This year Celent surveyed technology providers that service wealth management firms. The goal of the survey was to learn the motivations and strategies of wealth management firms that outsource components of their business to third party vendors. The last time we did this survey was five years ago.
From the survey, we learned that one of the main drivers of outsourcing today is so wealth managers can experiment with the latest technology before committing vast resources to a technology that may only be a fad. Similarly, wealth management firms are eager to outsource because it allows them to scale up or down their operation, or enter new regions, quickly and efficiently. Wealth managers prefer to work with a technology provider to test ideas, tools and regions, before building a permanent team and spending on fixed costs.
Several motivations to outsource have become more important today than they were five years ago. These motivations include: to improve efficiency, to enrich the customer experience, and to respond to regulation. Over the last five years, across the world we have seen a push for more stringent regulation. Therefore, it is not surprising that regulation is top of mind for most wealth managers.
As products and services are increasingly commoditized, it is important for wealth managers to distinguish themselves via the customer experience. It is likely that over the next 12 to 18 months, wealth managers will spend relatively more time on outsourcing front office operations. For example, firms may look to vendors for improvements in: the onboarding experience, components of the advice and planning process, and help desk services.
For more information on the global outsourcing landscape in wealth management, please see my report, Outsourcing in Wealth Management: The Drivers and Strategies.
It’s no coincidence that Merrill Lynch launched its new robo platform the same week it decided to exclude commission based product from IRAs. Likewise, the decision by Wells Fargo to announce a robo partnership with SigFig suggests that despite the pronouncements of pundits and industry lobbyists, DOL is hardly DOA.
It takes a brave man to guess how the Trump administration will balance populist tendencies with free market rhetoric. In this case, as I note in a previous post, the inauguration of the new president precedes DoL implementation by less than three months. The regulatory ship has left port, and in any event, it's not clear that President Trump will want to spend valuable political capital undoing DoL.
I’ll discuss Wells Fargo’s motivations in a later post. For now, I’ll note the degree to which a robo offer aligns well with the principles of transparency, low cost and accessibility at the heart of DoL. At the same time, I caution the reader to consider the challenges that any bank faces in rolling out a robo platform, a few of which I underscore in this column by Financial Planning’s Suleman Din.
It’s one of those watershed moments. Clinton wins, and the Department of Labor (DoL) conflict of interest rule takes hold and likely gets extended beyond retirement products to all types of investments. Trump wins, and DoL gets slowed down and perhaps even rolled back.
Assuming Clinton wins (which appears likely) firms will need to gear up on three fronts:
- Platform: DoL makes paramount the ability to deliver consistent advice across digital and face to face channels. Such consistency requires a clear view of client assets held in house, which in turn implies eliminating legacy product stacks and their underlying technology silos, as I note in a recent report.
- Product: Offering only proprietary products only is a non-starter under DoL. But too much product choice can be as bad as too little. Firms must demonstrate why programs and portfolios offered are the best for each particular client.
- Proposition: In a best interest world, the client proposition must extend beyond price. Client education, transparent performance reporting and fee structures, as well as an easy to use digital experience, will distinguish stand outs from the broadly compliant pack.
None of the pain points above lend themselves to easy solutions. As such, the banks and brokerages most affected by DoL are struggling to develop processes that go beyond exemption compliance. I’ll discuss more comprehensive approaches in the All Hands on Deck: Technology's Role in the Scramble to Comply with the DOL Fiduciary Rule webinar I’m co-hosting this November 14.
I hope you will join me for the webinar, and in the meantime, you will share your thoughts and comments on this post.
The word on the street is big data, data lakes leading to insight, uncovering the hidden opportunities within your massive trunks of data. All true but the majority of the buy side, asset managers, asset owners are still desperately struggling with getting their fundamental data in order.
Over 80% of AMs are $100billion AuM and below and 60% are $50 billion AuM and below, many of these AMs are progressing on solidifying their IBOR (Investment Book of Record) foundations. IBOR and the IBOR Services Matrix (see Inside the Matrix: The Future of IBOR) is still the architectural goal but not yet a necessity for all levels of the asset managers.
Many are not yet up to an IBOR level architecture and still dealing with more basic EDM (Enterprise Data Management) realities. A significant number of AMs are dealing with implementing solid data management and data governance across their portfolios and funds, don’t yet demand millisecond real-time but are operating in a near-time environment, that is operationally sound and cost sustainable.
Now the good news is that as AMs and increasingly institutional asset owners can take advantage of superior vendor solutions and bypass non-differentiating EDM issues. There is certainly little reason, in this day and age, for AMs to attempt to build their own EDM structures. Vendor products can provide core ETL (Extract Transform Load) processes and perform the core standardization, editing and cleansing of the data. Eventually this will all become utilities but for now it is still needs to be dealt with firm by firm.
Data lakes are phenomenal but before the majority of the buy side AMs and asset owners are primarily utilizing their data lakes they are feverishly executing the initial layers of data management and governance to stay market competitive.
Today’s financial consumer enjoys unprecedented information and choice, both in terms of channels and access to third party or crowdsourced opinion. Higher expectations support (and in part reflect) the skepticism that to a large degree defines the Millennial generation. These expectations underscore a fundamental shift in the power balance between the client and wealth manager, one reinforced by regulation such as the US Department of Labor conflict of interest rule.
The ascendance of the client should be a call to action for wealth managers. As I discuss in a new report authored with my Celent colleagues Dan Latimore and Karlyn Carnahan, wealth management firms need to operationalize insights from new data sources, and bring servicing models up to date with their more sophisticated understanding of the client.
Campaigns and next best sales approaches that have worked in the past (or at least well enough to encourage firms to invest man hours in their design and execution) must be brought into the digital age. Too often these campaigns are a blunt hammer: they are built to sell product and ignore the evolving needs of the individual client, as well as the multiplicity of digital touch points useful to reach him or her. It is hardly surprising that the client reacts negatively to the presumption inherent in these offers.