Celent’s Innovation and Insight Day: Wealth and Asset Management Stream

We are only weeks away from Celent's 2017 Innovation and Insight Day where we will explore how players in the financial services market are leveraging technology in innovative ways in order to differentiate themselves in an increasingly competitive and challenging marketplace. We will be featuring a number of case studies, discussions, and deep-dives into topic areas surrounding innovation and focusing on themes, such as:

  • Customer Experience
  • Products
  • Emerging Innovation
  • Operation and Risk
  • Legacy Transformation

This is the first year we will have a Wealth and Asset Management (WAM) breakout session where we will cover a range of topics around innovative solutions and trends in WAM.  The agenda can be found here: Wealth and Asset Management (WAM) Program and will be presented by analysts from the Celent Securities & Investments and Wealth & Asset Management teams:

  • David Easthope, Senior Vice President, Securities & Investments
  • Brad Bailey, Research Director, Securities & Investments
  • Kelley Byrnes, Analyst, Wealth & Asset Management
  • John Dwyer, Senior Analyst, Securities & Investments
  • Ashley Globerman, Analyst, Wealth & Asset Management
  • Arin Ray, Analyst, Securities & Investments
  • William Trout, Senior Analyst, Wealth Management
  • James Wolstenholme, Senior Analyst, Wealth & Asset Management

I particularly look forward to sharing research around the evolving wealth management landscape as the core client base shifts from baby boomers to millennials. While much ground has been covered from the perspective of wealth managers to meet the digital needs of nextgen clients, wealth managers continue to be behind the curve in their digital offerings.

How are wealth managers and vendors responding to the paradigm shift in the development and execution of services and products to meet millennials’ distinct expectations?

This is just one example of the many topics that we will discuss at I&I day – we hope to see you there!


Utility-Managed Services in Capital Market

Need to cut cost to boost sub-optimal levels of RoE is becoming essential for capital market firms in the backdrop of tepid revenue growth and increasing compliance burden. Firms have tried short term measures to cut cost, but should now consider long term strategic review of business and operations.

Moving beyond traditional outsourcing arrangements, mutualization of costs at a group or industry level through adoption of shared service and industry utilities would enable long term cost reduction.

Celent has been tracking the utility landscape for the last two years starting initially its coverage of the utility solutions in the Know Your Customer space, as that area saw a number of solutions emerge in a quick period of time. However, the industry has seen development and launch of newer solutions under the managed service/utility model that span across the value chain of capital market ecosystem – such as post-trade operations, reference data management, collateral management, regulatory reporting etc.

The utilities in capital markets are a new phenomenon with the potential to significantly transform how operations are carried out at financial institutions. Understandably, this has created a lot of interest and curiosity among several participants as they look to redesign their operations and solutions around the utilities to adapt to the changing situation. Uptake of the utility and shared services will be driven by a growing realization of value and can take a while.

Many large banks have already realized the valuable proposition that a utility can bring and have therefore taken an active role in adopting, and even in the development of, some of the utility solutions. Such large institutions are best suited for utility adoption in the near term. Some of the utility providers are large industry players with significant industry penetration in their respective markets; they can hand hold and provide a level of comfort to clients who are now considering adopting utility solutions. This would pave the way for next wave of adoption of the utility model and will likely take place over the short-to-medium term. As the firms in the above two categories adopt utility solutions in the short-to-medium term and demonstrate successful use cases, others who are currently on the wait and watch mode are likely to adopt this new model in the medium-to-long term.

A recent Celent analyzes salient features of the emerging utility-managed service in capital markets including detailed discussion on thirteen such solutions; the report is available for download here.

DLT – Beyond the Buzz

We published our new report on distributed ledger technology (DLT) called Beyond the Buzz today where we take a look at a range of use cases for DLT within banking and capital markets in addition to profiling the state of play across this ever-growing ecosystem of financial institutions, Fintechs, Bigtechs, regulators, and industry consortia.

