Wealth and Asset Management in 2018

Paradoxically, the number of mass affluent (MA) and high net worth (HNW) clients is increasing, but wealth and asset management has become a more challenging business in which to make money.

As the traditional investing population ages, the transfer of wealth from older pre-digital generations to their more technically savvy children and grandchildren is gathering pace. This new generation of investors is looking for higher rates of return on investments (ROI), a wider range of products, slick digital apps to access information, and greater transparency on advice and fees.

The ‘personal touch’, those face to face meetings over cigars and brandy in Mayfair, will remain an important engagement channel for many wealth management advisors and their clients - particularly the HNWIs. The growth of online, so called robo-investment managers (Nutmeg, Wealthify, MoneyFarm, to name a few) however, typically offering passively managed discretionary portfolios built from exchange traded funds (EFTS) and tracker funds, demonstrates how radically other parts of the industry are evolving. While this poses a risk to the traditional wealth management models in driving fee income down, this also presents opportunities for innovation and new engagement channels to reach clients who may not have traditionally looked at wealth and asset management services.

Alongside this rapidly changing market, increased regulatory requirements add another layer of challenge, with ever-increasing transparency over products, services, and fees charged; and disclosure and reporting requirements. Some of these requirements are sufficiently complex to necessitate new open-architectures and data-architectures, leading to further investment spend.

The stock response to these pressures, as in many industries, is to lower costs by merging with other wealth managers in an attempt to achieve economies of scale. While this can work in theory, in our experience the reality is often different:

  • Poor M&A execution results in a merger of balance sheet and assets under management (AUM) - “look at me, I’m bigger now!”
  • The differences and complexities between the integrating businesses are not resolved (clients, products, services, fee types, architecture, data models, and organisation) resulting in front, middle and back office consolidation not taking place to a sufficient degree to generate the promised cost savings.
  • These costs hit the bottom line, lowering company valuations / shareholder value, and leave a bitter aftertaste – “when I said bigger, I really meant fatter!”

This type of integration reminds us of a period when the banking sector underwent a period of significant consolidation, often without a true rationalisation of platforms, data, applications, and operating model across the integrating entities – resulting in many of the legacy challenges, and the significant cost base, facing banking today.

Wealth and asset managers need to invest in operational and technology changes to protect their businesses, reduce operating costs, create scalability, and drive innovation to build competitive advantage and define the future of the industry. This is particularly acute where the existing business has been built from a series of mergers or acquisitions.

We believe that a common-sense focus on the basics – fundamentals such as growing sales and reducing costs – will allow wealth and asset managers to address these challenges. Executed well, this will result in increased shareholder value.

Focus on sales growth

  1. Provide your clients with better customer service

    • Automate and streamline important client facing processes like client onboarding, and order capture and execution. Use this streamlining to offer more options and channels for client onboarding, and to enable greater “self-serve” functionality.
    • Give clients a financial planning and investment management app, providing access to their portfolio of funds, equities and money market accounts, payment support, up to date reporting, and the ability to increase or decrease holdings. This can also form a basis to build further product offerings and introduce or increase robo-advisory offerings.
    • Looking at trends in the industry, explore how existing infrastructure could support non-traditional wealth management offerings (eg. robo-advisory), to enable more varied and sophisticated services in the future.
  2. Sell a wider range of relevant, innovative products

    • Conduct client and product research, to understand client needs (risk appetites, investment objectives, etc.) and the deficit in current product offerings:
      • Is there a sufficient range of products (e.g. discretionary managed portfolios with different risk profiles) for MA clients?
      • Are there relevant bespoke products and services (e.g. more complex structured products) for HNW clients?
    • Innovate faster by opening up digital offerings to sell / access white labelled 3rd party products that clients want - this may lead to a distribution channel vs. asset manager strategic debate.
    • Conversely, introduce products that may be white labelled and can be supported by existing infrastructure and operations.
  3. Provide more value to clients

    • Provide market insight and investment recommendations online and through other digital channels.
    • Where the underlying data exists, use predictive client behavioural analytics to offer more tailored products and services to clients. Invest in better management information (MI) to drive client engagement across all channels.
    • Set up a digital marketplace of HNW clients who may be interested in different investment opportunities.
  4. Free-up client advisors / investment directors to focus on maintaining and growing the existing client base and pipeline

    • Shift more tasks to middle and back office functions, using technology to rationalise workflows and build more intuitive applications.
    • Automate as much as possible – account opening, risk profiling, pre-compliance checks, etc. Maximise the advantages of the rationalised workflows to increase straight through processing (STP), introducing new governance and controls as required to underpin this.

Focus on cost reduction

  1. Rationalise and automate organisation and processes

    • Eliminate multiple processes that perform broadly the same tasks. For example, there should be a single client onboarding process, which should be digital and automated to the maximum extent possible. Know Your Customer (KYC) and Anti Money Laundering (AML) processes can and should also be automated
    • More complex advice processes can be partially automated using robo-advice, natural language processing, and AI technologies.
    • Eliminate multiple systems that perform broadly the same tasks. Aim for an appliance model where each platform / system performs a distinct series of tasks without overlap with other platforms / systems.
    • Streamline the organisation to align with new front-to-back processes. Review the current organisational structure and identify opportunities for simplification or centralisation of middle and back office functions.
  2. Migrate clients

    • Having completed step1 rationalisation, migrate clients onto the reduced numbers of systems.
    • Embrace the communications, repapering and hand-holding required to migrate customers. The temporary disruption is in their long-term interests, and yours.
    • Provide services to clients in a more consistent manner.
  3. Invest in compliance, security, reporting, controls, and governance

    Compliance and security are hygiene factors for clients. Investing in them is much cheaper than dealing with the reputational and financial fallout resulting from a data hack or compliance issue.

    • Reporting – aim to create a single common data source / warehouse to drive reporting so that regulatory, client, and other reporting can be automated.
    • Compliance – review existing compliance obligations and ensure systems, processes, controls, and training programmes meet these requirements in the most effective way possible.
    • Controls – implement a robust and relevant control framework and supporting MI / Governance to ensure true business risks are monitored, measured and addressed.

Valentia Partners works in wealth and asset management across Exco level to individual relationship managers. Our wealth management experience includes delivery responsibility for the stand-up of new regulated entities, and the merger of a c. £5bn portfolio (c. 10k clients) into a larger existing wealth management portfolio for a global financial services business.

In wealth and asset management, we typically work with both business and technology teams across the full delivery lifecycle including the definition of business requirements, operating model changes, technology architecture rationalisation, business assurance of business and technology changes, and ultimately client migration and repapering.