Even before Covid there were tremendous cost income pressures – we have barely touched the tip of the iceberg of some of the likely influences that will enhance these pressures – Mifid II increased transparency for fees, and we haven’t even seen the full outcome of that yet. As an industry – despite what we say about brand and client service, we have a problem with lack of differentiation – are products innovative? In many cases, they are par for the course. Some firms have been stagnant in terms of organic growth – the response to the Owen James scene-setter survey shows firms are concerned about client acquisition as one of the key focus areas. And now in the Covid world, nothing has fundamentally changed – yes, we have got a little better with some digital engagement with clients, and some implementations have accelerated, but the needs of firms and clients have not changed.
Experts: Mark le Lievre - CEO and Lea Blinoff – Head of Solutions, Vestrata
Facilitator: Gilly Green, Sionic Officer, Sionic
State of Play
(Gilly Green) Whilst it is unusual to be asked to speak as the facilitator, Mark asked for some views on market trends as a brief introduction.
Key industry trends:
- Even before Covid there were tremendous cost income pressures – we have barely touched the tip of the iceberg of some of the likely influences that will enhance these pressures – Mifid II increased transparency for fees, and we haven’t even seen the full outcome of that yet.
- As an industry – despite what we say about brand and client service, we have a problem with lack of differentiation – are products innovative? In many cases, they are par for the course.
- Some firms have been stagnant in terms of organic growth – the response to the Owen James scene-setter survey shows firms are concerned about client acquisition as one of the key focus areas.
- And now in the Covid world, nothing has fundamentally changed – yes, we have got a little better with some digital engagement with clients, and some implementations have accelerated, but the needs of firms and clients have not changed.
Covid has, however, accelerated thinking on having the right strategy – whilst no one knows what will happen, it is clear that having a strategy focused on resilience is absolutely key.
- How do we become more efficient?
- What are our USPs around product that will attract and keep clients?
- How do we grow client assets organically?
This session should give us some food for thought on how we think differently about client engagement and strategic investment solutions. Vestrata have some pioneering ideas in this space so the session is about what we think are:
- areas where a wealth manager adds value?
- what are commodity processes?
- what areas are specialisms that could be bought in?
Mark le Lievre – addressing cost-to-income challenges, an introduction:
In Vestrata’s view most private banks and wealth managers are facing 3, interconnected, fundamental challenges:
- addressing cost-to-income ratios (McKinsey reckon on these being 85%);
- effectively implementing regulatory change; and
- in the absence of market appreciation, the need to enhance client engagement – and thereby grow revenues.
We have seen a number of key trends to address these issues at private banks over the last 5 years:
1) attempted to streamline and outsource back office booking platforms – there has been relatively good progress in this area
2) CRM and client / adviser efficiency – particularly in the last 3-5 years – covering KYC, AML, onboarding efficiently and together with enhancing client data;
3) However, there is one area – the Investment proposition – that has remained largely untouched. There is a significant opportunity for most wealth managers to reimagine their Investment Platform:
- How do you leverage world-class investment product?
- How do you package products on that investment platform?
- How do you leverage the investment platform to increase revenue base?
Most firms have a significant cost associated with developing investment solutions, yet have not consider thinking differently.
Reference the Owen James Scene-setter Slide – “Addressing cost-income challenges”
There’s no doubt that firms 2 or 3 things stand out in terms of actions being considered to enhance revenue:
- Systematic advisory processes to deliver ideas to clients
- Enhance and broaden investment offering
- Leveraging digital technology platforms to deliver an enhanced Client Experience
Lea Blinoff: - The future of a wealth manager’s investment offering.
Views and observations in talking to wealth managers – There are 3 top priorities for their investment offering
- Product portfolios
- Activating cost reduction
- New product development
Most wealth managers felt that their core discretionary offering is not differentiated and often ended up with asymmetric risk /reward – closet indexers with higher fees and higher tracking error.
If core is long-term preservation, it needs to be managed with a long-term horizon and more stable SAA – however this can then be a dampener on pro-active client engagement - and client engagement is at least as important as investment performance in growing share of wallet and retaining clients.
