WHAT THE CONSULTANTS SAY: PwC On Issues Facing Wealth Managers

Jeremy Jensen and Ian Woodhouse PwC 27 March 2014

WHAT THE CONSULTANTS SAY: PwC On Issues Facing Wealth Managers

Here is the latest in a series of commentaries by consultants on this news service about the issues facing the world's wealth management sector.

This publication has approached a raft of consultants operating in the wealth management sector to give their views about a range of challenges and opportunities for the industry in different parts of the world. A number of articles are being released in these pages in the coming weeks and we hope readers find them stimulating. The articles have been sought by this publication and also by Bruce Weatherill, of Weatherill Consulting, and also chairman of ClearView Financial Media, publisher of this news service.

Here are comments from Jeremy Jensen, PwC wealth management partner and Ian Woodhouse, PwC wealth management director.

It’s useful to reflect on the critical issues that wealth managers face in 2014 and how leading players are positioning themselves to capitalise. The challenge is to understand how best to capitalise on the industry inflection point.

A combination of powerful forces - client evolution, changing expectations, complex regulations, technology changes and more volatile markets - are driving the wealth industry to an inflection point. This is reflected in pressures to grow revenue and contain litigation and compliance costs. PwC’s latest Global Private Banking and Wealth Survey shows global cost/income ratios at 65 per cent in 2013.

Typically, in an inflection point, traditional competitive advantages come under pressure from new and disruptive entrants. This usually results in industry consolidation and exits. Subsequently, a new line up of industry winners and laggards emerge.

This is a challenging time for wealth management firms, but can also represent an opportunity for those organisations that can understand the key trends, are willing to challenge the status quo and who can capitalise on the inflection point.

Our survey shows a realigning of budget spend priorities. Supporting and enabling business growth is now the main priority for respondents, followed by cost reduction through enhanced efficiency, becoming a more client focused organisation and addressing legal and regulatory compliance also emerging as key themes.

Supporting and enabling business growth
Significant growth differentials are emerging across markets and client segments, and this drives a requirement for a more granular approach to market and segment priorities. Many survey respondents are now in the process of refocusing their market coverage and client segment orientation.

Increased regulatory demands have led to advisor client facing time in some countries reducing to just 40 per cent of total time, which constrains service and selling time at a point when client needs are changing and there is a much greater requirement for client insight to create responsive propositions to grow revenue.

Several wealth managers are improving how they undertake their client research, engagement and survey insight programmes. These now anticipate where client societal and behavioural changes are taking place to inform approaches to exploit them. For example, a decrease in client trust is fuelling competition from alternative competitors, such as multifamily offices and private client investment firms that are perceived to be more aligned with client interests.

Digitalisation across the industry is causing significant disruption as it spreads in a number of ways across different segments, ranging from simple self directed and guided solutions, through to approaches that complement the client advisor.

Emerging technologies, such as tablets and mobile devices with rich interfaces and visualisation, enable clients to receive information in real time, and with the advent of social networking, big data, cloud computing and gamification, firms have a host of new approaches to gain and use client insights from both structured and unstructured data. These will enable superior client insight, more personalised engagement and support deeper interactions aligned across multiple channels to create superior client experiences.

Although there remain numerous challenges associated with digital, including cyber security and regulatory uncertainty, it is clear that the nature of the traditional client and advisor interaction models are changing and it will be necessary to develop options for a digital strategy.

Cost reduction through enhanced efficiency
With sustained cost pressures, organisations are revisiting their strategies across the business model of distribution /advice, products and solutions and servicing and platforms. They are also exiting some markets and rationalising their booking centre networks.

Our survey indicates seventy per cent of participants are now seeking more centralisation of activities through internal shared services, sixty three per cent are seeking end to end process and efficiency improvements and just over half are now using outsourcing arrangements.

In outsourcing, more options are now available to address legacy infrastructure such as software as a service and the adoption of model bank approaches built around adopting common standard processes leaving institutions to customise only where they can really differentiate and add value. With this comes the need to assure the additional outsourcing regulatory and risk requirements and controls are in place in key areas such as client data protection and resilience.

This requires skills in designing and implementing target business and operational models which can anticipate the future, manage the total cost of ownership (TCO) and have a more flexible and modular framework and architecture to meet evolving business, regulatory and digital requirements.

Becoming a more client focused organisation
We believe the industry’s overarching imperative is to become more client focussed, delivering a superior client experience which translates into good client and commercial outcomes though loyalty, advocacy, and share of wealth.

Several participants are investing in their client engagement programmes, but are finding that delivering an impactful client experience requires excellence across a number of dimensions within the organisation, including client insight, relevant key performance indicators, effective channel and journey management, and strong governance .It further requires evolution in an organisation’s capabilities and a transition from being product specific to becoming truly client centric.

We are seeing signs of progress across the industry. For example, some firms are improving the key performance indicators on which they focus by moving from a focus on complaints to tracking other client outcome indicators, such as satisfaction, loyalty etc. Others have appointed a head of client experience to ensure clear organisational accountability for client focus.

Addressing legal and regulatory compliance
Responding to a fast moving, occasionally ambiguous regulatory and risk environment, will remain a significant challenge. For some players, there is the additional challenge of achieving clarity across different jurisdictions and overlapping compliance requirements. AML, tax transparency and integrity, security and privacy risks will be at the fore.

Further challenges will come from conduct, reputational risk and suitability, greater price transparency, the abolition of retrocessions, together with the assurance of no conflicts of interest, increased regulation on new products development and testing and change to remuneration. These will increase pressure on margins and make product and service innovation more challenging.

Risk and compliance management functions will need to keep pace with upcoming regulations and at the same time recognise that they have now become core to strategic management with a need to ensure robust risk frameworks and appetites which are embedded in decision making and in the culture at all levels.

Responding to challenges and seizing the opportunities
There is a danger that firms will underestimate the need to respond to this collection of threats and challenges. In doing so, they may fail to seize the structural cost, regulatory and client experience opportunities of the industry inflection point.

Management should be vigilant and challenge their status quo by looking at which of their traditional advantages and capabilities are now under pressure and what new advantages and capabilities will be required, assess the likely impacts and prioritise the best options to address both the gaps and opportunities.

Successful implementation of the changes required will need attention as many firms have a fragmented change agenda with a lack of alignment across the business .This should be addressed through providing better business design authority support and through stronger delivery and risk management assurance of their programmes.

The next few years will be challenging for the wealth industry. However, there are many opportunities to capitalise from the changes now underway. Executives with awareness who can respond with a pragmatic and aligned approach to address performance gaps and seize opportunities will lead their firms to become capitalisers rather than laggards after the current industry inflection.

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