Rising costs and growing client demand are making technology an increasingly important force in the wealth management space.
Numerous ‘wealth tech’ providers have joined the market to offer traditional wealth managers the opportunity to outsource parts of their client book as a way of increasing profitability and reducing regulatory burden.
With current wealth tech providers offering everything from an ‘end-to-end’ service to basic model portfolio software, it is essential that wealth managers do their due diligence to ensure that whatever solution they find ultimately serves their clients’ needs.
Here are some critical questions to ask when looking into wealth tech solutions.
Who is behind the offering?
A significant contributor to the wealth management sector’s sluggish adoption of technology has been a lack of suppliers that genuinely meet the sector’s demands.
Many digital solutions come from pure software boutiques with little or no ‘real world’ experience in critical areas like portfolio management, compliance and onboarding – which are constantly having to adhere to new regulatory requirements.
Technology is great, but experienced knowledge of the industry will ensure that technology does not become the tail that wags the dog.These firms can develop a piece of software tailored to a list of needs.
However, do they really understand what is required by wealth managers and their customers?
Ultimately, client needs may not change much over the years, but the industry itself is in constant change.
Technology is great, but experienced knowledge of the industry will ensure that technology does not become the tail that wags the dog.
Does the service meet my needs?
Areas like onboarding, reporting, and compliance have become as important as portfolio management in the wealth management process.
However, many wealth tech providers chose to outsource their back-end requirements and focus entirely on developing a basic investment offering. This may be adequate for consumers, but it is far more complicated when it comes to providing a broad range of services to wealth managers.
A digital service that does not control onboarding, portfolio management and reporting itself cannot sell itself as a complete service.
If you are looking to outsource more than investment management, then you should look at solutions offering an ‘end-to-end’ service to reduce regulatory burden and costs.
Can the service improve my profitability?
The cost of meeting compliance and regulatory requirements have increased significantly for wealth managers over recent years.
As a result, servicing the lower end of client books has become uneconomical under the traditional wealth management model.
Outsourcing the management and engagement of these clients can reduce costs significantly, turning unprofitable books into profitable ones.
It is worth comparing the fees charged and services offered by a range of services to find the ones that can both reduce your cost/income ratio and provide a full suite of services.
How will my clients’ money be invested?
Sophisticated investment algorithms are only as good as the inputs that inform them.
It is vital to make sure that a digital wealth firm’s portfolio management team has the experience and track record of delivering returns across market conditions.
Their asset allocation strategy is also important. A purely passive range of portfolios might not suit your requirements or those of your clients.
Digital wealth managers should blend assets to create diversified model portfolios with different risk ratings, meeting varying investor requirements.
They should also provide a degree of flexibility, enabling investors to tailor their own portfolios, with themed investments such as ESG, and should be able to explain in detail their inclusion criteria for each portfolio, clearly explaining their buy and sell discipline.
It is also important for providers to demonstrate an adequate process for determining client risk profiles and that the investments contained within each model portfolio carry an appropriate level of risk.
If the investments held within any model portfolio are concentrated too highly in one sector or geography, then the portfolio could be exposed to an unnecessarily elevated level of risk.
Does the service manage portfolios on an ongoing basis?
Basic offerings will mostly assess portfolios on a periodic basis, potentially leaving portfolios to the mercy of markets in between.
While time can eventually heal most stock market wounds, investors could be missing out on tactical opportunities.
A growing number of providers are introducing elements of active management into their offering, like ‘fine-tuning’ portfolios and carrying out scenario analysis in preparation for, and in reaction to, macro events.
While the additional oversight is likely to see costs rise, it could also deliver significantly enhanced returns for investors.
Who controls client reporting?
Regulatory and compliance requirements have significantly increased costs in recent years. Digital wealth offerings that manage client engagement can reduce the regulatory burden.
Many digital offerings outsource reporting requirements to their administrator, yet relying on a third-party for client reports restricts your firm’s individual reporting requirements.
Digital providers that own the reporting process can be far more flexible in this respect.
Also, with the introduction of Mifid II’s 10 per cent drop rule, ensure your provider has in place reporting mechanisms to identify, at the wrapper level, whether any 10 per cent depreciation has occurred so you can not only communicate this to your client, but also be able to record and evidence that you have done so.
Is the offering user-friendly?
While deemed more a matter of aesthetics, the look, feel and usability of a digital service could prove crucial in retaining and acquiring clients.
Questions that should be asked are: Is it secure and how do you maintain the security?
How can investors access their accounts? Services that offer desktop and app-based access could be preferable if investors wish to access their accounts 24/7 on the go.
Is it intuitive and clearly laid out, or does it simply look like a complex jargon-filled financial website?
Ian Cadby is chief executive of Tiller