Many of the managers are leaning towards a core and satellite approach to investment – giving more options to offer more innovative and differentiated investment offerings, including ESG, thematic investment opportunities and liquid alternatives.
The more innovative firms are also looking to integrate ESG throughout the investment offering and not to provide simply an ESG product on the shelf.
Accept that there is a difficulty of offering alts to retail clients in UK – complexity of launching and maintaining such as product has been challenging – especially for the mid-tier.
Additionally, and a key factor, is that a satellite offering allows the wealth manager an opportunity for more pro-active engagement with the client and an opportunity to stand out.
Post Mifid II, the focus in UK turned towards offering discretionary mandates and a vicious circle: – the regulatory complexity of offering active advisory has become difficult. Then it is even more difficult to activate execution only assets in the absence of a compelling advisory offering and those assets rarely leap from XO to discretionary – back to the problem of the discretionary assets not being conducive to active client engagement.
The spike in trading in March was largely opportunistic and due to conviction trading, not a surge of assets into discretionary mandates – an indication that individuals due have appetite for active advisory solutions.
But how to deliver active advisory in a compliant and scalable manner? And how do wealth managers acquire clients and grow assets? Especially given economic contractions and slower wealth generation following Covid…
Clearly you could just try to steal or acquire clients? Or could also get more engaged with the clients you already have (cheaper). In the last decade organic growth has happened mainly due to market appreciation, but wealth managers are now seeing active advisory as a key opportunity.
Considering the cost side of the equation, feedback falls into two buckets on product and investment solutions
- Many accept that the vast majority of investment functions are, in fact commoditised - a growing number of firms are looking to outsource fund due diligence, security selection and product structuring – whilst retaining other functions that contribute to brand, such as CIO, SAA and adviser/client engagement
- Reduction in size of approved product shelf – many are sub-economic, yet required the same level of oversight.
The experience, therefore in UK is that most have shied away from active advisory. Due to regulatory complexity and “hearts and minds” objections.
Whilst the “hearts and minds” may be mainly cynical the real barrier has been the regulatory complexity – delivery of ideas (suitability), or getting it wrong mean significant risk on a personal level for the individual adviser.
To get over this we need:
- Data analytics that can identify next best ideas, scalable and in a compliant way
- support the processes in a more systematic manner
- and hence risk reduction
Some firms cover the whole gamut – discretionary, centralised investment, personalised, bespoke. Majority of clients want personalise approach, but it works off a centralised process and the same asset allocation committee. This is because, if everything is bespoke – client outcomes will be very broad and a need for better risk management and a smaller conviction list for monitoring.
Complexity, of course, is added where there is a CGT constrained holding. Conviction list therefore becomes a much wider list for monitoring. Still a demand for active advisory but is a much small proportion of book due to the regulatory challenge – should see a larger pricing differentiation between advisory and discretionary to reflect these complexities and the scalability of the latter
Acquisitions have created complexity to the answer to the question – different lists of products, different ways of managing money, desktop decisions and hybrid centralised – businesses are probably trying to get to a centralised model, but what this does for
- client service
- morale of the advisers who like to manage money
is the challenge along with the regulator’s expectations on outcome for clients (which with “desktop discretion” is a key challenge).
One business that has been very acquisitive has taken a view of what is the client outcome as a starting point – and then worked back with the services required to get there – means that clients have tended to take on a more structure portfolio rather than a bespoke one. Adviser discretion sometimes biases clients towards advice when it shouldn’t.
Organisation culture has often been the real obstacle – when you talk a client through a “somewhat commoditised approach” most clients have accepted that this is a logical approach to drive down cost and that the manager can devote more time to managing the capital centrally in a more focused way.
As a controversial question - For those firms who have centralised and harmonised the investment process, the next question becomes, does a wealth manager belong in the business of security selection and product structuring, or are these better outsourced to asset managers to leverage specific expertise?
