Using automation and integration to beat the crunch

The financial crisis is taking its toll on the world economy. While the International Monetary Fund (IMF) has projected world growth will fall to 0.5 per cent in 2009, its lowest rate since the second world war, a study commissioned by the Asian Development Bank (ADB) has estimated the global financial crisis has slashed the value of financial assets worldwide by $50,000bn (€40,000bn).

According to private equity company Blackstone Group’s CEO Stephen Schwarzman, up to 45 per cent of the world's wealth has been destroyed by the global credit crisis. Not surprisingly, the wealth management industry is feeling the crunch.

Flight to safety

“Assets under management in the wealth management and private banking space have gone down.

This means lower fees for service providers. The world of structured products is dead at this point in time and there is a flight of capital into safer domains,” remarks Tobias Straessle, head of strategic business initiatives at Danish online investment bank, Saxo Bank.

He says there is a huge opportunity for smaller independent wealth managers.

“Assets are flowing in from the big banks to smaller banks. Clients want more control of their finances and will go to smaller firms to get more personalised, transparent service,” he explains.

“Structured products and hedge funds are less fashionable. It is back to basics in terms of products. Private wealth managers need to re-build the trust of their clients,” says Didier Pitton, product marketing director at wealth management technology vendor, Odyssey Financial Technologies.

A key wealth management firm that has been a victim of the sub-prime crisis is UBS. It posted the biggest loss in Swiss corporate history of $7bn in the fourth quarter of 2008. The Swiss financial institution saw its clients withdraw an estimated SFr58bn (€40bn) from its wealth management and private banking businesses in the last three months of 2008 alone.

The problem has been further compounded by the fact that the Swiss giant was forced to hand over confidential client data to the US in February this year. According to local media reports, in an internal memo to UBS employees, the management said that it would take two years to restore client confidence at the bank.

For European investors, the present crisis has meant a shift away from risky assets and towards wealth management service providers that instil trust in their clients and can provide a more personal advisory experience, states Isabella Fonseca, senior analyst at research firm, Celent, who has authored several reports on the wealth management business and technology trends in the sector.

Additionally, she says that investors are looking for new types of services, such as improved risk management, tax planning, and help with socially responsible investing. “Over the coming years, the wealth management industry in Europe is expected to go through three stages of consolidation, stabilisation, and, finally, growth, as consumer confidence returns,” states Ms Fonseca.

“In general, the more mature western European economies have seen more negative effects from the crisis. Smaller western economies are expected to follow their larger counterparts and experience slow growth in coming months.”

Facing the challenges

In these times of uncertainty, wealth management firms are taking several steps to deal with the downturn, says Ms Fonseca. They are lowering the customer segment net worth level to include a broader range of products and services.

For instance, Intesa Sanpaolo in Italy has lowered the assets required for investment for a private banking client from €1m to €500,000. Firms are also expanding the product ranges for their clientele. They are creating new levels of client investments and turning execution-only business to investment advisory business to generate AUM revenues. Many firms are also focusing on Central European countries.

Interestingly, despite the obvious impact of the financial crisis on the wealth industry, Ms Fonseca states that so far there has been no slowdown in market demand for wealth management technologies. This is mostly due to increasing wealth, she says.

“There is a need for robust wealth management systems,” she explains. “We have seen postponement of projects in certain instances, but no cancellation. With the consolidation activity, as one might expect, solutions that are able to scale to large volumes will be a better fit to be the solution of choice. Also, there has been an increase in demand for integrated front to back office activity, with a focus on firms’ infrastructure.”

Opening up the market

There is no doubt that technology is a key enabler of wealth management initiatives. Automation allows services that firms once only offered to the extremely rich to be offered to the mass affluent segment of the market.

Technology is also an important tool in targeting the growing mass affluent sector, according to Ms Fonseca, where automated client management, asset allocation, and product selection as well as comprehensive online services are vital to success.

“Wealth managers are expecting increased functionality, flexibility, and performance from IT solutions.”

There are two main technology trends impacting the wealth management space, says Ken Clanton UK Sales Director from SEI, a global provider of outsourced asset management, investment processing and investment operations solutions to the wealth management industry. “One is industrialisation of the investment management process,” he explains.

“Traditionally firms have delivered tailored portfolios to clients using a cottage industry approach. Technology is now enabling these firms to centralise their investment processes to drive down cost and risk without sacrificing the hand-crafted quality their clients expect,” says Mr Clanton.

“The second trend is straight through processing, connecting front, middle and back office processes,” he adds.

The sharp economic downturn is forcing firms to revisit their business models, observes Mr Clanton. Firms that have traditionally invested in heavy infrastructure have moved to a survival agenda, he says. “Firms that have a large infrastructure are really hurting.”

Outsourcing

As a result, SEI Private Bank has seen an increase in interest in its outsourcing solution for wealth managers. This encompasses a comprehensive suite of services relating to client acquisition, client management, investment management, investment processing, infrastructure and business services management and enthusiasm has spiked in recent months.

SEI’s offering provides wealth management organisations with infrastructure operations and administrative support. There is also a growing demand from smaller wealth management firms, says Mr Clanton.

With the large established wealth management firms faltering, the spotlight certainly seems to have shifted to smaller firms that can provide in-depth, transparent and personalised service.

As a result the demand for sophisticated technology solutions from tier II financial institutions too is growing.

“Tier II firms are looking for a complete wealth management platform that includes client management, portfolio management and advisory tools. They need a solution that can provide a 360 degree view of the customer,” notes Mr Pitton at Odyssey.

Martin Ross, Product Manager at Temenos Wealth Management division, which develops technology solutions of the wealth management industry, agrees. No more is the trend towards investing in a mere portfolio management solution.

“With clients looking for a holistic view of their investments, wealth management firms need an integrated advisory desktop that has all the elements of KYC (Know Your Customer), portfolio management, analytics and CRM (Customer Relationship Management) among others,” he states.

Increasing burden

The general consensus in the financial services industry is that in the coming months the regulatory burden on financial institutions will increase.

Technology platforms therefore need to have the ability to enable firms implement new rules for reviewing clients’ profiles and evaluate risks associated with investment strategies. They will also need to incorporate risk management tools.

With wealth management firms looking towards providing better transparency, independent advice and portfolio tools, there will be a growing demand for web based services, states Saxo Bank’s Mr Straessle.

Forseeing a growth in demand for online services, Saxo Bank is planning to launch an online wealth management platform for high net worth individuals.

“Saxo Bank is not yet into online wealth management. We are into online trading which we think we can leverage for online wealth management and we are looking to increase our focus on this area,” explains Mr Straessle.

Commenting on the market, he says that, although there are several similar products already existing in the market, most of them are execution based only.

“We would be looking to enhance the client experience at the front end to aid the client investment decision making process.”

Isabella Fonseca, Celent