The firm's head of architecture and chief relationship officer of wealth services in EMEA spoke about various tech issues within wealth management including regulation, age demographics, family office difficulties and blockchain.
Regulation is shaking up how firms approach their spending on technology.
The wealth management industry has been hit with several regulatory policies over the last few years, including GDPR and Mifid II, which have taken their toll on businesses. Fines for non-adherence to GDPR rule changes amount to €20 million ($24.8 million) for any business anywhere in the world that deals with EU citizens’ data. In 2017, professional services firm Duff & Phelps produced a survey that found that professional services firms typically spend four per cent of their total revenue on compliance, but that could rise to 10 per cent by 2022.
With these large numbers in mind, Daniel Semal, head of architecture at Pershing, a subsidiary of BNY Mellon, said during an interview with this publication, that firms have started to think about their technology plans due to the rise in costs and the work needed to make them tech compliant.
“I think regulation is really shining a light on financial services sector companies that buy a piece of technology and just stick it in the corner,” said Semal. “The idea of a regulator coming along and saying that technology has to do certain things is really starting to hurt firms. If you consider the technology that a firm might be running its entire wealth management business on, being told this has to be GDPR compliant makes it quite interesting, as they appreciate the need to have more control over their systems. Of course, there is some cost impact to this as we have to spend money making our systems compliant. We don’t have systems that are cold and sit in the corner, but they are our own systems. This shifts our resources but it does not worry us. Now, we make certain our systems are compliant and then look at how we can make improvements to add value for our clients.”
In 2017, Boston Consulting Group said that pre-tax margins for global wealth managers had fallen from 33 basis points in 2007 to 22.4bp in 2016, which is due to compliance costs. In a report by PricewaterhouseCoopers in 2018, over four-fifths (83 per cent) of wealth and asset managers were “somewhat or extremely concerned” about over-regulation. Also EY’s report in 2017 found that 87 per cent of wealth firms thought that new compliance and regulatory requirements were the largest disruption to existing business developments.
However, regulations can have a positive effect when it comes to technology, according to Maarten Heukshorst, chief relationship officer of wealth and advisor services in Europe, Middle East and Africa, and broker-dealer services in EMEA and the Asia-Pacific region at Pershing. He also spoke to this publication.
“I think the main regulatory themes coming through now have good intentions,” said Heukshorst. “These are meant to improve competition and transparency, and increase investor protection – in principle, these are all good things. But they do mean a lot of work for both our clients and ourselves. The cost of doing business in financial services has increased as a result. I won’t deny that has been good for us because we have a certain capacity to absorb that cost, but not all smaller wealth managers or IFAs have been able to do the same. In turn, this has driven some flow to the larger players. Scale has been an important factor for us. A lot of the operational work that goes on behind the scenes to run private client investment and financial planning businesses has now shifted to us – many firms would have done it in-house prior to regulatory changes.”
His comments find an echo in remarks heard by this publication at conferences and in other meetings that while compliance-driven spending can be at the expense of business growth, robust compliance can be a differentiator for a business. It's a debate that runs and runs.
Technology has become one of the most important sub-sectors within wealth management as firms reach out to tech-savvy younger clients.
One cannot mention Millennials without 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.
But Semal, who joined Pershing in 1997, believes that Millennials are not always the generation looking for the digital wealth management proposition, and this means firms have to make tech as user-friendly as possible.
“There have been many studies around Millennials and digital relationships,” said Semal. “Millennials getting into pensions early haven’t just been saying ‘I want everything on my phone’. They have been savvy enough to recognise, “this is for my future in 50 years’ time”, so they followed the interaction process. On the flip side, the ageing population increasingly expects to see what their investments are doing on their iPads and iPhones. A few years ago there was a view that to get new money we need to go digital. This is a sweeping statement but the digital proposition is key – we are doing a lot more on simple, user-friendly digital interfaces. You need to give people simplicity and power to own their information. But they still expect to talk to someone when they want to.”
Heukshorst, who joined the firm from UBP in 2015, added: “The reality is how are you going to be relevant to the next generation? We talk about Millennials – but it is going to take some time before they are all the wealth owners. Tools are crucial as the next generation are ‘digital natives’ – and this is where digital strategies come in. Still, there need to be discussions with the whole family rather than just the pot owner. And there are other concerns to consider, such as the next generation and Millennials paying more attention towards impact investing, leading to further thought about what products to sell.”
Family office challenges
This publication interviewed Stonehage Fleming’s chief technology officer, Nicholas Bernard, who discussed how the family office is taking its time with the introduction of technology, not just launching a solution for the sake of it. However, the firm wants to have control of its tech operation.
Some family offices that outsource their tech solutions. Pershing's Heukshorst said that it is typically hard for firms like Pershing to cater for family offices due to the complexity of wealth planning at stake.
“We do service family offices, however these obviously cater for the ultra-high net worths,” said Heukshorst, who has 25 years’ experience in the sector. “Typically, the UHNW space has been serviced by private banks, so the challenge that family offices face is the open architecture of where the money sits and accounts are held. In fact, with a family office, the pot of money could be held in 50 different locations, investing in non-traditional items. The challenge we have with some of the family offices is that a single-custodian model doesn’t work. But that is where technology can help. For instance, if you take in a third-party feed, you can still be the custodian of the bulk of the business and take a feed for the whole of the portfolio that the family office looks after.”
Blockchain, the distributed ledger technology underpinning crypto-currencies, rose to fame in 2009 as the technology underpinning bitcoin, the first and most well-known crypto-currency. Last year saw bitcoin’s meteoric rise as its value rocketed from under $1,000 to over $20,000 in less than a year, before retreating back to around $8,000 in today’s market.
HSBC said it had completed the world’s first commercially viable trade-finance transaction using blockchain in early May. This publication interviewed the Isle of Man Government, which said it will aim to combine its work on bitcoin and blockchain with the financial services sector.
But Semal believes that the financial services sector is still far away from knowing how much blockchain can influence the wealth arena.
“I think blockchain is a difficult one for the whole industry,” said Semal. “Thankfully, the blockchain bubble hasn’t burst, but it has levelled off. Five years ago, blockchain was expected to change the world – and it was going to change the world “next year”. While it has the potential to alter the way the financial services sector interacts that is a long way off, even if real solutions are starting to appear now. There are still some massive technology issues with the speed and efficiency of distributed ledger technology, especially as a replacement of core market infrastructure, and there are still security concerns. Then there is the crypto space. We will have to wait and see if crypto-currencies become regulated in the next ten years and if, for example, five per cent of a person’s pension pot becomes invested in cryptos. That is something we would have to service – but no one knows what that business model will even look like yet.”