Some firms that have centralised (big banks) have become bland, and have realise they are not good at investment. They are moving to planning and dynamic discretionary – clients don’t necessarily want to see a portfolio run by an individual, but want ability to take up dynamic investment in some way. ETFs and funds don’t lend themselves to that – a hybrid of centralised and the broker model is a balanced approach.
How do you create engagement around client outcomes? – advisory often gives a sub-optimal outcome, but how do you create a dynamic discretionary offering? This leads nicely on to…
A move to Systematic Advisory?
80% of an advisors time is spent on 20% of clients, yet clients leave due to a lack of client engagement/service.
In a study of a firm whose clients were exiting, even for portfolios that had performed well there were consistent outflows where the average number of contacts for clients in the preceding 12 months was low (an average of 2, and then mostly about the regulatory review/update of client information).
“The last mile challenge” – CIO produces an in-house view that dies as it never gets to the end-client. Traction on CIO views is very low (a common problem across the world).
We are starting to see use of a combination of qualitative and quantitative date to define individual client-level investment recommendations using technology. CIO may come up with a view, (e.g. want to be overweight in European airlines) – the technology analyses products that reflect that view, and defines the trades that implement that view that will optimise it appropriately for individual clients for the right vehicles, including suitability for the individual on eligibility and location of the products.
One firm who does this well as a benchmark – for every 100 recommendations sent to investment advisers – the first 50 were not even opened by the adviser. Of the residual 50%, 25% were sent to client. 6.5% got executed but another 6.5 resulted in another client engagement event – 13% penetration rate is considered high.
Sounds like a panacea – but would this approach patronise the client adviser? It is a sensitive issue in the industry and advisers react negatively to these changes.
Lea- having managed client advisers I accept this is a relevant point, but II see advisers that hide behind the relationship with the client - technological disruption is something we are all dealing with across many aspects of life. However, systematic advice should not be a “one size fits all” mathematical screening, in its basic robotic form, it serves a valuable function in the statistical analysis, but the real power is contextualising this to the client’s personal preferences (the behavioural part of the analysis) – and ultimately, we are talking about increasing client engagement and not removing it.
Slightly troubled on the client engagement level being a poor outcome with only 6.5% of CIO recommendations being adopted.
However, even the best CIO has a hit rate of 70% in the most effective process. No CIO gets all the calls right and some advisers make a humanly natural decision not to send the emails on to the client.
But, if the CIO is directing the discretionary portfolios anyway, there is a comparison to be made from the discretionary process against the individual adviser’s resulting performance, which may be worse overall, or riskier, which is not a good outcome for the client.
These issues are equally applicable in the discretionary world – finding an excuse to pick up the phone to the client might be helped by the data analytics. Might be upselling into discretionary as much as anything else. Client engagement is still key irrespective of the mandate.
The other opportunity is moving execution only assets into advisory. This approach can be a hook to convert these.
Who outside US is doing Systematic advisory successfully?
Morgan Stanley in US has done a lot of work on this. JPM is making a 50m investment and UBS has started to do this but under-invested. Notably, UBS trialled sending ideas direct to the client, which had a positive effect. Credit-Suisse have recently built tools in Switzerland.
So, this opportunity could de-risk advisory but also offer benefit to discretionary. How hard is it to integrate into the operating model? We tend to fall over with making these things work .
The premise of Vestrata is based on a business-to-business integration and not an external platform. Ease of implementation is key and the model is designed to be part of the firms overall proposition – the touch points for the existing model of the wealth manager are all defined.
It could also be used to address the 80% of under-engaged clients as a separate proposition.
This session was meant to challenge to our thoughts on the future of the investment model.
If the fund platform has been the holy grail of the past for ease of access, but has resulted in bland, undifferentiated offerings, what does the future look like?
Is Systemic Advice going to:
- get more ideas, to more clients and increase the take up of the CIO and hence advance the investment brand of the firm?
- help to differentiation the investment proposition?
- provide consistent, explainable client outcomes?
- add value to discretionary offerings through interesting satellite investment components?
- and generate more revenue through enhanced client engagement?
…all at the same time?