A regular focus for debate in wealth management is whether business leaders go for a brand-new technology platform or try and bolt legacy systems together and upgrade them piecemeal. This article argues how to address the issue.

Pershing, part of Bank of New Mellon, deals with much of the financial “plumbing” required by wealth managers, and is one of those businesses taking on the outsourced functions that firms increasingly find too difficult to carry out in-house. Rising regulatory requirements, as readers will not need to be reminded of, are a major driver. But more demands from clients and the effects of digital technologies also keep the trend in play. At the same time, mergers and acquisitions raise the issue of melding together firms that frequently have different systems. The risk of losing data in a bad corporate “marriage” – with all kinds of horrible consequences – will keep CEOs and colleagues awake at night. The issue of dealing with legacy technology systems is therefore important. 

Mark John, head of product and business development and Daniel Semal, head of architecture, Pershing Limited, comment on these issues. The editorial team at this publication are pleased to share these insights; this publication doesn’t necessarily endorse all contributed views and invites readers to respond. Readers should email tom.burroughes@wealthbriefing.com

Over the last 20 years, it is no secret that technology has underpinned the pressure on all financial institutions to maintain, disrupt, revolutionise and evolve.

In an ever changing environment, wealth managers are feeling the pressure to transform their businesses to remain competitive and to continue to grow and acquire new clients. As part of their growth strategy, some would look at new acquisitions whilst others would expand their proposition.  But all of them have to deal with the ongoing pressure of regulatory change. In 2017, the industry was focused on implementing MiFID II. While that compliance challenge remains for most, 2018 has brought with it new hurdles including GDPR, FAMR and SM&CR – all of which wealth managers have to respond to, and respond to quickly. In that environment, reforming legacy systems is no longer a nice-to-have, but a fundamental priority for business transformation. (The acronyms stand for Markets In Financial Instruments – 2nd iteration; General Data Protection Regulation (of the EU); Financial Advice Market Review, and Senior Managers and Certification Regime.)

Replacing legacy systems has become capital and resource-intensive, and presents huge operational risks in their build and transition. You have only got to look back to 2017 to see just how high the stakes can be, with a one high profile market participant abandoning their re-platforming programme after a reported initial outlay of £330 million ($434.8 million) - all of which is said to have been now written off even as they start on another one.

The issue of legacy replacement is itself on top of the underlying risk involved in any major transformation – system upgrades have frequently prevented access to ATMs for customers of major UK high street banks or worse still entire customer account networks. Additionally, bolting on tactical, external solutions that try to treat individual compliance risks creates another burden of overheads at a time when the industry is heading in one direction: driving down costs and streamlining efficiency.  

Overcoming this catch-22 situation often lacks a long-term strategic view. In turn, this has resulted in a spaghetti network of barely compatible legacy systems that often fail to provide a sustainable technology solution for wealth managers - and, more importantly, their clients. 

With rapid technological advancements, these systems are increasingly coming to an end-of-life state. Whilst they can still be operated, there is a diminishing pool of experts who can maintain them effectively, either in support or development disciplines to meet current client needs. In addition, their lack of scalability and their non-compatibility with new systems are also hindering business growth.  So, what are the key lessons for wealth managers replacing the old with the new in order to future-proof their systems?

Work backwards to go forwards
Tackling the legacy system challenge should be a means to fulfil a long-term transformational strategy, not a strategy in of itself. The competitive pressure to disrupt or be disrupted brings with it an assumption that a tech-first solution is the only imperative to revolutionise and evolve. But a small regional financial planner and a large wealth manager are going to look at technology in completely different ways. 

Clearly defining the goals throughout the organisation - such as what markets, asset classes, geographies and product segments wealth managers want to access and succeed in - should be a priority. This also means taking a harder look at the businesses and services that firms want to discontinue. For example, a reduction in asset class coverage can render significant elements of a legacy system redundant with no income generation to cover its cost. This problem can be compounded when coverage reduction or cessation is temporary, often dictated by volatile market trends. As a result, a business is left unable to sweat its assets to best effect. It is important to identify an end-state and work backwards, adopting technological change as an enabler of the overall targeted operating model serving a business, its clients - and yes, the regulator, to the best effect. 

It’s a puzzle, so find the pieces
Replacing legacy systems in one fell swoop is an unrealistic expectation for most mature wealth managers. Part of taking a more strategic view is analysing the business process across the whole enterprise value chain. 

Whilst regulatory change is as complex as it is overwhelming, the themes driving the legislative roadmap are becoming clear. The focus is on providing maximum cost transparency and foster enhanced overall investor protection. Wealth managers should be able to predict any changes to the system architecture that may become regulatory or technologically redundant as a result–particularly across the connectivity and data management chain. 

A natural conclusion of taking a more holistic view is identifying what needs to be kept and what needs to be replaced. Changing one bit of the puzzle could mean the entire architecture will be different in size, cost, resource and complexity, too. 

What is more is that it is rare to find all the answers with one single solution. The more likely scenario is to build a best-of-breed approach and form key strategic partnerships with a handful of providers that can adapt to changing business needs and complement a core capability. Integration is key. The providers need to be able to integrate with some of your existing systems as well as with other third-parties. They need to be able to integrate with a number of existing systems as well as with other third-parties at the same time to form what must be core partnerships. These include specialist providers of CRM, portfolio modelling & rebalancing and cashflow modelling.

Flexibility too, is key. Managing the different components requires a flexible and scalable platform that is capable of integrating different solutions for challenges as they evolve over time – whether driven by regulatory change or customer needs, or both. 

One step at a time 
At the heart of any successful business transformation strategy is to take into account the resources available. In deploying the 80:20 rule, the first phase of replacing legacy systems should be implementing the obvious changes first to achieve a major positive impact. Typically, 80 per cent of business processes can be improved straight away and it is the remaining 20 per cent that requires more time to source, test and implement viable solutions. The perfect match is not always immediately obvious, however. 

Administering the initial set of charges is often instructive in really understanding the full architecture and programming of new and existing systems without posing any material threat to business continuity. Here, it is more of an evolution than a revolution. 

Tomorrow, not just today
Today’s architecture will rapidly become the legacy systems of tomorrow, so it is important to build in headroom for future upgrades – particularly those that are integrated by third-party providers. 

It is of course not just about the technology, though. Changing human behaviour can be as daunting. Most organisations prefer the status quo: change is time-consuming and distracting. This is why the strategic objectives underpinning business transformation need to be driven from senior management and across every layer of the organisation. 

If employees do not understand the benefits of seeming upheaval, they will not buy into the changes that need to take place to be a fundamentally more competitive and efficient organisation.  

If wealth managers do not tackle the challenges of legacy systems now, they are in danger of losing market share to their more innovative competitors, or nimbler yet fledgling firms free of legacy risk who can deliver new products to the market in a much timelier fashion. 

There is no silver bullet, but a holistic approach and careful choice of the right, long-term strategic partners will help mitigate the risks associated with operational change and help an organisation move to the next level. Changes do not have to take place simultaneously but can evolve over time to ensure that the right investments, systems and people are in place to make an organisation truly fit for purpose.