The article, by Kevin Bonar, chief executive at Pershing, a BNY Mellon company, addresses a key issue for wealth managers - what is the best area for them to focus on and what should they outsource or quit altogether?

The following article, by Kevin Bonar, chief executive at Pershing, a BNY Mellon company, addresses the key question for wealth managers in the current environment – what is the best area for them to focus on and what should they outsource or quit altogether? As ever, while this publication is delighted to share such insights, the views of the author are not necessarily shared by this publication’s editors.

The retail distribution review marked the beginning of a new era for the UK wealth management industry. With the most significant regulatory upheaval in recent memory finally in effect, wealth managers across the country have been scrutinising their business models to see if the preparations they had made for the new environment were fit for purpose. Managers need to be capable of delivering a model to clients that balances the costs of meeting new regulatory requirements with an increased scrutiny on value for fees.

Preparation for RDR was a hugely demanding process, and there are still adjustments to be made. In addition to needing to reallocate assets to meet new higher capital requirements, many advisers were required to take additional exams, and changes to pricing required all documentation to be reviewed and for all clients to be informed. The transition to clean share classes is, for many firms, a laborious ongoing challenge. While it is certainly arguable that these efforts have improved general standards for clients, they have been hugely demanding of energy, time and resource for wealth managers.

RDR was not a one-off change - this was only the latest and most visible milestone in a general shift towards a greater focus on value that has been in process for over a decade. The costs of keeping up with technology and ensuring compliance have put increasing pressure on all aspects of the wealth management business. While great strides have been made in improving reporting systems, client relationship management and portfolio modelling, it is important that the increased investment of energy into these operational issues does not detract from what means most to clients: understanding their goals and delivering good advice.

Technology

Technology underpins a raft of vital operations for firms, ranging from accounting, administration, portfolio modelling and client relationship management (CRM). For many wealth managers it remains a thorny issue, as it is considered a major hassle to update systems. This can stop many companies from taking the plunge, but getting it right can illustrate real value to clients. Research has shown that clients consider technology as a central deciding factor in selecting a wealth management firm and there is no doubt that the right technology can save time and help wealth managers achieve scale.

The majority of people who consult a wealth manager want personal input from their adviser. On a day where significant market turbulence is reported, a wealth client will value the twenty minute call from their adviser to provide an update and allay concerns. Coffee meetings, unsolicited emails and a personal touch are extremely valuable, but they all require time and thought. Energy spent dealing with technical or regulatory issues detract from being able to deliver this value. As the pace of change of both regulation and technology looks set to continue, wealth managers will need to be able to handle these changes more efficiently.

Rather than continuing to focus on all aspects at once, managers should take inventory of which areas of their business they are good at, and which ones are holding them back.

Any aspect of the business which is client facing should only be outsourced if complete control can be maintained. Reporting is one example. A medium sized wealth manager might have two thousand clients, which it provides updates to quarterly. That's eight thousand documents to compile, review and issue every year, and a huge area for potential savings through outsourcing. However, if your reporting ends up plastered with the outsourcing company's branding, or if there is no ability to tailor and control content, clients may question the value being added by their adviser. Firms should look for white-label agreements where they can retain full control of the documentation clients receive, while alleviating the effort of preparing them from scratch.

Website

A similar principle applies to the firm's website. Maintaining a modern site that provides clients with interactive options such as tailored fund data and performance information is valuable, but it's also a huge logistical effort while the website's look and feel can and should remain an in-house concern, firms can use data providers to build interactive monitoring systems and information for clients.

Regulation is another key area where wealth managers are rightly seeking support. This can help alleviate FCA levies for certain permissions, for example holding money or trading derivatives. Firms should review their permissions carefully against outsourcing agreements to ensure there is no doubling up. They should also be careful to determine where ultimate responsibility lies in an outsourcing relationship; agreements should only be undertaken if the outsourcing partner is liable for the services they provide. The most valuable outsourcing agreements both liberate resource and remove financial risk.

The demands of the post-RDR marketplace have challenged the viability of old business models, tipping the balance against trying to do everything and encouraging a return to a renewed focus on clients and delivering a tailored, scalable product. Firms that are willing to embrace new processes, new technologies and new solutions that free them up to operate responsively, and to scale their products to their clients’ needs, will be best placed to survive and thrive.