The front office versus back office argument is age old across every industry. Should a firm invest into polished salespeople or focus on the less visible side?

The front office versus back office argument is age old across every industry.

Should a firm plough investment into polished salespeople and making money, or should it focus on the boring unglamorous necessities, essentially getting the house in order - it’s a big dilemma.

This was an opinion aired at the recent Breakfast Briefing organised by the publisher of this news service; the event was held under the headline "The Difficult Truth About Ops: Hunting the elephant in the room". The briefing was sponsored by BRT, and held at the Carlton Club in London’s St James’s district. 

The five expert panel members were Alan Hamilton, independent consultant, Simon New, director for wealth and asset management at EY, Cath Tillotson, managing partner of Scorpio Partnership, Bruce Weatherill, chief executive at Weatherill Executive Consulting and Roy Dunlop, managing director at BRT. The panel was chaired by Stephen Harris, publisher of WealthBriefing.

Wealth managers and private bankers believe the traditional front office functions such as advice, sales and planning are core, whereas slick internal IT functions and data crunching come second.

But what the industry has failed to notice is modern technology has blurred the traditional lines between these two different functions, meaning that front and back office are now one and the same thing, delegates were told.

“It’s less a debate about investment in back office or front office. You can’t throw a lot of investment into the front office if the back office data isn’t being represented in a client-centric way,” said Hamilton. “Once you’ve done that everything else will have transparency and it’s organised. Someone talking to a client that has a joined-up system has all the information he needs about the client in one place. That’s the challenge – whether it is front office or back office they need to be joined,” he said.

The underinvestment in information technology is causing firms big problems. Basic client needs are being unfulfilled while new regulation being implemented from the Financial Conduct Authority is making demands on the industry that it cannot keep up with. The Retail Distribution Review legislation was introduced at the end of 2012, aimed at cleaning up the financial advisory industry by providing greater transparency for clients using wealth managers and private bankers.
Yet two years down the line and still wealth managers are struggling to perform simple functions such as detailed fee breakdowns and consolidated balance sheets for their clients.

“Huge underinvestment in technology has held things back enormously,” said EY's New. “I work with a number of clients where they struggle even to provide a single view of their own internal assets to a client let alone provide a wider view including third party products.”

Wealth managers say they cannot keep up with the huge amount of new regulation created since the financial crisis in 2008. The constantly changing legal landscape has caused uncertainty among firms unsure about where exactly they should invest.

“Our resources are finite and every time we come anywhere close we have to spend a huge amount of money on the next regulatory initiative. When I joined my firm three years ago, consolidated reporting was one of the first things highlighted to me that we wanted to do,” said a senior operations executive from the audience participating in the discussion. “Three years later we’re still not any closer. Not because our heads are in the sand but because we’re fighting every regulatory initiative when it comes our way.”

Yet according to Hamilton firms can only beat the never-ending regulatory spiral through investing in technology so that internal systems can adapt quickly to any unexpected changes.

“You have to get ahead of the technological challenge; then it is easier to react to the regulatory changes,” Hamilton said. “If you can get into that position and some firms have then their adapting to these changes more easily once they’ve made that big investment. You have to be proactive rather than reactive; you have to get ahead of the technology. The investment you need to do to drive transparency and meet the client issues is the same technology that you need to deliver that information to your clients.”

Of course updating and introducing new IT systems can be costly – particularly for a small firm. But Weatherill said the cost excuse is no longer valid and questions whether some smaller firms are deliberately hiding behind IT “issues” as a way of preventing clients comparing them to their competitors.  

“Nearly all brochures promise consolidated reporting and it’s not delivered. Why is it not delivered – the real issue in my view is that many smaller wealth managers have no desire or intention to make their data available to anyone else to consolidate it because then the client can begin to compare different organisations,” Weatherill said. “So actually I think it is the smaller wealth managers who often keep it for themselves and don’t want to share their data. In a world in which wealth managers are trying to provide a premium service to their clients, the inability to do a consolidated report must be one of the truly stupid things.”
The general view expressed is that the major issue for firms that don’t have the right systems in place is that clients are taking their business elsewhere. RDR has meant the client now holds the power as they can see exactly for what wealth managers are charging fees.

If wealth managers cannot justify their fees and back up their work with heavy amounts of data then the likelihood is they will be left behind, was the view expressed by several people at the event.

“As clients expectations of transparency increase, as they expect the suitability rules to kick in for them and a service much more orientated around their needs then we are going to see pressure on fees and clients starting to demand different solutions,” said Cath Tillotson, managing partner of consultancy Scorpio Partnership.

“Some of them will continue to want a percentage of assets under management but their will be others who do want performance fees or fixed fees or transaction fees and the emphasis is on the industry to start thinking in much more flexible terms around how they respond,” she said.

However, embracing technology and data is not just important for keeping clients. It is also a vital tool if wealth managers are to woo the next generation. The industry will reach $102 trillion assets under management by 2020, up from $64 trillion in 2012, according to PricewaterhouseCoopers in its latest report on the sector. The report adds that unless wealth managers step out from their technological malaise then other internet focused industries could come in and snap up the business.

The PwC survey also reveals the chasm between what asset managers and clients expect. For example more than a quarter of asset managers were not sure whether the use of mobile technology for distribution or communication would play a critical role in their business.

“We believe that the expectation gap between customer needs and asset managers’ slow take-up of technology could provide opportunities for further new entrants to come into the industry. The most likely source of disruption will come from social media or technology companies, which may combine their reach, knowledge and influence with banking alliances to provide compelling asset management propositions,” the PwC report said.

“A social media firm such as Google, Facebook or Twitter or product providers such as Apple (through iTunes) or Amazon could, for example, provide front-office services, and partner with, or even buy, a back-office servicing firm to create an integrated asset management structure,” it added.

A member of the audience said banks such as Spain’s BBVA have been leading the way on this front - creating a digital banking unit and snapping up start-ups such as Wizzo which allows individuals to make payments to each other using just their mobile phones. It also acquired online bank Simple in February, which seeks to distinguish itself from traditional banks by eschewing fees and offering its customers data-rich analysis of their transactions.