Mifid forces wealth managers to raise game

There are currently many factors in the wealth management space driving the demand for more efficient client reporting and more comprehensive document and portfolio management solutions. However, regulation is the most important driver. In particular MiFID, the directive which aims at creating one single European market in financial services, will enforce distributors of investment products to improve their ability to store and retain “know your client” information. The mechanisms employed to retrieve that information will also have to be more efficient in order to report to clients, to the regulator or to the internal compliance team. The ‘best execution’ policy is expected to have significant repercussions on the client relationship management area. While in the past best execution was simply about getting the best price for the clients, firms will now be required to provide greater transparency on how they execute orders. Firms will have to store all quotes during the execution process and retain them for five years. Clients will have up to a year to query the execution of an order. Having document management systems able to provide immediate and secure information will become paramount. Implementing client ‘suitability’ and ‘appropriateness’ tests could prove to be another operational challenge for wealth managers. In this area there is still some lack of clarity, which is expected to be removed when European regulators will incorporate rules in their forthcoming updated regulations, due in January 2007. But what is sure is that the mechanism of record keeping will need to be more resilient than in the past. Wealth managers will have to carry out ‘suitability’ and ‘appropriateness’ tests on their discretionary and advisory clients respectively, to ensure that the products and services provided are suitable or appropriate for them. Wealth managers will have to obtain sufficient information regarding their discretionary clients’ knowledge and experience, in order to provide them with investment advice, which will not be a simple ancillary service as it has been in the past. They will also have to record the fact that a client decided not to provide the information. Advisory clients, the more sophisticated investors, will also need to be tested for suitability and any warning issued to them will have to be recorded. This means that wealth managers will have to go through a quite time-consuming and costly reclassification of their customers. They will have to look at enhancing their data management systems, or they will need to integrate customer relationship management products into their existing systems. As the product range distributed to clients extends, client reporting needs to be enhanced accordingly, either through hard copy or virtual web-portal, says Stephen Turner, head of global fund services UK at BNP Paribas Securities Services. “Adding products to the client portfolio means enhancing the reporting, as investors need to be able to see concentration and performance across multiple products.” In addition, clients will want to look at whether they are taking maximum advantage of their tax allowances within their portfolio, adds Mr Turner, or to their currency exposure if they are high-net-worth investors. End investors do more shopping around, looking from more enhanced servicing, but can they really be considered the driving force in the market? “Software houses are currently driving the demand for more sophisticated client reporting tools,” says Mr Turner. “As opposed to coming off the end investors. That is quite normal in a product cycle.” Damian Powell, UK general manager of SunGard’s APSYS bureau, says that clients are increasingly expecting wealth managers to have a holistic management approach to their finances, to plan their whole portfolio, not just a part of it. This fuels wealth managers to provide a broader range of products and technology can play a key role in collating the information internally and make it readily available to them.

