Wealth managers need to embrace new, more effective ways to find what suits them best with software solutions - a vital issue to get right given the costs involved of getting a decision wrong.

The way wealth management firms are buying software solutions is changing, so argues the author of this article, Simon Cornwell, co-founder of Vermilion Software.

With so much focus at present on “fintech”, it is important to get a strong grasp of the most efficient and effective ways that wealth managers can buy and make use of software solutions and what kind of mistakes people make.

Cornwell argues that rather than rigidly adhering to the traditional (lengthy) request for proposal process, which involves several vendors in a beauty parade that generally comprises a small number of “probables” and a long list of “improbables”, some technology buyers now think it is more efficient to just select two or three vendors that appear to be at the top of their game and ask them for a proof of concept.

This publication is pleased to share these insights with readers, which, given the global nature of the issues involved, will hopefully prove useful for readers as far apart as Asia, Europe or the Americas. As ever, the editors of this publication don’t necessarily endorse all the views of such guest contributors, and invite readers to send in their views.

The impact of technology systems on wealth management firms’ operational efficiency is well known. Having the right solution can help your firm to reduce the time it takes to onboard new clients, adapt more readily to market conditions and be fully compliant; having the wrong (or old, legacy) system can be very costly in terms of time and resources.

This realisation has encouraged many wealth managers to move away from spreadsheet-based applications and in-house legacy systems. These firms are turning instead to customised applications offered by specialists, with the knowledge required to ensure that the applications are truly fit for purpose.

The return on investment from the automation of investment management processes can be significant. Companies can increase not only the accuracy and scalability of their operations, but also other internal efficiencies such as reducing time-to-market and increasing productivity.

The need for clear objectives
Before implementing any new software application, however, clear objectives are required. The solution must meet the ongoing needs of the company. Irrespective of the complexity involved, a wealth manager must also be certain that the solution is right for the company from an operational perspective.

This involves choosing the solution that best fits a firm's particular business model, environment and technology stack. As a consequence, wealth managers are increasingly insisting that a proof of concept (PoC) must be included in either the vendor selection process or the sales process.

A PoC is a short, controlled test of a new solution, simulating the real world environment. A PoC allows the company to see the good, the bad and the ugly on both sides of the client-vendor relationship. In addition to aligning the expectations of the investment manager and the software provider, a PoC highlights any potential risks and the development required by both parties to ensure that the solution "fits". This saves the company valuable time and also the cost of implementing a product that is unusable.

A practical alternative
It can be argued that PoCs provide a practical alternative to lengthy requests for proposals (RFPs). The traditional RFP can take anything from six to 12 months to design, execute and analyse. By the time the process is complete, the needs of the investment manager have very often changed, to the extent that the results of the RFP are no longer valid. Furthermore, RFPs are very often driven by procurement, rather than the business. This can lead to frustrations in the business as innovative functionality is compromised in the name of cost streamlining (or even vendor risk), exacerbating the issue. In contrast, a PoC will significantly shorten the buying cycle, require a deeper understanding of the client’s business from the vendor and ensure that the vendor and client are sufficiently aligned culturally to guarantee a good working relationship.

The other problem with an RFP is that there is a tendency for all the vendors to tick all of the boxes and say “yes” to whatever requirements are outlined in pre-sales meetings. Very few will concede that their software can’t provide the functionality that has been requested, leaving the wealth manager with some nagging doubts. Very often, the only way to dispel these fears is to request a PoC at the end of the RFP process. The question wealth managers are therefore asking is: “Why are we doing this RFP in the first place – we could jump two or three hurdles by going straight to a PoC?”

Increasing use of proof of concepts
In a recent article, Steve Young, the chief executive of investment management consultancy Citisoft, explained that "the consolidation of industry vendors and providers, a more networked community, risk aversion and a desire to show immediate progress" are driving the increasing use of PoCs in vendor selection. I see this trend only increasing over the next five years. As we see concentration among the technology providers, the list of “probables” gets shorter and the list of “improbables” gets longer; the traditional RFP process begins to look less and less valid.

In my view, PoCs should form an integral part of any selection process; this will enable firms to test-drive a system to ensure that it is in good working order and has the characteristics required to meet the needs of the individual wealth manager.

The proof is, quite literally, in the concept.