activities, benefiting organizations in more than one way significantly lowering operational costs and helping them set up better middle and front office systems. Across the financial services spectrum, these needs have been well-served by specialized outsourcing service providers. The benefits of outsourcing have not escaped the attention of wealth managers Almost 80 percent of the respondents expressed a high-level of confidence in the efficiency of the outsourcing model for various wealth management functions. Furthermore, over 80 percent of our respondents express a high level of confidence in the outsourcing model. Many of them outsource select activities while some will consider outsourcing in the near future. With a well-defined governance structure and adequate monitoring tools in place, wealth managers can ensure that the service delivery levels do not dip. At the same time, they can get more returns on their productive hours by achieving a near 360-degree focus on client servicing and retention. 2.6 Current State of Outsourcing of Wealth Management Processes Familiarity with outsourcing amongst respondents Figure 8: Familiarity with Outsourcing Extremely Familiar 0% Somewhat Familiar 67% Neutral 21% Somewhat Un-familiar 13% Not At All Familiar 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% Outsourcing has certainly arrived in the wealth management domain. Two-thirds of our survey respondents indicate familiarity with the concept of outsourcing (Figure 5). Only a small minority of 13 percent look at outsourcing as a somewhat alien idea. 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 12

Outsourcing technology and operations already doing or plan to do so? Figure 9: Outsourcing already or plan to do so? (Technology & Operations) Yes, we considered it and chose to not to partner with an external partner 7% No, we would never consider partnering with an external partner 11% No, we have not considered it but may do so in the future 30% Yes, we considered it and are doing it right now 52% 0% 10% 20% 30% 40% 50% 60% percentage respondents An interesting result of this survey is that nearly 75% of respondents from wealth management companies with AUM over USD 1 Billion or employee headcount exceeding 10,000 have considered outsourcing. Out of the large companies that considered outsourcing, an overwhelming 8 are doing it now. Top outsourced activities Present and Future Figure 10: Top Outsourced activities - Present Account Opening Account Aggregation Reconciliation Risk & Attribution Analytics Risk Engines Fees / Billing Alternative Investments Wealth management Client Statements Portfolio Management Portfolio Performance Measurement & Reporting 8% 8% 8% 8% 11% 13% 13% 14% 0% 2% 4% 6% 8% 10% 12% 14% 16% percentage respondents 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 13

Wealth managers realize that their focus should be on their core activities and hence are more than willing to rid themselves of non-core activities. Our survey indicates that most outsourcing currently happens at the back or middle office level. The top three outsourced activities include Portfolio Performance Measurement & Reporting, Portfolio Management, and Client Statements (Figure 6). When the current scenario is compared with the future outsourcing plans, we see that the top few activities for which outsourcing is being used or considered remain the same i.e. client statements, portfolio performance management and alternative investments Figure 11: Top functions planned for Outsourcing Risk Engines Risk & Attribution Analytics Account Opening Reconciliation Fees / Billing Account Aggregation Portfolio Management Portfolio Performance Measurement & Reporting Alternative Investments Wealth managements, Private Equity, Fund Processing Client Statements 6% 7% 8% 8% 10% 11% 12% 14% 16% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% percentage respondents An interesting feature of outsourced activities indicates that alternative investment processes related to wealth management, hedge funds, real estate are increasingly being considered for outsourcing. 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 14

Timeline for outsourcing additional activities Figure 12: Timeline for outsourcing additional activities No plans to outsource 24% Don t Know 24% Within 2-3 years 1 Between 6 months and 1 year 1 Within 6 months 13% 0% 5% 10% 15% 20% 25% 30% More than 50 percent of the wealth managers we surveyed indicate that plans are afoot to outsource a section of their activities within the next 2-3 years. 2.7 Vendor Selection for Outsourcing Top criteria for vendor selection Figure 13: Top criteria for vendor selection Service provider s domain knowledge Service provider s domain knowledge of wealth management administration and management Speed to achieve objectives 1% 11% Capabilities beyond wealth management Service provider innovation and creativity Flexibility to accommodate change Service provider technology sophistication Service provider overall reputation 7% 8% 8% Service provider process expertise and quality Price and overall economic proposition 24% 23% 0% 5% 10% 15% 20% 25% 30% 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 15

When it comes to vendor selection, the message is loud and clear apart from the expected parameters of cost efficiency and process expertise, domain knowledge of the wealth management industry is also essential to initiate a successful outsourcing relationship. The service provider s administration, technology sophistication, adaptability to change, innovation in service delivery and overall capability and reputation also have a key role to play in wealth manager s decision to outsource. Location of provider does not have a significant impact while deciding on outsourcing. Another finding from the survey is that as the respondent s company s AUM increases the importance of cost benefit as the sole or primary criteria for vendor selection reduces 3 CONCLUSION The study confirms the tremendous rise of the wealth management industry and explores the new challenges wealth managers are confronted with in the face of greater competitive pressure and customer demands. As wealth managers seek to provide superior service to their clients, they are faced with the challenge of focusing on their core activities, while at the same time maintaining and streamlining their operations. Competitive edge can be lost easily by even minor lapses in either area. Outsourcing presents a great opportunity for wealth managers to leverage the expertise of service providers and to farm out non-core functions. The enthusiasm towards outsourcing prevalent in the industry is because wealth managers get superior efficiencies in their current areas of concern Middle and back office functions while they focus on their core competencies of providing better services to clients. Wealth managers can ensure success of outsourcing relationships by ensuring a stringent service provider selection program based on service providers processes, quality standards, cost efficiency and knowledge of the wealth management industry. Proper service provider management can create a win-win situation for both parties where they reap benefits of this present and growing opportunity.. 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 16

