Searching for a perfect solution

All wealth managers and private banks need to have the technology to carry out their business. But having the scale to build an in-house solution and keep it up-to-date with client and regulatory requirements seems out of the question for all but the largest players in the market. What then is required and how can wealth managers best leverage external vendors to gain a trading platform tailored to their individual needs? “It’s expensive to build an in-house system unless you are one of the very big players. Having the budget to keep it up-to-date and not end up creating a patched up legacy system is not really feasible,” says Daniel Carpenter, sales manager at Investmaster. He adds that wealth managers can either buy in a platform that they leverage internally or outsource the whole lot to a third-party services provider – but that building it in-house is no longer considered to be commercially attractive. Christian Elsmark, global head of business development at FundQuest, a trading platform owned by BNP Paribas says: “The biggest problem faced by wealth managers is lacking the scale to deal with the maximum number of clients with the fewest amount of people.” He thinks a good trading platform should have three elements, modelling, individual and group portfolio rebalancing plus execution facilities. “The game is about finding a provider that offers mutual fund platforms, technology platforms, wrap platforms and a combination, and is able to perform consistently and transparently,” he says. From the front office perspective, the key to a wealth manager’s successful operation is the ability to model and manage portfolios. Modelling, where wealth managers need to be able to asset allocate and rebalance constantly on a discretionary basis, is the bread and butter of a decent trading platform according to Lord Calum Graham, member of the Advent Emea Advisory Board. “The ability to bulk up orders and to get economies of scale and then break them back down again back into individual portfolios is key,” he says. Searching out skill And trading platforms can also help with the provision of recommended funds. Fundsquest, amongst others, has its own research teams, “to find the skilled managers as opposed to the lucky ones.” The assumption is that with a huge global funds universe wealth managers cannot possibly have specialist knowledge of all areas, and so the services provider aims to help. The trading platform will then create a model portfolio based on the wealth manager’s client profile and the buy list. The wealth manager can then go back to the client and adjust or change it accordingly.

Elsmark: biggest problem facing wealth managers is lack of scale

Helmut Schmid, executive director, client execution services for funds at UBS Investment Bank in Switzerland looks after UBS’s own private bank as well as servicing external clients. “Clients are demanding a wide range of instruments and so we need to offer boutique style selection but on a global level and include open architecture processes in that. We deal with over 50,000 funds in both the primary and secondary markets,” he says. But however sophisticated and flexible a modelling system is, it also needs to link in with client reporting functions. Part and parcel of the customer relationship management, client reporting now needs to be increasingly sophisticated and much more frequent than the quarterly or half yearly reports. Mr Elsmark says that FundQuest can create detailed statistics on asset allocation and performance and, perhaps crucially, do it in a white labelled format to look like the information comes from the private bank itself, rather then having been generated by a third-party system. Also gaining in popularity is a close of business type update where clients get the relevant information hived off and presented to them online. Other clients want intra-day information and some now want real time as well. Investmaster’s Mr Carpenter says: “This encapsulates all the touchy feely things that allow wealth managers to get and keep their clients. Five years ago this was a neglected area but now that markets have rebounded then there’s a lot of thought going into this area.” “One of the key issues seems to be that often the same data needs to be entered more than once, thus taking time and increasing the risk of mistakes being made. And so work is being done so that multiple users from different areas can access the same data but use it according to their own needs.” Execution services too seem to be high on the agenda. Indeed, providing best execution or procuring it seems to be quite a perplexing issue. According to Mr Schmid at UBS, “the prevalence of multi-instruments creates execution headaches. With cash instruments it’s easy and changing execution venue is also relatively straightforward. But with complex alternative structures it can take up to a year to even change execution venue. And so getting the right partner in the first place is of utmost importance.” And with MiFID, the Markets in Financial Instruments Directive, the requirement to offer clients best execution has thrown up issues for wealth managers. Lord Graham explains: “The procurement of best execution is much cheaper than executing yourself. It requires less audit trials and does not require the capture of multiple data.” Direct execution What tends to happen is that the wealth manager will have a written policy of executing with x, y and z, on the basis that those venues offer the largest pools of liquidity and the best prices. But at the high end some wealth managers and family offices are under pressure to be able to go direct to some markets be that via a broker or an exchange and this requires direct execution facilities. Client classification is another issue thrown up by MiFID. It will basically place more onus on wealth managers to carry out checks regarding investor classification and then document that those checks have been carried out. Having a flexible system in place to crosscheck classification and rebalance portfolios according to both classification and investment objectives is seen as something that needs to happen soon.

Graham: procurement of best execution cheaper than executing yourself

But this is theoretically one of the most potential areas of expense. A client can change his classification on a trade by trade basis and for the wealth manager the challenge lies in how to deal with this potentially frequent change. Lord Graham explains: “Dealing with lots of portfolios means that in a software system there needs to be rules and parameters applied so that if x happens then y will happen too. But if one of those parameters (client classification) is, in theory, constantly changing then automatic modelling that can cross reference portfolio rebalancing with a client’s classification is needed. “This is causing a huge headache in the buy-side industry and most are trying to work out whether realistically they can get away with not offering the ability to change classification on a trade by trade basis.” Catering for regulatory change and reducing operational risk is, in fact, one of the biggest pull factors for accessing a trading platform externally. Even the best legacy platforms with their inherent patchwork of upgrades will have been hard pushed to cope with wave upon wave of regulatory change in recent years. Mr Schmid at UBS says: “The operational risk perspective is one of the most valued services you can offer. Compliance and the reduction of operational risk takes time and money that private banks simply do not have and failing would irreparably damage a wealth manager’s reputation,” he says. A whole myriad of services on offer to help wealth managers run their business, it seems. But is it an all or nothing equation? Can wealth manager choose to buy in the bits they don’t want to, or can’t, do and manage the rest in-house? Mr Schmid cites the example of Asian wealth managers who like to execute locally, but also want access to markets where they are not always registered and use UBS to execute where necessary. In future some say that a sort of pick and mix approach will overtake the one-stop-shop offering fashionable of late. Indeed, as wealth managers increasingly create their own funds and in effect become boutiques as well as wealth managers then their needs will change.