As part of a continuing series from consultants and advisors, Celent gives an overview of the global wealth management arena.

This publication has approached a raft of consultants operating in the wealth management sector to give their views about a range of challenges and opportunities for the industry in different parts of the world. A number of articles are being released in these pages in the coming weeks and we hope readers find them stimulating. The articles have been sought by this publication and also by Bruce Weatherill, of Weatherill Consulting, and also chairman of ClearView Financial Media, publisher of this news service.

The following article is by Ashley Globerman and Isabella Fonseca of Celent.

The European wealth management industry continues to be dynamic and face challenges in the aftermath of the financial crisis. Issues facing wealth managers in 2014 may include: operating efficiently in an increasingly strict regulatory and reporting environment, facing bottom line pressures due to challenging economic conditions, and segmenting customers who have different demographic profiles and varying product and digital channel expectations. Additionally, wealth managers must justify their services to increasingly sceptical clients who demand more advisor-client communication. In short, advisors are being forced to do more, with less time.

Technology continues to play a significant role in how wealth managers will address these challenges while also expanding their existing client base and accessing new clients. Firms continue to outsource and partner with external vendors in the current cost-controlled environment as advisors seek to fulfill the demands of clients and regulatory requirements. With the proliferation of the internet and affordability of smartphones, the way in which clients prefer to perform banking or trading activities has evolved significantly, as is evident in the number of bank branches that are closing across Europe in favour of mobile banking. The development of technology strategies, such as front-back office tools, mobile apps, social media presence, and social trading platforms are at the forefront of firms’ strategic plans.

Celent has identified several of the market trends shaping the overall European wealth management industry:

Market trends
• Tightening of regulations. The European wealth management industry as a whole faces a stringent regulatory environment, which is forcing firms to adjust their business strategies and implement more comprehensive reporting tools:

– For example, the Markets in Financial Instruments Directive II (MiFID II), which is expected to be implemented in 2015, aims to protect investors by addressing developments in technology and market infrastructure. MiFID II impacts firms in several ways, such as increased client reporting, transparency, and regulation of certain investment products. Among many of the factors affecting firms, budget allocation in preparation for its installment, an increase in reporting, and the proposed ban on incentives for independent advice in the retail sector, are notable changes.

– Regulations such as the UK’s Retail Distribution Review, which came into effect last year, address the topic of product distribution to investors. This poses advantages and disadvantages for some type of asset managers to sell their products. The RDR impacts financial advisors as well as the sale of financial products to retail consumers.

– The US Foreign Account Tax Compliance Act (FATCA) requires banks to keep a record of their clients who are subject to US taxation. Such requirements primarily have an influence on the back office operations staff. For example, the US and UK increased efforts to collect tax on undeclared assets, with a particular focus on assets held in Switzerland.

For example, as a result of these regulations in Europe, there is a push towards fee-based services and more stringent investment transparency reducing the number of independent advisors in the UK (due to RDR), and number of part-time advisors in Germany.

• Transparency is still of foremost concern to investors and regulators. As a result of the financial crisis, investors continue remain wary about the market and economic climate. Although economic conditions are improving, investors’ demands for increased visibility and control of their investment decisions remain a challenge to the wealth management industry. Investors are gradually becoming more sophisticated and desire high-quality services and timely reporting in addition to choosing their own investment strategies. As a result, firms are focusing on customer service and reporting as a priority in addition to making market/education materials readily available to clients.

• The financial crisis, among its many effects, has swayed investors’ attitudes towards a self-directed model of investing. As such, there is a steady increase in the number of self-directed traders across Europe. The self-directed model of investing, those individuals who place their own trades through an online trading platform, is growing steadily across Europe as retail investors increasingly opt for greater control over their investments and gain confidence in their investing ability through the increasing accessibility of educational resources.

Investor scepticism towards financial institutions and advisors and demand for investor protection, such as justification of investment decisions by advisors and competitive product and service pricing are driving investors towards a self-directed model of investing. Investors, particularly those of Gen X and Gen Y, have turned to self-directed models, including “social trading”, which is a more social and engaging than the traditional model of investing.

