The Wealth Manager's Dilemma

By Kevin Maxwell | 24 June 2015

John Blackman reflects on the challenges and opportunities that are currently at the forefront of the investment industry.

From our viewpoint, as a technology solutions provider to the wealth management industry, we see two main themes emerging which are essentially in conflict with each other:

1. Fees are being driven down. Since the introduction of the Retail Distribution Review (RDR) the wealth managers’ value proposition is being challenged as charges become more transparent to the investor. This pressure will be further increased by the emergence of lower cost direct-to-consumer (D2C) services and MiFID II.

2. Service expectations are being raised. In what is now a highly competitive market place clients are demanding a greater level of service: broader range of products, improved returns, and more effective engagement with their wealth manager.

The dilemma lies in the fact that retaining and growing the customer base requires a continually improving service, which itself requires notable investment by the wealth management firms, at a time when margins are being compromised by external pressures. Industry surveys show that the majority of firms expect to increase their compliance spend by more than 10% this year, and for most there will be additional business requirements competing for investment, such as a highly engaging ‘digital experience’ for clients.

These expenditures impose a real challenge to profits, however there are a number of areas where the right technical solution can address multiple problems simultaneously. For example, MiFID II will vastly increase the volume of client reporting and require evidence of receipt – electronic distribution is the only cost-effective solution, and in addressing this provides the opportunity to ensure client communication channels really meet the customer needs for the future.

The changing landscape of the wealth industry has also generated a number of new opportunities:

  • The traditional advisory service has become a very challenging business model as a consequence of the RDR, and many of the established wealth management firms are looking to transition their advisory clients to a discretionary service. However some clients are deciding to move the other way towards self-directed, which has generated the need to offer services that provide access to investment expertise in a scalable and profitable manner, all within the confines of regulations that are still subject to some clarification and refinement. Guided investment and direct-to-consumer (D2C) discretionary propositions are establishing more prevalence, boosted by the fact that a large number of individuals need an ‘investment home’ as a notable number of IFAs exit the market. Given the traction similar propositions have gained in the US it would seem likely they will continue to grow here in the UK.

  • At the same time the pension reforms have created significant potential for wealth and asset managers; new products to meet clients’ income and drawdown needs, retaining pensions as part of inheritance planning, and greater use of other investment products alongside pensions to compensate for reduced contributions. Given the new withdrawal ‘freedoms’ there is also the challenge of making sure that assets remain under the firms’ management.

The necessity to retain profit margins in a challenging market and the opportunities offered by the ‘advisory gap’ both drive the need for a more efficient business model. We see this resulting in a centralised portfolio management process, making increased use of models and funds, and leveraging greater automation in the core activities such as ensuring alignment to mandate. This approach increases scalability (e.g. managing more clients), improves regulatory compliance (e.g. consistency of investment), whilst reducing operating costs (e.g. bulking of market-side orders across all client portfolios).

These changes are also driving a convergence between the two sides of the industry – the asset managers who supply the funds and the wealth managers who distribute them – with the Exchange Traded Fund (ETF) often serving as the magnet. Wealth managers are able to offer risk-oriented investment portfolios with less management complexity than traditional equities, whilst being very familiar with the transaction process, and the asset managers get a much greater distribution of their funds.

By John Blackman, Chief Executive Officer, JHC

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