Time to tailor technology

Baby boomers have different priorities from the traditional grey-haired investors of before”, says Lori Heinel, head of global investment products at SEI Investments. “This generation has reinvented political institutions and conventions. Now that they are wealthy, there is no reason they won’t want to reinvent wealth management too.”

Ms Heinel is of the school of thought that argues that wealth management needs to smarten up its act in order to properly meet the needs of the new generation of clients. Integrating the latest technology, stretching from the back office right into the front office, is the key to achieving this goal.

SEI has come up with some interesting new ideas on what the world’s wealthy want from their banks as well how to meet these requirements, after spending three years researching the global wealth management market.

The American multi-management specialist estimates that the baby boomers – those people hitting retirement around about now – are the wealthiest generation ever. In the US, for example, by 2017 they will receive the largest inter-generational wealth transfer in history, estimated at $5,000bn (?4,100bn) in today’s money.

Sandwich generation

The SEI survey, entitled “Are Private Banks Ready for Today’s Wealthy Individual?”, found that these high-net-worth clients are moving away from the traditional focus on merely preserving capital. According to Ms Heinel, they are moving towards using their money to attain “what they define as a richer life and achieve a greater sense of fulfilment for themselves and their family”.

They have a broader range of things they want to spend on, such as long-term care for elderly parents, tax advice and international property acquisition.

“This generation is educated and questioning, so they might be less willing to ascribe expertise to a client service manager,” says Ms Heinel. “They also have more life issues going on than previous generations. They are paying for their children’s college educations and weddings, whilst also taking care of elderly parents and trying to set themselves up for the future. We call them the ‘sandwich generation’.”

SEI interviewed chief financial executives in 13 European countries on how they are responding to these new demands and concluded that not enough is being done. “Banks are not seeing the opportunities for intensifying loyalty and adding value to client relationships with a proposition that addresses a broader set of consumer needs,” the survey says.

Indeed, banks responding to the survey admit that they do not feel they are servicing wealthier clients as well as is in their power. The survey adds that large regional banks face the added problem of being “caught in a squeeze between large global private banks with their massive resources for research and development for product provision on one hand, and the smaller wealth managers whose strengths lie in their in-depth client relationships on the other hand”.

The banks believe that an ideal service would be characterised by a client adviser who understands the customer’s goals and aspirations, is knowledgeable about possible solutions and has a continuous presence in an organisation with a sound reputation.

As a result, they are focusing their improvements on customer relationship management, as has been well documented in PWM. The banks are also planning to invest in what SEI says are traditional ways: through more technology and more products.

But SEI is arguing that such reliance on “non-revenue generating areas” is inadequate. Instead, banks need to change their entire service model. SEI’s answer to the problem is, unsurprisingly, for banks to use its new wealth management solution. The solution uses technology to integrate client relationship management, financial and non-financial advice, investment modelling and decision support through to full client accounting, portfolio administration and reporting.

The idea is to build a platform based on an in-depth understanding of the client with integrated end-to-end functionality. This should achieve the holistic approach required by the new generation of wealthy individuals.

Banks will have to make up their own minds on SEI’s new offering, but the argument for the need for a technology-based integrated service in order to meet the needs of the sandwich generation is compelling.

Integrated technology

Bruce Raine, chief executive of IPBS, agrees: “The biggest problem is that more often than not, the technology used by private banks is not integrated, or more importantly not synchronously integrated. The tendency is probably to implement software that best suits each functional area, without regard to the overall business objective. One would never have a dinner party for six people where two spoke only German, two others spoke only Italian and the two others spoke only English, but this tends to be the way that that banks tend to choose software platforms.”

He argues that modern communications have intensified the need for banks to change their business models. “Only a few years ago, a client might telephone or fax his or her account manager and arrange a date and time in the future when their account could be reviewed, and this would always allow some time to correlate the various aspects of the account. But, today, clients have grown accustomed to having information pretty much on demand. Clients don’t even want to make an appointment. They want to see their accounts now on the internet at any time they choose, twenty four, seven, three sixty five.”

This means that data consolidation has to be seamless and instantaneous. “Overnight even, is not going to cut it anymore,” says Mr Raine. “This is virtually impossible, of course, when your trading platform is updating security positions but your cash management system hasn’t been given the settlement details yet. Or, where your mutual fund platform has accepted a subscription but the confirmation hasn’t managed to get into the portfolio system yet because that’s on a different platform or another floor or, worse yet, in the building next door.”

The risks of not having an integrated and automated operation are hard to ignore, according to Mr Raine: “If the client doesn’t see the total picture accurately he or she may make decisions that they would not otherwise make, which may be detrimental, with hindsight, to them.

“Similarly the investment manager, and in some cases intelligent software, may make incorrect decisions if the back office settlements have not processed a transaction or they’ve processed it, but it hasn’t made its way through the unification process yet,” adds Mr Raine. “We are aware of a very high profile private bank that not so long ago settled a couple of very large bond sales twice. The employees were terminated but it begs the question, was it really human error or a platform failure?”

So what’s holding banks back from implementing such integrated technological solutions? “Its not expensive and its not difficult,” says Mr Raine, whose company offers an integrated end-to-end solution. “But, unfortunately, the vast majority of software vendors and a very high percentage of in-house developed platforms have been developed with myopic vision. They undoubtedly offer excellence in the functionality that they were developed to provide but they seldom address anything else but the very specific functions that they were designed to manage. Bridges of course have been built to overcome these issues, but in today’s world the bridge is no longer efficient. Fully integrated, end-to-end solutions, are few and far between I think and that may be why they are not used so widely.”

Nyan Dunsford, global account manager at ‘end-to-end’ service provider Odyssey, which is used by such private banks as UBS subsidiary Ferrier Lullin, adds that implementing such new systems requires considerable staff training: “Often banks do not train staff in all areas of a solution, and therefore do not obtain full benefit”. She adds that this could be offset with staff reductions. “However the real benefit is increased productivity with greater number of portfolios and clients being managed more efficiently and alpha generating and asset gathering roles increased due to the growth in processing capacity achieved.”

Ms Dunford warns that banks must choose their integration model carefully. Any technological solutions employed must be flexible enough to evolve with a dynamic product outlook to cater for new business requirements such as product innovation. “The age of investing in conventional asset classes only is being replaced by new, more tailored investment products and private banks are under increasing pressure to be innovative in this area. The increased use of more complicated structured products as well as derivatives has meant that back offices have been forced to account for positions they have not originally been designed for. Onshore tax efficiency requires advanced tax optimisation solutions together with ultra-efficient management of client and portfolio constraints.”

But Ms Dunford is adamant that for private banks, integrating technology into all processes is a must. “In a rapidly changing environment, simple tools that provide basic functions are no longer enough. Investment in new generation front office solutions is one of the key factors that can help investment management institutions achieve their goals. The modern day solution not only reflects the diversity demanded of the financial markets, but is also modelled on providing high value client service, centralised management of investment strategies and automated processing of the transaction life cycle.”