Agreeing partnerships with the right fintech partners can be part of how wealth managers, private banks and others in the industry keep and build a competitive edge. This article explores the terrain and gives an array of examples. This article is the third in a four-part series.

This is the third in a series of articles from Panos Archondakis, global head of banking and wealth management at EPAM Systems. (See the first and second articles.) In this article he examines what wealthtech is doing to improve how the industry operates, the client experience, and the success of businesses. Panos looks at a number of firms operating in different areas, such as automated onboarding, compliance, portfolio construction, order execution, risk analytics, advisor tools, and more. 

This news service is pleased to share this important content; the usual editorial disclaimers apply. We invite reactions, and please email tom.burroughes@wealthbriefing.com if you want to jump into the conversation. 

Wealthtech refers to the use of technology to improve wealth management practices. It involves leveraging innovative technologies, such as artificial intelligence, big data and automation, to optimise various aspects of wealth management and investment services.

The wealth management industry has undergone significant changes in recent years. Increased regulatory requirements and compliance standards, evolving customer needs and expectations, and the rise of tech-savvy startups have intensified competition within the wealth management landscape, placing greater demands on traditional wealth management firms to adopt technology-driven solutions to meet these challenges effectively. 

1. What wealth management functions are table stakes? And what digital tools are available to investors and wealth managers?
Before we dive into what’s available, it’s worth looking at the typical wealth management functions and how wealthtech technologies are enabling wealth managers to leverage digital tools to improve efficiency, reduce costs and improve the customer experience.

•  Onboarding, KYC and customer compliance: Onboarding is the process of verifying a new client's identity and financial information. KYC, which stands for “Know Your Customer,” is a regulatory requirement – financial institutions must verify the identity and financial information of their clients. Ongoing customer compliance is the process of ensuring that clients continue to meet the requirements of the applicable regulations.

Wealth management companies can leverage wealthtech platforms to automate the onboarding, KYC and ongoing customer compliance processes to help reduce the time and cost of these processes as well as improve compliance. Notable providers include SmartKYC, LexisNexis, Reuters World-Check and CLEAR.

•  Workflow management and process automation: Workflow management and process automation, such as automated onboarding, reporting and trading, are essential for wealthtech companies to help improve efficiency, reduce costs and improve customer service. Notable providers include Pega, Refinitiv and Reuters.

•  Mandate compliance and advisor compliance: Mandate compliance refers to the process of ensuring that an investment portfolio meets the specific investment objectives and risk tolerance of the client. Advisor compliance, however, refers to the process of ensuring that an investment advisor is following all applicable laws and regulations, helping to protect clients from different types of financial harm.

To manage mandate and advisor compliance, wealth managers can use a wealthtech platform to automate the compliance process, ensuring that investment portfolios are selected based on the client's risk tolerance, that all transactions are recorded accurately, and that investment advisors are following all applicable laws and regulations to reduce the risk of fraud and other financial crimes. Notable providers include APIAX, LatentZero and Charles River.

•  Investment strategy management, portfolio construction and portfolio optimisation: Investment strategy management looks at developing and implementing an investment plan that meets the specific needs of an individual or institution. This process includes portfolio construction, by assembling a group of assets that are expected to meet the investment objectives, and portfolio optimisation, by adjusting a portfolio to improve its risk-adjusted return. These three concepts are interrelated and are often used together to create an investment plan that meets the specific needs of an individual or institution. Notable providers include Expersoft, UBS Partner, Temenos, FNZ and additiv.

•  Order and execution management (OEM) and market access: OEM refers to the process of placing and executing orders for financial instruments, while market access refers to the ability to access different markets and trading venues. An OEM helps wealth managers improve the chances of getting the best possible price for an order. Market access enables investors to access different markets and trading venues, giving them more choices and helping them to find the best deals for their orders. Notable providers include Charles River and LatentZero.