We bring together a framework for assessing the use cases identified in the report, specifically, their status: Announcement; Proof of Concept, Pilot, Implementation, or Broad Adoption versus whether a consortium is driving the technology or a more unilateral/ bilateral initiative is implementing it. The breadth of use cases and complexity of the underlying markets all point to a very mixed picture such that 2016 and 2017 will continue to be active on the news flow front as the number of use cases proliferates and learning curves are climbed.

Interoperability with legacy systems, regulatory clarity, and modularity of technology architecture will all be critical elements to generating the scale and network effects which are so critical to the financial markets. Parallel running of existing systems and markets versus new DLT-enabled systems and markets will present unique challenges. Consequently, we are excited by the opportunities for private market securities which will be a relatively easier breeding ground for testing and implementation of DLT than large, listed, markets. The risks around the inertia of incumbency as we call it will also be much lower.

Regulators have a very important role to play given the distributed nature of the underlying technology and the global nature of its possibilities which will demand regulatory clarity and consensus on a multi-jurisdictional basis. RegTech was a theme that we identified here at Celent earlier than anyone else and the RegTech benefits of DLT are likely to become clearer to regulators and financial institutions as testing and proofs of concept mature. This could become a very important and supportive dynamic.

While we have focused on markets and use cases which have a significant amount of incumbency, we are hugely excited about the potential of DLT to streamline business processes between organizations and the potential for new investable asset classes to emerge. We are also alive to the reality that so much innovation is taking place outside of traditional financial institutions that a broad lens of observation across the entire DLT ecosystem will be essential to keeping track of where viral adoption rates will occur first.

Our next research will focus on precisely that as we will highlight a DLT use case which seems to be significantly ahead of the pack already with full spectrum relevance to: retail and institutional investors; merchants and enterprises; developed markets and emerging markets; with a variety of use cases across finance…stay tuned.

A New Black Swan

So the latest Black Swan was spotted in the last few days in the UK when the outcome of the Brexit vote took everyone by surprise. While many are still trying to make sense of the whole situation and figure out what it means for the future, the only thing that is certain at this moment is there will be a lot of uncertainty in the coming weeks, months and possibly years.

In question is the constitutional and political arrangement of the United Kingdom and broader EU, but how is it going to impact the financial services industry? The future of the “bank passport” that allowed financial institutions to do business easily across Europe will be a topic of much interest. Restrictions in ease of doing business might result in them moving out of the UK, and some have already started the process. This would not only result in shifting (if not loss) of banking jobs, but could also balkanize the markets. Technology requirements, for example hosting of data centers within national jurisdictions, could similarly balkanize operations. This would also impact adoption of centralized operations, like cloud services, and slow down the growth of start-up culture and innovation. Balkanized operations and restricted market access would deter or slow down smaller players in designing and launching innovative solutions, and help larger incumbents.

Then there is the question of pan-European regulations and initiatives like Target2 Securities. T2S entailed firms with significant European presence to restructure their operations across Europe. While UK never decided to join the T2S project, firms with European operations were so far busy designing their optimal operational mix within continental Europe. If the UK vote now requires further restructuring that may force them to rethink their current plans and impose additional resource constraints. Also of interest would be the LSE-DB merger; even though both parties have said the deal is not threatened by the vote, politicians might have other ideas.

The political negotiations in the coming weeks would therefore be closely watched as market participants look to navigate their way through the latest developments. All in all the level of complexity and uncertainty in the system has suddenly grown manifold. All blame the Black Swan.

The next wave of fintech disruption

The bank has traditionally sat in the center of the broader financial world.  The post-crisis challenges have allowed fintech firms to capture market share in traditional banking endeavours such as payments, lending, investments, and financial planning. First wave fintech disruptors with no asset base or legacy banking infrastructure have made significant inroads into challenging banks in their core businesses. Banks have reacted in a variety of ways to these challenges with disparate degrees of success, but only those actively partnering with and supporting fintech innovators have gained a competitive edge.

