Systems spend spurred by rules and scandals

In November last year, Pictet & Cie, one of the world’s larger private banks, with more than SFr365bn (E235bn) in assets under management and custody announced its decision to implement a wealth management platform from technology vendor Advent Software. While the solution’s integrated portfolio and client relationship management capability was the main reason for Pictet & Cie selecting it, the platform’s enhanced compliance ability too helped influence the decision to go with Advent. Daniel Ericsson, director of solutions management at Advent remarks: “Over the past two years there has been an increasing focus on compliance among wealth and asset management firms. It is a key deciding factor while selecting a technology platform.” Regulatory burden Some of the reasons behind this enhanced focus on compliance, he says, are the need to reduce operational risk as in the case of Pictet & Cie and end client demand. Regulatory pressure too is a prime driver. There is a wide variety and ever-increasing of regulations around the world that wealth management firms and private banks need to comply with today. These include generic regulations such as know your customer (KYC) and anti money laundering (AML), as well as market-specific ones such Europe’s Markets in Financial Information Directive (MiFID) and Sarbanes Oxley (Sox) in the US among others. According to local media reports, towards the latter part of 2008, the China Banking Regulatory Commission (CBRC) issued a notice to strengthen its regulation on wealth management products issued by banks in China. This move, it seems, followed on from an increase in customer complaints and disputes regarding new financial products that have recently entered the rapidly changing Chinese economic market. “Reputation risk is perhaps the highest risk for wealth management players today. Thus, wealth managers have to ensure and contribute actively in the prevention of money laundering,” says Michel Longhini, Head of BNP Paribas Wealth Management International. Suitability too is a major issue, he adds. Regulations such as MiFID have suitability as a key tenet to enable investor protection, which involves ensuring that investments recommended are appropriate for the individual client situation and risk tolerance. Meeting requirements Wealth management firms have in recent years invested in a wide variety of technology solutions to meet compliance requirements. These include trade compliance systems, usually a part of order management systems, that ensure that trades placed do not violate regulatory or ethical rules. Operational risk compliance solutions form another group of platforms that monitor compliance with firm wide directives such as business continuity and regulatory requirements such as Sox. Then there are pure wealth management compliance systems that ensure among other things that suitability norms are met. Email retention and surveillance systems, document retention systems, internal audit systems and AML solutions too fall under the compliance umbrella. Early this year, Ziegler Wealth Management, a full service regional broker-dealer based in Chicago, announced that it had deployed technology vendor, SunGard’s surveillance solution across approximately 100 of its financial advisors, regional sales supervisors and branch managers in an application service provider (ASP) environment. The solution aims to help Ziegler control internal and regulatory risk by proactively pinpointing questionable transactions and positions, improving field supervision processes, and keeping pace with regulatory changes. Financial industry research firm, Celent, had in 2007 forecasted that the US market for automated wealth management compliance solutions would grow from $178m (E129m) in 2007 to $318m in 2011. While these predictions had not taken into account the financial crisis which has let to a substantial reduction in IT budgets, Robert Ellis, senior analyst at Celent and co-author of the above mentioned study, says that investment in compliance has not reduced. In fact, pointing towards the results of a survey carried out in January this year by Advisor Perspectives, a US firm serving the financial advisory industry, he states that technology investment in compliance in the US has in fact increased and a similar trend was evident in Europe and other parts of the world as well. “MiFID is the main driving force behind the focus on wealth management compliance in Europe. In the US, it is regulation as well as scandals such as the Madoff issue that are driving investment in compliance technology,” says Mr Ellis. The survey by Advisor Perspectives of independent registered investment advisors (RIAs) revealed that the Madoff scandal, where Wall Street financier Bernard Madoff swindled investors of up to $50bn, has sent shockwaves through the investment community, eroding client confidence and refocusing advisors. As a result, say Advisor Perspectives, compliance is poised to drive many technology decisions in the coming year. While an average of one-in-four survey respondents said that they expect to spend more on compliance in 2009, that number came closer to one-in-three for firms with AUM of