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GUEST OPINION: Wealth Management Tech Infrastructure - An Evolving Picture

Hamdan Khan, Dan Belshaw

Ernst & Young

1 July 2013

Wealth managers are starting to boost the amount of “transformational” spending on technology and other areas to cut costs, boost client service and stay profitable in a tough environment.

This commentary by Ernst & Young’s wealth management experts Dan Belshaw and Hamdan Khan looks at the issues.

The wealth management industry is undergoing a sustained period of upheaval. The ongoing wave of regulatory reform hitting the industry is increasing cost and influencing changes to business models at a time when margins across the wealth management value chain are under pressure.

In response to these pressures, a number of wealth managers are starting to increase “transformational” spend and are adapting to the changing landscape. Investment in new technologies is increasing as managers look to cut costs, improve client service and support/provide revenue generation opportunities. Outsourced and white-labelled options are increasingly being seen as credible alternatives to in-house solutions, often blended into a “best of breed” infrastructure. 

Firms are increasingly adopting “integrated” investment management technology platforms that provide enhanced portfolio management tools to the front office while increasing automation and scalability through the middle and back-office in a single platform.

These platforms streamline client on-boarding processes, enhance fee processing, and provide pre and post trade compliance functionality to help ensure investment visibility to support management' s ability to remain within a client’s investment mandate.

There are only a relatively small number of wealth management-specific integrated platforms available and these technologies can require significant investment to deploy successfully. Despite this upfront funding and the complexities of implementing the systems, an integrated platform can generate long term cost savings as disparate technology landscapes can be rationalised and back-office business functions streamlined.  As well as efficiency benefits, business risk can be reduced as front office practices and data collection can be standardised for both regulatory and business reasons.

Investment is also being made going into front-office advisor tools in response to a growing trend to build out front office infrastructure for enhancing client interactions and providing financial advice. These tools can provide support for a range of activities including suitability assessment, financial planning, CRM, asset allocation, and investment research functionality to support advisors in building a holistic view of a client’s wealth. They also allow advisors to manage investments in line with the client’s objectives and risk appetite.

As an industry, wealth management has been slow to embrace digitalisation and consequently has fallen behind in providing clients with access to information and services.  An emerging trend is to provide advisor tools alongside next generation client web portals to enhance collaboration between client and advisor and to give clients greater access to their personal and investment data. As is evident in other markets such as Australia, Far East and the US, the adoption of the latest technologies for digital channels and client facing platforms is crucial for wealth managers in targeting younger professionals and entrepreneurs as well as mass affluent clients moving into wealth markets.

White labels

As wealth managers look to broaden their client propositions or reduce cost, more innovative solutions are being considered and used. Option such as outsourced technology providers and “white labelled” solutions are proving increasingly popular with solutions such as managed portfolio services and deposit and lending products.

These solutions allow wealth managers to implement technology and product solutions that are consistent with the wealth managers’ branding but are typically quicker to deploy, with lower risk and often more cost effectively than trying to undertake internally.

Wealth managers are exploring the benefits of outsourcing in addition to implementing software. One of the perennial challenges in the industry is the approach to managing a high number of small client portfolios that can be costly to maintain.

With the burden of increasing costs of regulations such as the Retail Distribution Review, an increasingly popular strategy is to move smaller, “sub-scale” clients away from more expensive propositions such as discretionary based portfolios into model portfolios. The wealth manager retains a high degree of control and performs asset allocation for the model portfolios; the implementation of the portfolio is then outsourced to a third-party service provider.

In line with recent changes, we expect these trends to continue in the coming years as the wealth management industry continues to evolve and wealth managers continue to strive for greater net inflows and improved margins through the adoption of new technologies and outsourced solutions. Failure to address historic under-investment may leave a number of wealth managers unable to survive in the increasingly competitive wealth management market.