Margison: the costs of derivatives post-MiFID could outweigh benefits

“What we are seeing is a demand for fully integrated software solutions, so that the front office can look at data on clients’ transactions as the back office in real time,” he says. “This way, people at the front office don’t have to wait for file transfers from the back office systems and for the data to be reconciled. Relationship managers will have all the information about the client, financial transactions, tax and accounting information available at their fingertips.” “Managers need to be able to offer clients investment opportunities before the clients pick them up themselves,” adds Mr Powell. Under MiFID, this holistic, or portfolio management approach will be enforced and will have be to be applied to new services and transactions from November 2007, in view of these new requirement of appropriateness and suitability. “Firms can efficiently use portfolio management tools to evaluate the current status of the client portfolio and compare it against a model portfolio,” says Neville Margison, product strategy director at Investmaster, the company providing IT solutions to the UK wealth management and institutional broking sectors. “Wealth managers today either use the back office system to do their evaluations, and they get very limited functionality, or they use excel spreadsheets. It is a very simplistic market at the moment.” Business strategy Will all distributors have to rush to buy new software solutions or to outsource these services to administrators, to get ready for MiFID implementation, now scheduled for November 2007? Market consultants say it is very important that wealth managers understand the impact of the new regulation on their organisations and decide if they want to keep their current business profile post-MiFID or review their business strategy. “One particular area could be derivative trading,” says Mr Margison. “It could be that the cost of being able to do that business post-MiFID outweighs the benefits revenue that they earn.” In fact, derivatives will be considered complex instruments for non-professional clients under the new regulation. If a firm wants to suggest that a client deals with them it will have to issue risk-warning, which can be costly. For a firm operating in a local market, reviewing its business strategy could mean to take advantage of the opportunity to create a pan-European operation, option favoured by the elimination of cross-border barriers of different local market rules or legal boundaries by MiFID. Gary Wright, managing director at consulting firm CityCompass is very keen to stress that firms can look at MiFID as a business opportunity, not only as a compliance chore. Firms can use client reclassification, for example, as an opportunity to cleanse their databases and update their marketing material. “If firms have to re-profile their clients on a one-to-one basis from a regulatory view point, they can take this opportunity to reacquaint themselves with the client and their portfolio, to provide better service and, if the account has been dormant for a few years, to resurrect it. [Reclassifying their customers] also gives them the chance to move their business across board, to increase their product range, rebalance their portfolios” continues Mr Wright. “And offer services to a wider amount of clients, across all EU markets.” “If costs of reclassifying customers are too high, private banks may want to move some of their services from advisory to discretionary,” says Philip Warland, consultant at London-based firm Halsey Consulting. This will reinforce a trend which is already there, he says. Mr Powell at SunGuard warns that even if companies want to carry on their business as they have always done, there is the risk that if they do not invest in technology, they will be left behind. “Some of my clients are telling me that they are going to invest [in technology] just to hold on the existing clients. If they don’t start taking advantage of training or investing opportunities, their competitors will.” Market players, in fact, already operate with some form of client protection, although that my not be as stringent as MiFID is making it, says Mr Wright. “Firms will get there [to November] with the existing systems, which are built around servicing and reporting to the clients. A bit of tinkering will suffice up to November. And that is all that is available in the time that is remaining” he says. “Post MiFID there will be an evolutionary approach, investing in that type of technology will happen gradually. No one invests ever in big strategic technology developments. It is too risky. What firms have tended to do over the last 20 years is to invest on a sort of ‘suck it and see approach’, only if the system is good and needs system developing support, they invest in more technology.” International organisations on the buy-side should have got what they need already in place, he says. “It might mean a re-look at databases, data structures and how they classify clients within those data structures, but it should be straightforward as an IT project.” Levels of investment For a firm, investing can mean buying new software to run in-house or outsourcing to software companies or administrative providers, who develop in-house solutions or buy them from software houses. “Sometimes we develop technology ourselves, sometimes we will go onto the market and buy it” says Jim Clark, director of sales and marketing at State Street in Luxembourg. “We have core custody and accounting systems, but particularly in the field of regulation, we would go and buy from a software company. We will put all this technology together to create our overall service,” he says. If securities services companies traditionally offer their services to asset management companies, services such as client reporting are provided to many different people, including distributors, portfolio managers, compliance officers or investors in the fund, explains Mr Clark. “You could give very similar information, but cut and presented in a different style, according to client needs,” he says. SunGuard offers an outsourced solution but also provide clients with the opportunity to implement the product in-house. “Wealth managers should be looking at outsourcing as a platform for growth. Outsourcing is not just a cost-cutting or staff reduction exercise,” warns Mr Powell. Similar prospective on the positive effects of technology on the business growth brings Lord Calum Graham, member of EMEA’s advisory board at Advent Software, whose last product launch ‘Advent portfolio exchange’ provides portfolio and client management solution. Lord Graham stresses that being able to consolidate different sources of different wealth managers onto a single report can bring in considerable extra business, in terms of “wallet share” especially in the case of ultra-high-net-worth clients, who tend to employ different managers. Key from a business prospective, believes Lord Graham, is that that systems improving client reporting “allow distributors to switch from a transaction based model to a fee-based model, which is much safer,” and this is applicable both in the retail and high-net worth world.

Graham: calibrating many wealth managers on to one report is lucrative