Outsourcing in Wealth Management: A Growing Trend

Outsourcing has been in use in the financial services industry for quite some time, at least for a couple of decades. However, wealth management firms have lagged the financial services industry in adopting outsourcing, primarily due to issues relating to privacy, data security, and loss of control. Many of them did not invest in technology from a strategic point of view for a long time, instead taking a siloed approach depending on specific business needs. The global financial crisis has contributed to a major paradigm shift in this regard. The crisis has significantly impacted both revenue and costs. Lacklustre market conditions have prevented them from generating superior returns impacting top line; this has been exacerbated by loss of clients, who, driven by disappointing returns and loss of trust, have looked away from their advisors or looked to diversify wealth management relationships. At the same time increasing regulatory pressures and newer regulations have compelled wealth managers to grapple with newer challenges in terms of control, compliance, risk management and streamlining operations. In this evolving environment wealth managers have slowly started to wake up and embrace technology and operations outsourcing as one of the solutions to meet the challenges. Cost cutting remains the primary driver behind adoption of outsourcing, which typically can save 20% to 30% of costs over a 3 to 5 year period. Secondly, outsourcing also offers easy scalability options; this is more relevant now as firms are either cutting down or closing operations in certain markets, while looking to expand in others – all in a short period of time. Time to market has therefore become critical. Data management, especially in large organizations offering multiple services, is another aspect that firms are looking to outsource. Along with benefits, there are a number of areas for concern with outsourcing. The most important of them is loss of control and security, both of great importance to wealth managers. Data privacy and data hosting constraints continue to be key concerns; violations in this area can be harmful for wealth managers’ brand image, which somewhat limits the universe of functionalities that wealth managers are comfortable to outsource. Another concern is around fiduciary responsibility and compliance and operational risk. Since the firm is responsible for regulatory compliance for all operations, including the ones outsourced, there is an increased need for easily accessing data and information for enhanced control and client and enterprise reporting. Firms will need to demonstrate their ability to provide the information requested by both clients and the regulatory authorities on-demand and in formats for consumption tailored to the individual’s preferences. Over time the industry has evolved a set of norms to overcome the concerns related to outsourcing. Extent of outsourcing adoption varies by region, the US being far ahead of Europe, while Asia lags the other two regions by some distance. Adoption also depends on the size and nature of wealth management firms. While Tier I and Tier II retail banks, insurance companies and brokerages have outsourced significantly, adoption of outsourcing remains moderate in smaller sized firms, especially in trust companies and family offices. In terms of functionalities, the further a wealth management function is from a client “touch point,” the more likely it is to be outsourced. Therefore, mid and back office functionalities are more likely to be outsourced. Outsourcing in the areas of global custody, securities lending, client servicing, and accounting and settlement of trades in is relatively widespread. Front office functionalities have been outsourced less; while some firms are slowly outsourcing their client on boarding or financial planning functions, outsourcing in the areas of product development, marketing, and fraud management is still limited. Outsourcing in the wealth management industry is likely to see further adoption in the near future. This will be mainly driven by firms in the US and Europe. Outsourcing practices in wealth management is still not as mature as those in other parts of the financial services industry and wealth management firms are starting to realize its benefits. In addition, existing market conditions as well as external factors like regulation will drive the growth in outsourcing business. IT budgets are expected to remain flat or decline in most markets. This will restrict firms’ ability to spend on technology. However, this also means firms will now have to do more with less and channel investments efficiently. Outsourcing provides one option for increasing efficiency without needing significant investments in infrastructure. Tier II and tier III firms will embrace outsourcing following the lead of tier I firms. While IT outsourcing has been the dominant part of outsourcing practices till now, process outsourcing is likely to gain more traction in future.

CCP adoption in South Korea

In 2009, the G20 agreed to set up CCP (central counterparty) settlement by the end of 2012. However, as of early December 2012, adoption of CCP settlement for OTC derivatives has not been passed by South Korea’s National Assembly. In other words, South Korea yet to keep its commitment to the G20 agreement which says that G20 countries should set up a CCP by the end of 2012. The adoption of CCP settlement is crucial to improving the transparency and stability of the OTC derivatives market. In order to prevent another KIKO incident in the future, the role of CCP is essential in South Korea. This would also help support Korea’s global credit standing.

New Wealth Managers in India- the Chartered Accountants !!

In an upcoming report titled – Trends in Indian Wealth Management Market, Celent analyzes the key emerging trends in the wealth management domain in the Indian market. The report captures all that is shaping the contours of this very interesting market place. One of the key discoveries is the growing trend of chartered accountants doubling up as wealth management consultants. This is a new phenomenon, where in small accountancy outfits are also doubling as point of sales of tax planning and savings instruments for clients. These products range in breadth from insurance to mutual funds. In larger cities accountants are also helping clients route investments into private equity and venture capital transactions. Manned by professional accountants with long standing relationships with their clients, smaller accountancy firms are only recently beginning to leverage their intimate understanding of their clients’ financials to advise them on suitability of different product classes for investments. This class has become active in advisory services in the wealth management domain recently. The wealth management offerings are positioned more in way of the traditional financial advisers. Accountants have emerged as an important intermediary in the wealth management business lately, charging commission income for products proffered and fee income for advisory services as their overall annual fee. Interesting how new channels are adding to the dynamism of the market place !!!

Market Data in Wealth Management: An Asian Perspective

One lesson of the recent crisis for wealth management firms is the need to address changes in client attitudes. Of late there has been a massive increase in the range of products leading to complex combination of investment scenarios. Wealth managers, in their aim to remain trusted advisors, have turned to market data providers to remain knowledgeable about market news and gain deeper insight into market analysis. Market data, considered a commodity till recently, is gaining importance for wealth managers for redesigning portfolios and to provide information from different sources in a single and user friendly space. The primary users of market data through wealth management applications include front office staff, including advisors, relationship managers, and investment specialists who use data to analyze existing portfolios and develop investment strategies. Market data is also used in the back and middle offices for handling the management, oversight, and administration of investments and trades. In Asia, different countries are at different levels of maturity in terms of wealth management. Japan is the biggest market and mostly institutional; Singapore and Hong Kong are sophisticated and closer to the Swiss private banking model. Outside Japan, Australia, Singapore, and Hong Kong, requirements are very local and domestic in nature in terms of product choices, regulatory and compliance requirements, and language issues. Investors in these countries prefer domestic asset classes, and mostly invest on their own without relying on advisors heavily. So far wealth management firms have mostly been relying on traditional portals like Bloomberg, Thomson Reuters, etc. With greater regulatory oversight post-crisis, emerging focus on online channel and greater demand for global data, wealth management firms’ approach to market data is changing. Before the financial crisis, firms mostly preferred siloed solutions for separate job functions. This not only increased cost for data management systems but also resulted in duplicate data. This attitude is slowly changing, and firms are after an enterprise wide market data strategy. Move to web-based technology, request for specific services like email and mobile alerts are also notable trends in this market of late. Still, the market is not as sophisticated as those in the West. Many global market data vendors use the same central solution in Asia, with some customization required for local requirements. Celent has learnt that some vendors use a simpler version of their product in Asia by disabling many functions and having small, product-specific resources. Local data vendors have strong presence in Japan; many software vendors, working in conjunction with the content providers, are active in this space, especially in India and China. Other regions are mostly dominated by the global players.