This publication interviewed SEI's wealth business about effects of regulation on wealth managers, technology and how the firm says it can ease the pain of M&A transitions.

Wealth managers with in-house technology services aren't so common as regulatory costs force them to consider hiring outside help, the proposition director at SEI Wealth Platform UK argues.

New regulations, including Europe's MiFID II and GDPR, are driving up compliance costs. And this is causing wealth managers to re-think how they pay for technology, Kevin Russell told this news service in a recent interview.

“In the private client segment, the medium to larger size firms, typically around half of those that we have spoken to, run their own operations [and] have in-house technology,” said Russell. “I think things like MiFID II coming along on the back RDR [Retail Distribution Review], and the pace of regulatory change, has made it challenging for firms that have in-house technologies, as they look to grow and acquire. For us, MiFID II has been a trigger for some of these firms to think the time is right for them to extend conversations about changing its platform use, as before they would have said that they were comfortable." RDR took effect at the start of 2013; MiFID II came into force in January this year; and GDPR, the overhauled package of data protection rules, becomes law from 25 May.

“What some firms are finding now is that the cost of operations and technology is outstripping the rate at which they can grow. Their margins are coming under pressure. Combine that with the price of active management, price of advice, price of funds and the downward pressure by the regulators, it means there is a stress on that business. One way to relieve that stress is to think 'how we can focus on business growth and development, and let someone else do all the stuff that connects everything?' We can put in play solutions for those firms to allow them to focus on their primary objectives, which are the clients," he continued.

According to a 2017 Duff & Phelps report, regulatory costs could more than double over the next five years. The report found that firms typically spend four per cent of their total revenue on compliance, but that could rise to 10 per cent by 2022. In 2017, Boston Consulting Group said pre-tax margins at global wealth managers had fallen from 33 basis points in 2007 to 22.4bp in 2016. The fall was a result of inflated compliance costs, it said. 

Role of technology
The great wealth transfer will see a reported $30 trillion handed tothe next-generation in North America alone over the next decade. The clients of tomorrow want technology to help manage their financial needs.

One cannot mention Millennials without talking touching on their demand for technology. According to a recent study by Deloitte on Millennials, aged between 18 and 34, 80 per cent of this population cohort own a smartphone. Furthermore, at least half of Millennials want to use one for their financial planning, according to Legg Mason.

With this in mind, Russell said firms are preparing systems for the next wave of tech-hungry clientele.

“I think there has been a huge change in the mind-set of some of our clients,” said Russell. “We did research last year, amongst 12 of the top 50 investment managers. One of the key themes that [emerged] was the inter-generational transfer. It is a key challenge for wealth management firms. I think some have been more proactive than others about addressing that challenge. The primary thing that firms are starting to do more is think about how do families and the next generation want to contact with them. The next-gen transfer will demand more for digital, more demand for mobile, and clearer and transparent services.

"The next-generation are taking more of an interest in their financial situation, and are therefore more informed. The shape of services that are offered either through advice or to the customer need to change. I think some firms have got that and know they need to change, and we have supported the development of a new customer portal for its clients and mobile apps. We are seeing clients think digital with the change from face-to-face to webchat. There is more of a demand for us to extend our services to new communication channels. Research has shown that Millennials want richer client reporting, on a portal, pdf or print out – and we are seeing demand for increased flexibility on that so access to more data, charts and decision information.”

M&A
In recent years, there has been a trend of merger and acquisition deals in wealth management, with firms seeking scale to preserve an edge at a time of rising regulatory costs, while others are spinning off operations seen as non-core to concentrate on areas in which they can achieve profitable growth.

A Pricewaterhouse Coopers (PwC) report last year on asset and wealth management deals found that disclosed deal values hit record levels in 2017, totalling £11.4 billion ($16.03 billion) in the year to September.

When firms come together, different operating systems can make corporate marriages unhappy. Russell said that SEI can play a role in helping firms solve amalgamation issues.

“Firms have different systems, and when one firm acquires another or there is a merger, there is a need for a review of that firm in the context of amalgamating the systems together," Russell said. "You can’t just place firm A activities into firm B’s operating model. If you do that it won’t work. What you do have to do is go into a considered change programme, which looks at which firm has the more efficient model to use. And if the firm is not ready for this then they need to get the right infrastructure in place with right people and structure. And then you can transition the business into a new structure.

"There is an order with these things. Before you migrate processes from firm A to B and you deliver a new product, get the building blocks right. Firms will typically have an idea of how they want to run it, but it’s part of that acquisition process, it’s never a complete thing until the organisation comes together. The role we play in those situations is a supportive one to help the firms join together, and we have a team here that supports organisations going through an M&A deal."

This publication recently reported on the the challenge of removing tech wrinkles in wealth management M&A, following an intrerview with Ben Revill, business manager at Xpedition, formerly known as Touchstone CRM.