Similarly, exchanges have stood at the centre of the capital markets for much of human history. The years of connectivity, combined with the earth-shaking changes in the ability of firms to access capital and a global regulatory model that has focused on risk mitigation, have created an ideal world for next wave disruptors to bring solutions to complex trading, liquidity, regulatory, and operational problems that have been difficult for incumbent firms to solve on their own. This investment is going toward blockchain, RegTech, AI and other tools for driving change in the capital markets.

As it has happened with banks, those market infrastructure providers that decide to embrace, leverage and coexist with upcoming fintech firms will be able to further their historical strengths and stay at the core of financial markets.

Since 2008, capital flow into fintech investments has grown sixfold. Last year, about $19 billion in capital was invested in fintech across approximately 1,200 deals, nearly doubling funding flows in 2014. We have seen banks partnering with fintech, filling gaps and bringing critical experience and enterprise scale to these endeavours. Major parts of the financial services ecosystem run the risk of being transformed by pioneering financial technology firms. At the same time, strategic firms have developed innovation centers of excellence, laboratories, and their own CVC funding vehicles to invest and guide in areas of core interest to these firms. CVCs now represent 25% of global fintech capital flows.

This week the Deutsche Bourse announced the creation of its CVC DB1 to fund innovativation in the capital markets. Celent, on behalf of Deutsche Bourse, explores this next wave of fintech in the capital markets and highlights the power of future collaboration between leading financial infrastructure players and fintech firms.

Future of Fintech in the Capital Markets can be downloaded from the DB1 Ventures website. I look forward to your comments.

Moving towards a more stable and healthier OTC derivatives market

The Bank for International Settlements (BIS) recently reported that there was a decline in the cost of replacing outstanding OTC derivatives, the first since the financial crisis. There was a similar decline in the gross notional amount outstanding as well. While this indicates the tough regulatory regimes worldwide in the aftermath of the crisis, it also a sign of a healthier and more resilient OTC derivatives market. Due to the rising regulation-related costs of trading, market participants are looking to make their OTC derivatives trading more efficient. Tools such as trade compression and collateral optimization are being used for this purpose. So the decline in outstanding is also an indication of more efficient trading due to compression. Another sign of the efforts to reduce systemic risk is the rise in volumes of OTC derivatives that are being centrally cleared. The greater use of clearing houses is something that regulators have been espousing for some time, and an approach that most market participants and observers agree with. Besides the internal factors, external economic ones such as interest rates and exchange rates also explain some of the decline in value of OTC derviatives trading. Again, these are a sign of market fluctuations and do not necessarily represent any market decline. In our view, the BIS numbers are indicative of both the changes that regulators have put in place over the last 7-8 years and of a global economy that is still recovering from the financial crisis and the following economic challenges.

Run, hide, partner, or buy: Fintech, automation, and disruption in wealth management and capital markets

Readers of a certain age may remember Frankfurt's aspirations of surpassing London as the world’s leading banking center. While that vision has not come to pass, Frankfurt remains a powerful hub for global finance. Home to Deutsche Bank, the European Central Bank and the Deutsche Börse exchange among others, Frankfurt’s importance is reinforced by its location at the very heart of Europe.

With this in mind, Research Director Brad Bailey and I are excited to bring the next Celent Wealth and Capital Markets roundtable to Frankfurt on Tuesday, May 10th. Of particular interest will be the role played by fintech firms in disrupting an ecosystem long dominated by large financial institutions. Brad and I will share ideas and examples from recent research, while senior executives with banks and asset managers and other large institutions from Germany, Switzerland, the UK and Italy will offer their perspectives on the disruption and the technology strategies they have adopted in response.

To maximize the participatory nature of this event, Celent is capping attendance at 20 individuals. At present, we have a few seats still open and would love to hear from other clients interested in joining us.

