Custodians’ collaboration key to integrated reporting

A stricter regulatory environment and more complex client requirements are forcing private banks to see technology as a high priority area for investments and a key differentiating factor, while competition between technology vendors, custodians and new technology players entering the wealth management space is also becoming fiercer.  

Access to client data is a key driver of technology investments. When serving wealthy and sophisticated clients, in particular, private banks need to be able to provide access to sophisticated portfolio reporting, as clients expect to be able to monitor exposure to asset classes, markets and geographies, at any time.

“As a trusted adviser, the aim for a private bank is to get an electronic feed from all the different custodians where client money is held, in order to offer a holistic consolidated view of the client’s assets and be able to advise the client on that,” says Martin Engdal, senior director, market strategist and business development at Advent Software, Emea.

But in order to provide this integrated reporting, third-party custodians need to collaborate, and extract data from their systems. This can be challenging and can take a long time, due to lack of resources on the IT side, and low priority attached to these tasks.

“However, this is changing and custodians are more willing to work with us these days, otherwise they risk losing their business,” explains Mr Engdal.

Moreover, competition is increasing, with new players entering the space.

Some large custodians, which derive revenues from transaction and custody fees, compete with technology vendors, and offer free services including simple portfolio management or trading solutions via their web-sites, as long as assets are held in custody with them.

These services are valuable to smaller wealth managers. However, as complexity rises, and clients become multi-jurisdictional with assets spread across many custodians and the asset mix grows, private banks still need to invest in an in-house professional portfolio management platform, believes Mr Engdal.

Tax reporting is another major service banks need to improve, in view of the upcoming automatic exchange of tax information between governments. Upgrading systems is also crucial to beat competition.

A bank needs to be able to report assets and client identification data to a tax authority, first of all, but also needs to inform clients on what was reported. And there needs to be reconciliation of the two sets of figures. This is driving some of the banks to reduce the number of tax residencies they are serving in their client base, says Olivier Carré, partner, regulatory and compliance leader at PwC.

This is a highly added value service, which banks may be able to provide in a very automated and sophisticated manner for clients only in a few core countries, he says.

At Société Générale Bank and Trust, the emphasis is on trying to design country specific reports that can be directly channeled to the tax authority, avoiding the need for the client to make complex calculations, explains Olivier Leclerc, managing director of SGBT in Luxembourg.

“We are always investing in IT systems and people, trying to widen the number of countries for which we are able to provide these dedicated tax reports,” he explains.

Transparency and consistency of data are crucially important. Information on data needs to be auditable, as regulators and auditors might challenge tax or income data, and private banks want a solution that protects their business and give them a very scalable solution, says Ralf Menegatti, product owner Asset Management Emea at Axiom SL. “A system needs to provide traceability of data, and enabling the tracking of data from the source to the report and back from report to source.”

Outsourcing is a big trend today in private banks, notes Frédéric Perard, head of Luxembourg at BNP Paribas Securities Services. In the past, many private banks had their own infrastructure system, but today the smaller to medium banks in particular cannot afford it, due to increased costs and decreasing revenues and also because clients are more demanding.

Due to the changing regulatory environment, private banks in finance centres such as Luxembourg will serve fewer clients with bigger assets. They need “top-notch front office systems”, for example, to be able to deal with OTC (over-the-counter) derivatives, instruments which more sophisticated individuals use.

However, even in this space, competition is increasing, with wealth managers such as Pictet and Lombard Odier offering custodian and outsourcing services, in front to back office wealth management activities, including portfolio management, risk management tools and a large suite of products, explains Mr Perard. “Safe global custodians,” though, still remain competitive, particularly with big wealth managers, he says.

In a stricter regulatory environment, the process of onboarding clients needs increasing resources in wealth management. Also, ensuring suitability of investments, according to the risk profile of the client, is a key focus today. These processes need to be automated as much as possible, so that it is possible to track and audit-trail the information, in order to meet regulatory demands, says Advent’s Mr Engdal.