Earlier this year the UK witnessed a significant change to rules about pensions investment, said to be a boon for wealth managers. This article revisits the issues.

Earlier this year the UK’s Chancellor of the Exchequer, aka finance minister, announced a shake-up to pension and inheritance rules, the impact of which is potentially to release billions of pounds into new investments and add more business for wealth managers. That, at any rate, is the hope. This publication spoke to industry practitioners about the impact on the wealth industry here; it has also been the focus of conference panel discussions (see here). 

Against this background, Cosmo Wisniewski, director, Citisoft, the investment management consultancy, takes a look at what the benefits to the industry might be. The views expressed here are not necessarily shared by the editors of this publication, but they are pleased to share these views and invite responses.

It used to be easy to determine what was happening in the wealth management world: look at what new practices the institutional asset managers had been developing about ten years earlier, adapt it to a wealth management context and you could anticipate what was about to be introduced. 

Of course, this is a flawed approach, but the business is changing fast and the retail sector is certainly pressurising wealth managers to improve their services. This is as true in terms of the “digital experience” that is so prevalent in demonstrations of new software for the market as it is in terms of pressure to generate better alpha through new instrument and multi asset strategies. Meanwhile, the pressure on costs and value continues unabated and the use of exchange-traded funds has rocketed as a direct consequence.

Business from emerging economies will be affected even faster than the mature affluent societies and the threat of offshore, globally available competition is real.

Firms are doing their best to differentiate but many wealth managers fear that a brand revolution is just round the corner and the retail sector will eat further into the traditional wealth management space. The “millennial” generation that will soon be controlling vast amounts of inherited wealth are used to consuming substantial amounts of data on the go and having far greater access to and visibility of their financial affairs. Alternative service models facilitated by digitisation, such as automated investment advisors and hybrid delivery, have the most potential to meet this need but are currently underdeveloped. 

Artificial intelligence will have an even greater impact. The analysis of behaviour patterns to build highly accurate customer segmentation is the most obvious use of artificial intelligence technology, but I can also conceive of strong usage in product management, client onboarding, KYC and compliance.

Of course, as the customer becomes more "remote" in terms of face-to-face interaction, how will wealth firms ensure that clients remain “sticky”? This is the area where the truly innovative firms will come to the fore – and many will fall by the wayside.

In the short term, however, wealth managers will still need to cater for the more traditional approach. I don’t see the “old style” wealth manager disappearing very soon. The technology needs to allow the newer type of client to be in control (e.g. to provide an online view of investments) but still give the investor access to informed guidance. 

Meanwhile the back office continues to struggle, utilising ageing technologies that require far too much manual intervention. The inefficiencies here create opportunities for new entrants that have a far more efficient business model and potentially significant cost advantages.

There are few signs of real innovation or investment in the back office; most of the new initiatives are being delivered by the same people or firms, or are merely newer versions of the same systems. Neither of these approaches brings real innovation or change to this much-needed environment.

Service expectations are also developing rapidly and regulatory changes (especially the consequences of MiFID II and FATCA) are adding to the pressure to go “modern” with much more electronic communication. The impact of extending instrument types throughout the organisation and infrastructure, the pressures on fees and the improving transparency of those fees are putting a big squeeze on the once confident wealth sector.

With initiatives like crowdfunding in all its guises gathering pace and in the media almost continually, the onslaught of direct to consumer propositions and the massive reduction in the traditional advisory services, the wealth space is rapidly evolving. 

This situation is, however, prevailing just as wealth managers need to look into MiFID II and try to curb costs. Most of the relevant surveys show expected compliance costs increasing between 8 per cent and 15 per cent over the next 12 months, and we don’t meet anyone who thinks this is just a short-term blip.

But there is one bright glimmer that is bringing in new money, or at least taking it out of the pension funds and putting it in new “drawdown” products – the pension reforms. 

While the press is finding lots of reasons to criticise this mini-revolution, the interest it has sparked and the indications of flexibility are positive. It does at least mean that a new, younger generation can be sold the idea of saving for their retirement from an earlier age more successfully (especially when the trend has been to argue that pensions have not been good value over the last 30 years). 

Dress it up as saving for the future and being able to gain access to tax efficient returns earlier in life and the property market may start to see fewer buy-to-let properties.