The wealth management industry is changing. More and more universal banks have discovered the contribution wealth management can provide to the revenue stream and have put their focus on this segment. Disruptive competitors such as robo-advisors are targeting the market at an aggressive price point. Fee transparency improves the negotiation position of clients. Cost of compliance increases. A result is considerable margin compression.
At the same time, client structure and client expectations are changing: Wealth grows in new geographies. COVID has demonstrated that personal advice does not always require physical proximity and time-consuming travel. Client profiles are shifting, and a new clientele has very different expectations in terms of interaction style and transparency.
To stay relevant, firms are widening the offering: Holistic advice, ESG investing, crypto and tokenization present opportunities, but also require new ways of guiding clients to the right product. Technology enabling robo-advisors allows traditional firms to offer service levels which earlier were profitable only for much larger client portfolios, and to target a broader client base if they choose so.
In this environment, a highly efficient and cost-effective processing chain is a critical enabler. Process and technology innovations such as AI, digital identities, gamification and modular business models can become game changers. Adapting and integrating these innovations offer considerable opportunity for firms. Key is a systems platform capability of dealing with the implications of these drivers.
In this first post, we examine which wealth system capabilities will be required to exploit opportunities for profitable growth. It considers these capabilities both from the perspective of a wealth management institution reviewing options for developing their landscape, and of a platform vendor planning their product roadmap.
Growth in wealth in new geographies
Recent years have seen a consistent ascent of Asian economies, accompanied by considerable increase in wealth in the region. Not only do 27% of the top 1% richest individuals in the world live in China, India or other APAC states; also 48% of all individuals with wealth between USD 100.000 and 1m live in this region, establishing a solid upper middle class.
To serve these markets, wealth managers need platforms which are able to implement local regulation, to integrate with local data providers, and to enable multi-entity and multi-country operations. Furthermore, platform vendors need to decide how to provide their services in the region.
As we have observed in client situations, the complexity of implementing local accounting rules in their interaction with the regulatory framework and reporting requirements is regularly underestimated. Tax calculations may provide further stumbling blocks. In these cases, integrating with local vendors providing specialized expertise and software components may be a faster path to market.
Dealing effectively with multiple entities is another key platform capability in enabling new markets. Having to rely on separate application instances, with separate data pools, integration requirements and frequently even separate customizations, results in excessive cost from reconciliation, business operations and IT (as we have learned from ERP systems in the 00’s). Therefore, consolidated data management is critically required. However, privacy and regulatory concerns demand for sophisticated data architectures and potentially additional protection layers such as cryptography.
Hand in hand with supporting a multi-entity organization goes the need to map client facing entities to booking centres. Where back-to-back bookings are required, they must be automated to contain operational risk, and appropriate controls must be in place to ensure effectiveness of risk mitigation.
Supporting internationalization requires localization of the user interface. While the mere process of translations is typically well-managed in modern platforms using double-byte character sets (DBCS), different writing directions and associated cultural conventions require additional consideration.
System vendors (and their clients) should consider an additional perspective – how to cover a geography from a sales, implementation and support perspective. Building a sales organization and the required relationships may take considerable time, so working with a local or a well-connected global partner may be more effective. Localized implementation and support capability may also be important to be competitive in regions with materially different cost structures, and to address time zone differences.
Broadening the customer base without diluting the brand
Traditional wealth management services are people intensive and expensive to deliver. This requires a sizeable portfolio to be profitable. Process innovation which we will discuss in a later post allows offering services and products also to a broader, but less affluent client base, expanding the addressable market in existing regions.
However, marketing to a broader base is also at risk of creating brand dilution. Careful management of brand architecture with sub-brands linked to the core business can reduce this risk, while still profiting from the brand value of the parent.
New market participants
Deloitte finds that the growth of the wealth management market in new geographies is underpinned by a diverse range of institutions. In particular for platform vendors, it is important to understand the structure of the market they are selling to.
Apart from the traditional wealth manager or private bank expanding into new regions, growth also stems from existing retail banks building wealth management units for their upper customer segment, and from the emergence of local wealth management firms which emerge “bottom-up”. This has fundamental implications for architecture and licensing model of wealth management platforms.
A retail bank opening a wealth management division already has a core banking system (CBS). Duplicating the entire CBS stack in the WM group make it unnecessarily complicated to maintain a single view of the customer, and it duplicates maintenance cost. In response, a new generation of modular wealth components emerges which can integrate with underlying platforms. Monolithic vendors may see their market considerably constrained unless they increase modularization themselves. APIs are key to integration.
Scalable commercial offering
As mentioned earlier, growth happens in different shapes and sizes of wealth management firms. Small but fast-growing firms may find that leading vendor offerings do not scale down to their level – systems are too expensive, too difficult to install and to run for a small organization. This can be an opportunity for platform vendors if they manage to serve their demand in a way which is economically feasible.
Other parts of the software industry have developed offering structures of a basic, pre-customized software as a service which can grow later to a broader offering either in the cloud or with local software. This approach is attractive also in wealth management platform market, with a simple, pre-customized version of the software delivered through the cloud and priced per-seat, transaction-based or by AUM. This model allows asset managers to expand the use of the platform in line with their needs and their IT capabilities as they grow.
At the same time, it is highly attractive to platform vendors as it provides them with the opportunity to position themselves with a wealth manager at a time when the purchasing process is much less competitive, they can use their experience to help the client grow, and they create a revenue segment which is poised to grow dynamically with their clients.
Controlling the bottom line
The wealth management industry as a whole has been subject to considerable margin pressure. A major contributor to high cost in existing organizations has been the internal production of commoditized, low-value services. More recent competitors often source these services externally, not only to contain cost, but also to profit from the reliability of industrialized and well-controlled production processes.
There is a clear trend towards industrialization of the Wealth Management ecosystem. Large parts of a wealth management service can be assembled through APIs from components such as account, settlement, portfolio and risk management in a “Business Process as a Service” (BPaaS) style. This allows a wealth manager to focus on its core capabilities and new firms to set up business quickly by composition of established services.
Wealth management platforms have a major role to play in enabling this transformation. They must provide the capability to embed external services in a transparent way through APIs. This means that no internal dependencies beyond their service contract should exist between the modules of the solution. Similarly, the firms offering the services should expose these through APIs, helping the insourcer to quickly increase volumes and increase their benefit of scale.
Network based platform innovation
Fin-techs are increasingly offering clever tools supporting specific parts of the wealth management business; an example are components for guiding clients to most suitable products. However, this requires another type of integration through APIs which is much more granular and more real-time. Such services require responsive real-time APIs.
At the same time, using such tools requires a vendor to think “ecosystem first” instead of trying to reinvent the component. In the past, systems have been designed to maximize the functionality provided – and grown more and more complex. Clients and vendors realize this brings challenges in terms of maintainability and time to market. Furthermore, no fin-tech will invest into integrating with a platform, only to find its functionality included in the next release of the host platform. A “network first” mentality is needed to protect this investment.
A new breed of core banking platforms, the “lean CBS”, do not claim to deliver every possible capability under the sun, but rather explicitly refer to other firms delivering specialized solutions.
The wealth management industry offers opportunities of growth: Markets are opening up in new geographies. New client groups can be served profitably through new technologies without exploding cost or jeopardizing brand value. Decomposition of the value chain through industrialization yields cost savings and faster go-to-market. These macro drivers are enabled by modern platforms.
The next post will explore how wealth managers can provide their clients with the most effective client experience, and how platforms can critically contribute delivering it.
 Credit Suisse Research Institute 2021, Global Wealth Databook 2021