Friday HighlightJan 31 2020

Advisers can no longer ignore the case for going digital

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Advisers can no longer ignore the case for going digital

Online services and smartphone apps have transformed the way institutions interact with their customers and vice versa, providing many benefits to all involved and creating a client expectation for more on-the-go access to their money.

Critically, those that have failed to keep up have lost out.

After years of falling behind, the wealth management and Ifa sectors are now undergoing a similar wave of digitalisation.

Here, we look at why it has never been more important for intermediaries and wealth managers to embrace the modern age and the value that comes with doing so.

Reducing the regulatory burden

The regulatory responsibilities placed on firms have increased dramatically in recent years.

Alongside new money laundering regulations, directives like GDPR and Mifid II have increased security, transparency, and added value for clients.

Thanks to digitalisation, it is no longer necessary to drop such customers to stave off margin pressure.

However, the associated costs for firms, not to mention time commitments, required for custodians, are considerable. These costs can ultimately be passed down to fee-payers. 

For example, we estimate that the process of bringing a client on board can cost anywhere from £1,500 to £2,000.

The assessment process involved in onboarding does not stop once the client is signed up and invested, either. Many intermediaries now have to review customer suitability and money laundering paperwork annually.

Crucially, these pressures are a particularly critical issue for firms with a book of smaller portfolios.

We estimate that the cost of onboarding or re-papering a client account of £200,000 costs in the region of £2,000. This creates a high cost/income ratio that has resulted in as many as a quarter of firms having a book of ‘sub-optimal’ clients. 

However, thanks to digitalisation, it is no longer necessary to drop such customers to stave off margin pressure.

Outsourcing back-office functions to a quality wealth technology provider can reduce regulatory costs considerably overnight.

Not only does this enable wealth managers to continue servicing clients of all sizes, but it also boosts balance sheets and frees up more time for existing and new customers. 

Effective fund management and client suitability

The industry has moved towards centralised managed model portfolios which, by their nature, are standardised. 

So how do they show ‘added value’ and offer differentiation?

Outsourcing back-office functions to a quality wealth technology provider can reduce regulatory costs considerably overnight.

A few digital offerings enable firms to bridge the divide between model portfolios and bespoke discretionary portfolios, blending a model portfolio with non-model assets like ETFs, funds or individual stocks, while ensuring suitability against centrally set constraints.

The advantages are clear - chief investment officers (CIOs) gain visibility and control by setting constraints based on client needs, compliance officers see consistency and suitability and portfolio managers can exercise discretion and demonstrate the impact of portfolio changes through instant reporting.

This allows firms to instantly optimise portfolios on-the-go with software that calculates the optimal and minimal number of trades to bring the portfolio in line with suitability constraints.

Meeting client expectations

The third, and perhaps most obvious, reason technological integration should be essential for intermediaries and wealth managers is the fact that it is expected by clients.

Thanks to the rise of mobile and internet banking, investors seek out immediate and interactive, 24/7 access to the money they put into the hands of professionals.

They want minimal friction accessing services and their choice is for everything to be client-facing and self-serve.

These days, digital expectations span every client. However, they are most notable among younger customers who use apps for everything, from banking to ordering food and booking a taxi.

This has become a particularly important issue as the next generation of investors are inheriting wealth from their parents.

Technology is now a necessity for any firm hoping for sustainability.

Digital tools are there to enhance the adviser model and the hybrid between face-to-face advice and digital self-service is where the big opportunity lies for investment advice firms.

According to recent research by GlobalData, more than a quarter of high-net-worth (HNW) individuals’ children cut ties with the wealth manager used by their parents when they inherit.

To avoid falling into this pool, firms must anticipate the demands of their next generation of clients and ensure their digital offering is up to scratch. By doing this, they can also take on funds lost by their less-prepared peers.

Managing digitalisation

Technology is now a necessity for any firm hoping for sustainability – especially given that GlobalData expects a mighty $8.6 trillion of global HNW wealth to pass down generations in the next decade.

For many firms, ‘going digital’ will seem a daunting task. Aside from the high costs and time required to develop an online service in-house, low-cost robo-advisers have priced many out of the market – particularly at the lower-end.

A way of sidestepping this issue is to place the task of digitalisation into the hands of a specialist  technology provider. These firms are dedicated to creating solutions that add value to financial businesses and are often led by experienced teams with market-leading products.

Jonathan Wauton is co-founder of Tiller Technologies