greater than $1bn. Larger firms, or those that manage wealth for ultra-high-net worth clients, said the survey, will be spending more in anticipation of a new regulatory environment and increased scrutiny related to due diligence on alternative investments such as funds-of-funds. Interestingly, around 30 per cent of the surveyed firms said that they will be cutting back significantly on technology spending over the coming year. Controls always there Commenting on BNP Paribas Wealth Management’s compliance technology investment during the financial crisis, Mr Longhini says: “Despite a tight budget, we didn’t stop our efforts concerning compliance investment. “We have a complete range of tools to monitor our risks and they are fully in place. They were especially efficient to ensure that the products we distributed were suitable for our clients, which is very important in this context of financial crisis,” he adds. As such, the focus on compliance and regulation has not increased, says Mr Longhini. This, he says is because controls, checks and balances have always been an important part of their business. “Rules and guidelines always existed in order to enable our entities to comply with the existing regulations and internal policies, and they are strictly applied,” he explains. Nevertheless, notes Mr Longhini, this context of financial crisis and volatile markets highlights the necessity for wealth managers to be more than ever irreproachable in term of suitability. “One of the consequences of the financial crisis has been increasing attention in the industry to compliance from a risk perspective,” remarks Stephen Taylor, director of UK based MBA Systems, a specialist software house that concentrates on the investment and wealth management industry. This trend is especially visible in wealth managers owned by banks, says Mr Taylor. These firms, he says, are able to reduce their risk by removing manual procedures and improving record keeping in a systematic fashion. “The emphasis now is on adding some market discipline to an area of the industry that has hitherto been relaxed,” states Mr Taylor. Recently, Atlanta headquarterd SunTrust Banks, one of the largest banking organisations in the US, selected a compliance solution from NorthStar Systems International, a US based wealth management platform vendor, for use in the bank’s Private Wealth Management line of business to enhance its management of investment policy compliance risk. For wealth managers, the accurate preparation and maintenance of investment policy statements that monitor client’s risk profile and investment strategy is a key component to clarifying client goals. With the NorthStar Compliance Solution, SunTrust Banks aims to gain the ability to capture vital client information, create Investment Policy Statements as well as monitor client portfolios in real time on the basis of their individual holdings and audit them according to compliance requirements. “This will help monitor risk and cost while promoting higher client service levels,” says Bob Skea, president of NorthStar Systems. While SunTrust had been in discussions with NorthStar for its compliance solution from before the financial crisis took place, Mr Skea believes that the financial crisis has brought about a definite shift in the way wealth management industry views compliance. “Even till a year ago, wealth management firms could not get enough of client acquisition and asset gathering. Now its all about servicing and compliance is a part of it. Importantly, compliance is no longer optional,” he says. New questions Mr Skea says that one of the biggest changes the vendor has experienced in recent months is not in the level of interest it has received for its compliance solution, rather, it is in the nature of queries. “The specificity of questions we are getting shows that firms are no longer paying lip service to compliance. There is a genuine concern about compliance issues, and rightly so,” he explains. Didier Pitton, marketing director, of Odyssey Financial Technologies echoes the point. Wealth management firms are taking compliance much more seriously than earlier, he says, since private wealth investors have been very disappointed in the last few months with the bad performance of their portfolios. They are also quite concerned about risk management of products since, says Mr Pitton, many times sub-prime products were sold as money market products. Now, he says, wealth managers are reinforcing investor protection rules to ensure that investors clearly understand the investment strategy of the product they invest in. For instance, he explains, while earlier the fact sheet of a structured product would only highlight the risk-return potential, it now describes all the risk details explaining the worst case scenario as well. “Investor protection rules are a key part of MiFID. The regulator in this regard was ahead, but the investment management industry’s initial reaction was to regard it as yet another administrative burden. But after the crisis, most wealth managers realise how useful investor protection is. What was seen as cumbersome is now being regarded as extremely relevant,” states Mr Pitton.

Daniel Ericsson, Advent Software