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

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!

 

Roll over, don’t play dead

Roll over, don’t play dead
In my most recent report, Wings of a Butterfly: Regulation, Rollovers and a Wave of Optimization Software, I discuss the challenges the DoL conflict of interest rule poses to the $7 trillion IRA rollover business. These challenges center on the need for advisors to break down 401k plan costs and make apples-to-apples comparisons of proposed rollover solutions.   Why focus on the rollover? First, the rollover decision serves as a touchstone in the relationship between client and advisor. Trust sits at the center of recommendation to roll over, and seldom are the vulnerabilities of the client so exposed. The importance of the  rollover decision is further magnified by timing. It often takes place at the apex of client wealth, where the consequences of missteps for the investor can be severe. For the advisor, the rollover offers a unique opportunity to capture assets, or at least advise on their disposition, as well as present a coherent strategy for drawdown.   The implications of the decision to roll over extend beyond the client advisor relationship to firm strategy, of course. They are particularly relevant to product development and distribution. I’ll discuss these implications in a later post.

Motivations behind Outsourcing in Wealth Management

Motivations behind Outsourcing in Wealth Management

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.

DOL or DOA? The Election and the Conflict of Interest Rule

DOL or DOA?  The Election and the Conflict of Interest Rule

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.

Shining light on the thinking at BlackRock

Shining light on the thinking at BlackRock

It’s clear that there’s more than a little chutzpah behind BlackRock’s demand for tougher regulatory oversight of robo advisors. This post probes the thinking behind it.

Does BlackRock, with FutureAdvisor in hand, want to shut the door on new robo entrants? A desire to forestall such competition would suggest a level of fear that I do not think exists. (Among other things, the robo narrative has moved past the independent or 1.0 stage). BlackRock’s main concern seems to be that the sloppy hands of existing competitors might result in regulatory sanction on everyone, and so put the hegemony enjoyed by BlackRock and its asset manager competitors at risk.

Neither faster, nor better, nor cheaper

While BlackRock may have paid $150 million for FutureAdvisor, I don’t think the firm believes it owns a better mousetrap. FutureAdvisor may have an innovative glide path feature (which may explain why FutureAdvisor has an older clientele than its robo competitors), but tax loss harvesting, 401(k) advice, “try before you buy” functionality and other core capabilities have become table stakes in robo world. If anything, BlackRock may believe that its proprietary ETFs (characterized by low tracking error and a broad product base, e.g., Japanese fixed income) outshine the plain vanilla offerings of Schwab and Vanguard, although this argument is undercut somewhat by the firm’s recent decision to drop fees.

Asset managers in the catbird seat  

Like the ETF business, robo advisory services have become increasingly commoditized, even as the DoL conflict of interest rule presents a massive tailwind for both. It’s a tricky time for asset managers seeking to shift their offer from manufactured product to advice based solutions.  BlackRock appears to feel it is in the catbird seat, and is perfectly happy to secure its hand and that of its asset manager competitors, all of whom have done well by automating their investments platforms. I’m not saying there’s collusion here, just a noteworthy confluence of interests.  

I’ll talk about the motivations behind the launch of another asset manager-backed robo in my next post.

A New Black Swan

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.

Benchmark manipulation and market surveillance

Benchmark manipulation and market surveillance

The CFTC has recently revealed the instant messages written by Citigroup traders related to benchmark manipulation. Having recently published a report on Market Surveillance industry trends and soon to publish another one on the leading vendors, this seemed quite relevant. Current surveillance systems, be it for trade or communications surveillance, use the latest technology to capture possible instances of market abuse or manipulation. The capabilities are far beyond what was available a few years ago, and are holistic and comprehensive in nature. But in the end, the system is only as good as the people using it. The recent revelations have put a question mark over not just the traders involved in the benchmark manipulation scandal, but also the management of some of the leading institutions. Some firms are now going to great lengths to monitor their traders, but this is not an end in itself. The industry culture has to be transformed. The next instance of manipulation will not be in the same place and firms would have to overcome the motivation to profit in order to ensure compliance. The rise in the levels of regulation in the last few years probably would play the part of a positive reinforcer in the decision-making process and help influence industry culture, but is not a guarantor of propriety.

The battle for the soul of exchange-based equity trading?

The battle for the soul of exchange-based equity trading?

The recent statements by Nasdaq regarding the possible use of a trading delay by the proposed IEX Exchange puts the spotlight on a battle for supremacy not just between rival exchanges, but very different philosophies regarding what the ultimate role of exchanges in the global capital markets should be. The established exchanges, willingly or unwillingly, represent the status quo in terms of how exchanges should function. IEX on the other hand hopes to represent the interests of those trading participants who believe that they have been left behind in the race for speed in today's capital markets, especially the retail participants and the smaller buyside. It seems like an inevitable outcome in the aftermath of the global financial crisis, which has stoked the debate on economic inequality and the unfair advantage that a select group of trading participants have over others due to their advanced technological capabilities and use of highly sophisticated financial products. 
Getting back to the objections raised by Nasdaq over the SEC proposal that any delay of less than a millisecond could qualify as immediate, which would enable IEX to operate in the way it wants, there is certainly some substance in Nasdaq's argument. The SEC would have to come up with a solution that is acceptable to both sides, and does not leave it vulnerable to legal challenges. It is going to be an interesting couple of months for industry obervers as they follow the debate over the fairness and validity of the SEC proposal, and the decision on the IEX application.

Citadel Securities and the changing market microstructure

Citadel Securities and the changing market microstructure

The recent purchase by Citadel Securities of the assets of Citigroup's Automated Trading Desk business has further cemented Citadel's position as a leading market-maker. It follows closely on the heels of Citadel's acquisition of KCG Holdings' designated market maker business at the NYSE. Citadel has also been performing strongly in the swap markets in the US, specifically the swap execution facilities (SEF). It has built a reputation for reliability in difficult market conditions, at a time when broker-dealers are finding it difficult to maintain their market presence.

While the success of Citadel is noteworthy, it represents significant industry and regulatory undercurrents. Investment banks have labored under tougher market conditions and stronger regulatory restrictions. Firms such as Citadel have benefitted as they are not as tightly regulated as the banks. While this trend had been predicted in the years immediately after financial crisis, it is interesting to see the predictions coming to bear. The effect on the market structure has also been profound, and while many of the relevant developments have taken place in the US, other leading capital markets should also see similar changes in the near future due to similar economic and regulatory evolution. Investment banks will continue to narrow their focus in terms of their capital market presence, and we expect the leading ones to carve out specific niches instead ofmaintaining the comprehensive presence they had in the last decade.

From the buyside's point of view, while the lower presence of investment banks could indicate lower volumes and liquidity, it also represents a market in which there might be greater responsiveness to the needs of medium and smaller sized buyside firms.

Moving towards a more stable and healthier OTC derivatives market

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.