This is partly due to their tech-savvy nature, comfort in sharing information online, self-reliant attitude, and the expectation of easily accessible data, including educational resources. Despite volatile and challenging economic conditions over the past several years, the self-directed market has shown moderate growth across Europe; Celent expects this trend to grow in strength as the global economy improves.

• Advisor populations are decreasing in many markets across Europe. As such, advisor retention is a challenge for many firms as a result of advisor retirement and a disproportionate number of replacements, and recent legislation affecting commissions.

– For example, the RDR may decrease the number of IFAs in the UK. Instead of meeting strict education and registration requirements, IFAs may choose to drop out of the market.

– In markets like Germany with relatively relaxed definitions and standards for the advisor community, new transparency and registration rules are likely to reduce the number of part-time advisors.

Impact on numbers

In addition to regulations affecting the number of advisors, clients’ loss of financial assets and slowly improving economies are likely to decrease the number of wealth customers and put pressure on wealth managers to reduce less profitable advisors. Lastly, international private banks are likely to divert resources from their European operations to growth markets. Reconsideration of commission structures, advisor-education, and the implementation of effective advisor tools are some of the ways in which firms can combat the challenge of retaining advisors.

• Traditional wealth management firms are losing some of their market share to smaller firms. Innovative niche brokers are emerging throughout Europe and are gaining in popularity among retail investors. This is particularly the case in social trading where investors rely on their peers for investment advice and market knowledge. In order for traditional firms and advisors to compete in the social trading space with these emerging companies, they will either need to create their own trading platforms or acquire those already in the market.

Promotions and low commission rates remain critical for firms to compete in the market. Incentives and fee breaks are widely used across Europe to attract customers. Promotions such as free product giveaways upon account opening, refer- a-friend scheme, and free account transfers are a few of the promotions marking the competitive pricing environment.

• Bolstering channel management including digital strategies is at the forefront of firms’ strategic plans. The combination of shifting attitudes towards self-directed investing models and web-based tools are driving consolidation of traditional bank branches and new client portal requirements. Firms are faced with consumers’ progressive use of technology and are finding solutions that meet these demands while operating in a cost-sensitive environment. Wealth managers are faced with using different technologies, devices and channels, all with the same goal of better servicing and communicating with clients.

The online channel remains the major access point for both advisors and investors; mobility is gaining more and more traction, and social media is more nascent, but growing quickly. Each channel presents its own unique compliance and monitoring processes. The next phase for firms is to have a full digital strategy developed for both advisors and end users for mobile application functionality and social networking.

Market fragility continues to drive the demand for increased communication between advisors and their clients resulting in an integrated digital strategy. Increasingly, wealth managers believe that smart-phones and tablet devices provide an opportunity for advisors to reach prospective clients and better service clients. There is increased pressure on advisors to be more aggressive with prospecting, more in touch with clients, and focus on reducing the sales cycle, which forces advisors to do more with less time. Advisors require more client-centric technology encouraging transparency and information sharing. Therefore, the market is headed for an integrated digital strategy to help advisors communicate via the online channel, through mobile devices, and through social networks with clients.

Segmenting product and services based on an increasingly diverse client base. Firms are addressing all types of customer segments, going outside their traditional investor segment, and therefore require scale and technology. There is a tendency to service customers not only in the traditional target market but also outside that box and through multiple channels. So the retail banks moving to serve the HNW customers, while private banks have lowered their threshold to serve more of the lower end of the market.

The emerging female millennial generation of investors is a growing pool of new clients for wealth managers. This generation is marked by increased participation of women in the labor markets and increasing involvement in personal and household financial decisions. Wealth managers will need to assess how they approach this client segment as their approach to financial management, as a whole, varies from the traditional and older male investor. The millennial generation as a whole is generally more self-directed and tech-savvy.

In conclusion, Celent expects 2014 to be an improving, but still challenging year for European wealth managers due to tightening of regulations, slowly improving economic conditions, rebuilding investor trust, and keeping up with the demands of tech-savvy clients. Celent expects that technology will play a critical role in the development of wealth managers in 2014.

The following points are crucial for wealth managers to continue operating and building their business in the current environment:

• Providing customers with a transparent, cost-effective service.
• Investing in meaningful customer service and communication, education, and social media usage.
• Keeping up with investor demands for investment products and services.
• Segmenting customers and tailoring products and services according to their needs.