4 ABOUT US Wipro Technologies Wipro Technologies (NYSE: WIT, www.wipro.com) is a leading global provider of consulting, IT Services, outsourced R&D, infrastructure outsourcing and business process services, delivering technology-driven business solutions that meet the strategic objectives of our clients. With over 25 years in the information technology business, Wipro Technologies is one of the pioneers in the remote delivery of services, and has constantly innovated to provide a comprehensive range of integrated services. Wipro Technologies has a dedicated business unit for financial services clients to help them manage risk, comply with regulations, enhance product features, and manage transformational challenges while driving efficiency, cost savings, faster time-to-market and improved service levels. With over 10000 consultants, Wipro Technologies Finance Solutions practice is currently servicing more than 65 large clients across the globe. Wipro Technologies has built proven capabilities in developing and implementing solutions for each of the Banking, Capital Markets, and Insurance industries. Wipro Technologies has experience working across the entire range of market participants in the financial industry. Wipro Technologies is ranked in global top 25 enterprise services providers in financial services industry according to Fintech 2006 - an American Banker and Financial Insights rankings. For more information on Wipro Technologies and its Financial Solutions practice, please contact Wipro Technologies at info@wipro.com or visit their website at www.wipro.com FSO Knowledge Xchange FSO Knowledge Exchange is a unique media and research initiative focused on all aspects of financial services worldwide. FSO Knowledge Xchange s portal www.fsoutsourcing.com features the latest news and views, events, case studies and a directory of financial and outsourcing firms. Weekly e-newsletter and quarterly magazine provide authoritative, strategic and actionable insight and decision support in the outsourcing domain. It is a must-read for all executives, senior management and implementers within financial services and outsourcing firms. FSO Knowledge Exchange (www.fsokx.com) produces and promotes world-leading summits and conferences. These events focus on various topics in the financial services organizations for senior decision makers at exclusive locations around the world.. 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 17

5 APPENDIX 5.1 Executive Profiles Survey respondents largely consist of influential executives within various segments of the wealth management industry. They either take the final decision on outsourcing or influence the outsourcing decision. Figure 1: Over 70 percent of respondents are involved in outsourcing decisions Front office Back Office 2% 4% Technology side 8% Other 12% Business Side Financial Advisor/Producer 20% 20% Partner 33% 0% 5% 10% 15% 20% 25% 30% 35% Figure 2: Strong representation of the wealth management sector Investment Bank 3% Fund Manager 8% Industries Insurance Private Banking Full Service Brokerage Asset Manager 10% 12% 12% 21% Other 34% 0% 5% 10% 15% 20% 25% 30% 35% 40% percentage respondents 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 18

5.2 Industry Representation The survey saw a strong representation of the wealth management industry with 21 percent of the respondents comprising asset managers followed by full service brokerages and private banking institutions. Some of the firms that participated in the survey are ING Bank Citigroup SEI Investments Developments, Inc Venture Investment Management Limited Gladstone Companies Modern Bank Gem Capital LLC 5.3 AUM and AUA Size Almost half of the respondents manage assets of over a billion, with one fourth of them handling over 25 billion dollars in Assets Under Management and Assets Under Administration. Figure 3: Size of your AUM and AUA Over 50 billion 18% 16% 25 billion - 50 billion 10% Size 15 billion - 24.99 billion 5 billion - 14.99 billion 3% 0% 3% 6% Size of AUA 1 billion - 4.99 billion 11% 15% Size of AUM 500 million - 999 million 1% 5% 100 million - 499 million 1 22% Under 100 million 32% 30% 0% 5% 10% 15% 20% 25% 30% 35% percentage respondents 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 19

6 CONTRIBUTORS 6.1 Wipro Technologies Kevin Menezes Wealth Management Practice Head, Wipro Consulting Ramesh Subramanian Vice President, Finance Solutions Swapnil Bhatnagar Senior Executive, Strategic Marketing Anurag Gupta Group Manager, Strategic Marketing 6.2 FSO Knowledge Xchange Natalie Vania Research Director, FSO Knowledge Xchange Ullas Marar Research Analyst, FSO Knowledge Xchange Christina D Souza Research Analyst, FSO Knowledge Xchange Rekha Vatsa Executive Director, FSO Knowledge Xchange 2007 Wipro Technologies & FSO Knowledge Xchange LLC Page 20