Compliance

Optimisation: Look Before You Leap, Say Top Wealth Executives

Wendy Spires Group Deputy Editor London 21 April 2011

Optimisation: Look Before You Leap, Say Top Wealth Executives

Many wealth managers are going about optimisation programmes in the wrong way – potentially wasting both precious time and money - industry experts told senior executives at the latest London Breakfast Briefing.

Sponsored by SEI, the investment processing and wealth management firm, the event saw over seventy top-flight wealth management executives gather to debate the issue of how best to optimise operating models – with particular reference to the shifting sands of the UK’s regulatory landscape.

Know the lie of the land

One of the main problems, said Ryan Hicke, managing director of SEI’s Global Wealth Services team, is that firms enter into  optimisation exercises without having first carried out a thorough “know your business assessment” – something which he sees as a pre-requisite before embarking on any significant change programme.

Hicke made the point early on that when engaging with potential client firms SEI doesn’t necessarily view successful engagements solely as ones where its services are ultimately taken up; as he notes, what can sometimes be most empowering for both provider and potential client firm is an acknowledgement of where they are not strong – in his words, “clarity and an articulation of what they don’t do.” This point chimed with the view of Cath Tillotson, managing partner of Scorpio Partnership, who later emphasised that client segment focus is essential if firms really want to add value.

In Hicke’s view, the key to a successful sales process centres on working with executives to find out the answers to the following: “What is it about the firm’s current capabilities today which they believe they can exploit from a value standpoint, that they can scale and that they should retain because of a competitive advantage?” From this point, he said, there needs to be clarity on what the firm’s growth strategy is over the next three, five or seven years before areas of alignment and areas of disconnect between these goals and the existing operating platform. “Operating models need to be able to evolve over time,” he said, adding that firms need to play to their particular strengths – and this will involve differing levels of in/outsourcing in each case.

Constant evolution

Hicke’s emphasis on flexibility and the ability for firms’ operating models to evolve over time was echoed by Ian Woodhouse, director of PwC’s EMEA private banking and wealth management team. “The wealth management industry has changed dramatically over the past few years, and it will continue to change,” he said, adding that firms must also be thinking about the very principles underpinning their model. Clients, having gone through the pain of the financial crisis, are increasingly questioning “whose side the wealth management model is on, the bank’s or the client’s”, said Woodhouse. This questioning of the model is “now manifesting itself as increased regulatory attention”, he continued, and now we have bodies such as the FSA weighing in with reform programmes such as the Retail Distribution Review intended to drive up standards of investment advice.

Woodhouse further pointed out that the industry, by and large, is in a difficult situation due to the fact that operating models were typically under-invested in during the good times. “The industry had the luxury of relatively strong growth in revenues before the crisis,” he said, “and in consequence, not everyone has been investing in their platform and their operational infrastructure." In illustrating this point, he highlighted the fact that some UK wealth managers and private banks run at a cost-income ratio of 80 per cent (or even north of that), while others operate a lot more efficiently at around 50 per cent.

The optimisation imperative

As pointed out by Jean-Pierre Flais, deputy chief executive of SGPB Hambros, another reason why perhaps historically wealth management firms weren’t so focused on operational optimisation was that the priority was primarily on “tailor-made”, case by case and hence too manual service provision – often at the expense of efficiency. “Those days are now long-gone” and optimisation is now essential, he said: an increased compliance burden, pressure on margins but higher fixed costs and heightened demand from clients for service excellence has left firms with “no choice.”

Cath Tillotson, managing partner of Scorpio Partnership, pointed to the rapid rise in the use of platforms, both of wrap platforms in the UK, and of unified managed accounts in the US, and pointed out that as firms look to capture greater efficiencies, volume will be key. “It is volume of assets under management which will allow innovation and provide firms with the revenue base to grow,” she said.

Flais did however caution that firms – particularly large, diversified ones – should not rush to centralise all their processes in a bid to secure greater efficiency without careful planning. They should, instead, take account of factors such as the legal entity status or the local regulatory requirements of the individual operations of each business... From this perspective, it is sometimes better to focus on aligning the operating processes of the entities working under the same business models, for instance via the setting up of global “centres of expertise”. As he argued, while optimisation exercises have a lot of potential for success, they also have a lot of potential to fail – with dire results if not properly thought through.

Overwhelmingly, the take-away message from the briefing was that while operational efficiency is naturally a priority in the context of increased fixed costs and pressure on margins, optimisation efforts must be highly-focused and predicated on a thorough understanding of where a business is, and where it wants to be. In the words of Hicke, without clarity on a firm’s current capabilities and advantages any attempt towards optimising operational models is “an endless exercise in futility.”

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