Big bucks for Betterment

how to invest in a business: elements to create added values and profits for the investors

The $100 million investment by Swedish VC firm Kinnevik in NYC based Betterment doubled in one swoop the amount the automated advisor has raised to date. This latest capital raise translates into a valuation of more than $700 million and follows a $60 million round that the firm completed last year.

Since that time, Betterment has increased assets under management from just over $1 billion to nearly $4 billion in assets. Betterment would not provide a breakout of AUM, but direct to consumer sales account for the bulk of holdings to date, spokesman Joe Ziemer told me. This makes intuitive sense: while Betterment Institutional has emerged as a strong driver of growth, the firm’s retirement platform has not been around long enough to make a difference. That said, the pending imposition of a uniform fiduciary standard for retirement advisors by the Department of Labor should provide a significant tailwind for that leg of Betterment’s business. Indeed, investment by Kinnevik, coming in the wake of the proposed standard, signals a validation for the robo advisory model in its pure play form. This model has come under stress in the face of competition from incumbents like Charles Schwab and Vanguard, and more recently, asset managers BlackRock and Invesco. A closer look at the Kinnevik portfolio reveals financial services to be a small part of the firm’s overall holdings. Clearly the firm sees a huge opportunity in this arena, with the automation of retail wealth management an inflection point. I have more thoughts on this deal that I’ll share in a follow up post. If you can’t wait, email me directly at wtrout@celent.com to discuss. I’d love to hear your thoughts as well.

Building smart blockchains

In trying to discern the signal from the noise in the blockchain space, the noise level is high, but the signal is strong. My recent report, Blockchain in the Capital Markets: A Smart Distributed Future describes the implications of the blockchain and smart contracts in the capital markets across the value chain. The report explores the Fintech disruptors and the incumbents who are battling for position. Key themes that continue to arise in capital market blockchain use cases are the review of legacy systems (many of which grew up in a time of high margins), low cost of balance sheet, and freely extended credit. These systems need to be optimized for the realities of the regulatory, capital, and profitability metrics that exist today. I have also been reflecting on my participation in The Blockchain Conference last week in San Francisco. This was a great event that brought together some of the leading players in this space. The conference clearly indicated the impact distributed ledgers will have across industry verticals, as well as showing the implications for both evolutionary change and revolutionary change. There was extraordinary commitment to developing enterprise grade, secure, private solutions that will most impact the capital markets. The presentations and panels offered a look into this rapidly moving space, where everyone (from the smallest startups to the largest tech vendors) is approaching a new database model that will have far-reaching implications. The signal is there, and it is strong!

The rise of private capital, disintermediation, and the advice premium

private capital Five observations and a final takeaway from my latest report, Private Capital on the Rise: The UHNW, Private Securities, and the Hunt for Non-Correlated Assets.
  1. The digital revolution, the requirements of a behaviorally distinct Millennial generation of investors, and the bloating of the IPO market post crisis have driven enthusiasm for non-bank or alternative sources of capital, with private equity (and venture capital) funds at the fore.
  2. Recently, direct investment (i.e. the deployment of private capital into closely held companies) has emerged as an intriguing alternative to private equity, particularly among family offices.
  3. As per the figure above, direct investment represents the “fat middle” of the traditional funding hierarchy. It assumes the disintermediation of the private equity fund manager, and is more discreet and flexible than equity crowdfunding, which has a distinctly retail orientation.
  4. On the down side, accounting system limitations make it difficult to value and account for private holdings in any scalable way. The inability to capture pricing and position information on a regular basis presents risks and opportunity costs for the direct investor.
  5. The good news is that technology vendors are developing systems to track and reflect percentages, cash outlays, and other categories relevant to private capital investment, as opposed to systems that view the world solely through the lens of unitary shares.
To point 5 above, a takeaway: While next-generation technology will be instrumental to success in the short term, portfolio management systems with the firepower to support the market for private securities will eventually be the rule. A more level technology playing field means that competitive advantage will come less from tools or even capital and more from insight and intellectual reach. The advisor able to provide these will be able to command a premium.