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Wealth Managers Get Defensive As Risks Swirl - Deloitte

Jackie Bennion

26 October 2020

(An earlier version of this item appeared on Family Wealth Report, sister news service to this one. The report comes from the US but the lessons are global in scope, so we are reproducing this article here.)

These days it is impossible to talk about risk without talking about the part technology plays. The risk advisory practice at as one singular platform to indentify patterns of risky behaviour?” It is largely what the pandemic has forced firms to consider as workforces and operational tasks have been dispersed far and wide.

Take someone trading in a personal trading account. That may be perfectly fine, Ehrsam suggests. But link it to an email or some other activity by the trader and it might indicate collusive or fraudulent behaviour once you start piecing bits of data together. “A silo approach wouldn’t catch that,” he said.

Another substantial change Deloitte's wealth management clients are grappling with is how do you observe employees who are no longer office-based?

Ehrsam argues that this is a critical element of the supervision.

“When someone comes into the office every day you get to observe and supervise them firsthand. And there’s a comfort in that. But now people aren’t coming to the office, you are not getting that direct line of sight or those daily conversations so you are looking for signals in the data rather than in the human interaction.”

In the early months of the pandemic, businesses were congratulated and surprised themselves by how well operations held up under new remote-working conditions. But from Deloitte's ringside seat, fatigue and other performance factors are now taking their toll. "I used to think in the first few months of this that everyone’s productivity went through the roof because what else did they have to do?” But the problem is that there are still far too many disconnected back-office manual processes functioning on old technology. “As a result, operational errors are rising,” Ehrsam said.

Getting a pulse on the cultural health of a business is another concern as people are no longer sitting across from one another able to pick up on those critical in-person cues. Or for that matter provide mentoring, extemporaneous collaborating and, in defence of humans, all those other unique traits that have taken us millennia to develop.

We asked Deloitte how this lack of physical interaction might be affecting a firm’s reputation risk.

“It is an interesting question. We are talking to a client that is very concerned around their culture. They are saying: ‘What is changing about my business and what are the longer-term changes? And how does my organisation’s culture protect specifically against reputational risk?’”

The bricks holding your business together are your culture, Ehrsam explains. “If it breaks down, it is often what exposes you to reputational risk because it is a failing of your people when something arises out of bad culture."

In the world we live in, organisations are rightly worried about their reputation and COVID-19 has only increased scrutiny. "It gets back to how do you make sure your people are making the right decisions as they face the obstacles of their job. And that often comes down to how you act when no-one else is in the room watching you,” Ehrsam warns.

Others pressures changing technology decisions for wealth managers are coming from regulators; notably meeting new regulation “Best Interest” rules introduced by the SEC in June on the transactional brokerage side. The compliance is aimed at strengthening fiduciary standards for broker-dealers when making any securities recommendations to retail investors.

Ehrsam says the measure has speeded up advisory firms using technology to pull in third-party information and data to be able to make product comparisons. “It’s one space where we are seeing a lot of technology advances in terms of being able to meet these new best-interest obligations.”

Rolling over
It has also raised the risk spectre for regulators monitoring rollovers - people leaving a company and rolling over their defined contribution assets into a self directed IRA platform. The fear being that they are leaving the safety and security of the defined contribution space for a brokerage account “where they can buy and sell many more types of products,” Ehrsam says.

He questions how well the government can roll out something like Reg BI in the current climate.

“It used to be you would go to the field, you’d meet with the bankers, you would go through a training session, you’d be there to answer questions; none of that exists in person now. So the change-management aspect has become really difficult.”

Then there is cost management. Although cost pressures have been around as long as Ehrsam has been doing what he does, he feels that these are getting more and more pronounced.

“The revenue side is pressured; there are new entrants; there are digital advice platforms; there are fintechs. Firms are asking, how do you take cost out of that in an effective way?

“We were just talking to a wealth manager whose mailing cost was significantly larger than their peers. This is a private bank and they are still mailing lots of welcome packets and statements because they have customers who have said ‘No, I still want my paper.’ The cost savings of removing a paper statement delivery can be tremendous if 80 per cent of your clients have been receiving information this way."

It has come down to: "Can you take costs out of something as simple as mailing?”