•  Portfolio performance and risk analysis providers: These types of providers help wealth managers to measure the return and risk of a portfolio over time. Portfolio performance analysis is important because it helps investors track the performance of their portfolios and to identify areas where they may need to make changes. Risk analysis is also key because it helps investors understand the risks associated with their portfolios and to make informed decisions about how to manage those risks. Notable providers include SwissQuant, Expersoft, Aladdin and RiskMetrics.

•  Client channels and adviser tooling: These are essential tools for wealth managers who want to provide their clients with a high-quality customer experience. By using the right channels and tools, wealth managers can improve communication with their clients, make better investment decisions and provide better customer service. Notable providers include Additiv, InvestCloud and Crealogix.

There are many more capabilities in a wealth manager, but these cover some of the critical functions supporting the operation of the business. Naturally, there is a wide range of wealthtech providers who offer platforms or “as-a-service” offerings in all these functional domains.

2. What external factors are influencing the freedom to choose?
It is now almost a given that any fintech platform will be made available “as-a-service” in the cloud, but sometimes a key consideration can be whether it will operate in a private data centre or in a private cloud. This is particularly relevant for organisations or jurisdictions where mainstream public cloud services and offerings are restricted.

Regulators play a significant role in directing wealth managers to specific solutions. With strict rules in place regarding KYC, tax, suitability, cross-border advice and product recommendations, the complexity almost requires wealth managers to consider third-party solutions, while at the same time limiting the number of vendors offering tailored solutions in specific jurisdictions.

With further pressure coming from commercial constraints over the cost and time-to-market of wealthtech solutions, there may be a gravitation towards a small set of vendors in certain markets, especially if the market size itself is relatively small.

However, the wealth managers who have invested in proprietary systems in any of these in-demand domains are now presented with an opportunity to expose the functionality via APIs to unlock new revenue streams as a supplier of a trusted solution to peers and competitors. The opportunity is to become a player in the ecosystem and to monetise prior investments.

3. How reliable are fintechs and other platform providers?
Once they have achieved a certain scale and are demonstrating sustained performance and revenue, platform and “as-a-service” wealthtech providers can be considered fairly reliable and self-sustaining. However, a key problem for a fintech is how to scale rapidly, as product feature enhancement, general maintenance and support efforts increase almost exponentially as the number of clients using the platform increases. Also, it can be a hard constraint for these second-phase fintechs to obtain access to sufficient high-quality engineering and product management personnel to meet client demands.

Another problem affecting the consumers of wealthtech platforms and services is the ever-present threat of consolidation. While a lucrative exit is often an end goal for the fintech, it can leave existing clients high and dry if the platform is acquired by a third-party vendor and essentially shut down, or even worse taken in-house by a competitor bank looking to shut out competition. There has been a wave of this type of consolidation in recent years which highlights the risk, with InvestCloud’s merger with Finantix and FNZ’s acquisition of Appway being two high-profile examples.

4. The opportunity for banks and wealth managers
There are two main opportunities for banks and wealth managers. First, monetising their existing investments into high-quality, regulatory-compliant platforms by exposing the service to peers and competitors is a well-trodden path as highlighted by UBS, Deutsche Bank, eMoney and other large asset and wealth managers in the US and globally.

Secondly, there are numerous examples of wealth managers wanting to leap-frog the competition and bypass the lengthy and potentially painful and costly process of developing a proprietary solution in any of the major functional domains. The answer is to simply acquire a leading platform or service provider and gain the benefit of a stable and tested solution, while simultaneously denying competitors access to the same functionality.

Final thoughts 
While there is a constant burden of running to keep up with new regulations, technological innovation and evolving customer demands, there are also clear opportunities for wealth managers who are willing to diversify their offerings and potentially open new revenue streams. Exposing robust, complex, and mandatory services to others for a fee provides a new way to realise a return on the investment, while timely and considered acquisitions and partnerships with appropriate fintechs can create a competitive advantage, at least for a period of time. We will explore some of the opportunities in a future article.