Why wealth managers are at a ‘Tipping Point’ when it comes to reconsidering their business models

Tue 03 Dec 2013

Many are faced with the stark choice of completely rethinking their business operating models, or risking failure.

Wealth managers are under pressure from several directions. Many are faced with the stark choice of completely rethinking their business operating models, or risking failure.

Shifting customer demographics, the demand for transparency, fierce competition and on line interaction have conspired to create a clientele of e-commerce addicts in search of the latest technology on demand.

At the same time, the complexity of processing and increased reporting are taking managers’ eyes off their central task of doing what they do best; growing and delivering profits in an ultra competitive market.

But by far the greatest pressure, the one that demands the biggest shift in thinking and realignment of roles, skills, structures, processes, assets and technologies, is regulation.

Regulators are stealthily but steadily shifting responsibilities. Advisers putting client money into platforms are all too aware of the new duty of obligation that requires them to undertake due diligence on the platform - with limited guidance as to how to ensure that platform is compliant.

Platform rebates, a suggested financial transaction tax, FATCA, new client money rules and the demand for custody reconciliation evidence all represent huge challenges, especially to smaller players. In the last few months we have seen 17 major consultations by the FCA on issues of importance to the retail wealth management industry, with 11 implemented.

They represent huge costs too. More money for FSCS levies and the implementation of regulatory changes and increased reporting all contribute to a cost spiral that shows no signs of stopping. 

To gauge the sector’s response to these multiple pressures, Equiniti undertook research amongst 60 senior level executives from leading wealth management firms asking how they intend to tackle the pressures they face.

70% of wealth managers state that they will be looking to restructure their business by outsourcing some or all of their processing requirements within five years. 38% have already revised their position on outsourcing as a result of regulation.

66% see cost savings as a reason for structural change through outsourcing. 43% believe another argument for outsourcing is the ability it creates to focus on customer needs, while other reasons given include scalability, efficiencies, operational risk management and access to CREST, without the worry of operational detail.

But the research also highlights that brokers and wealth managers are reluctant to lose control of dealing or CRM. Only 22% and 26% of firms outsource or would consider outsourcing them respectively, whereas around 50% of custody is already outsourced and a further 12% of firms would consider it in the future.

Significantly, while most executives are aware of the cost issues within their back office, many were unaware of the true costs of running their operations. It was found that many firms have initiated and invested heavily in time-consuming IT developments that are neither core to their business nor guaranteed to meet its longer term requirements.

Equiniti’s reaction to the findings is that we are at a tipping point. Ours is a global financial services sector with footprints in many countries and a method of operation that is truly international. But such an ambitious outlook has provoked unprecedented international scrutiny. While firms reacted to the recession by stripping out the investment necessary to modernise their IT and compliance departments, regulators reacted by reviewing their responsibilities and reach.

I think the sector has a long way to go before it catches up with the demands that are being placed upon it. As domestic and pan country regulators move to “harmonise” regulation, some of the biggest elements of legislation are yet to come. The Securities Law Directive, Market Abuse Directive, EU corporate Governance Frame work, EU transaction Tax to name but a few, all of which will demand business process change and IT redesign.

Companies that do not have a strategic plan that brings together an impact assessment, solution design, solution build and test, agreed between senior management, compliance managers and IT departments, must act now.

Mark Taylor, Managing Director, Equiniti Investment Services