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Survive and thrive in wealth management
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Survive and thrive in wealth management

Firms should embrace change, ride the technology wave and align business models and strategy

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The Bahamas Investor Magazine
July 29, 2016
July 29, 2016
Sean Raine (pictured)

After surviving a period of asset prices in free fall, spiralling revenue and the near collapse of some of the world’s leading wealth management firms during the financial crisis, the global wealth management industry has regained some of the ground it lost, but there are many challenges that remain.

Increasing global regulations, the move from undeclared to declared offshore assets, ever evolving client behaviour, the rapid advance of digital technologies, and a dynamic competitive landscape have changed the rules of the game and raised the cost of doing business.

Many wealth managers in The Bahamas will face serious revenue and profit challenges ahead–both measures still lag historical performance levels.

These market players must gear up for radical change, and transition to a “new normal” while anticipating global changes.

Game-changing technology
In a report last year, Minister of Financial Services Hope Strachan said The Bahamas needed to vary, diversify and most of all, fortify its banking sector by providing more banking licenses where qualified applicants exist.

But technology has ripped up the geographical landscape and the traditional bricks-and-mortar model of private banking and wealth management. For example, a bank licensed in a Caribbean jurisdiction has decided to run its back office in Nassau. Another bank is licensed in the Cayman Islands, but runs its back office from South America on a cloud platform in Jersey, Channel Islands.

Customers are also changing, driven partly by their experiences with innovative and disruptive companies such as Amazon and Apple. This places even higher expectations on wealth managers. Why shouldn’t customers receive the same technology- enhanced and efficient experience that they get in their personal lives in all aspects of their financial relationships?

What can wealth managers do about the change taking place around them? They must embrace a new approach to doing business that seamlessly blends the online, mobile and social experience.

Wealth managers must learn the new rules quickly, particularly as there is no sign at all of competitive pressures easing.

Foundations of strategy
There are four pillars that should uphold every wealth management strategy according to Strategy & Inc:

1. Where to compete
Wealth managers need to identify the markets where they can most effectively compete and maintain long-term differentiation. This will require an honest review of their strengths and weaknesses and determine which onshore and offshore markets they should be in.

A greater focus on capital preservation will require many firms to re-evaluate strategies that previously served them well. Some companies have already made this their number one investment priority–something that would have been unthinkable a few years ago when the top goal was usually generating higher levels of return for clients.

2. The business model
An analysis is required to establish if there is a good match between the business model and the operating environment taking into account changing regulatory requirements. There needs to be a sharper focus on enhancing the investment management and advisory process to deliver greater value to clients and improve investment results in a low- return environment.

As wealth managers seek to enhance profitability and growth, they will be asked to do more with less, or at the very best, static resources.

At the same time, the operating models that support the core business are under pressure from a variety of forces, these include FATCA compliance which will impact on wealth managers. According to Minister Strachan: “The Bahamas has developed a strong reputation for leadership in international financial sector issues and will always strive to remain at the forefront of complying with international best practices and regulatory standards.”

An evaluation also needs to be conducted on the products and services offered to ensure that they are aligned with client preferences and expectations. If change is required, decisions must be made quickly and a road map developed to reshape operations to support any new strategic direction, be it to reduce risk, contain cost or achieve some other objective.

3. Adopt a fit for growth approach
For the majority of wealth managers, cost pressures are likely to persist. They must review their operating model with a systematic effort to separate “good” expenses from “bad” (those that are non- strategic or revenue generating) expenses. They must adapt the cost structure to the practicalities of where revenue comes from.

4. Technology
According to analysts Forrester Research, the threat posed by competitors in the wealth management space with access to superior technology is significant: “Firms built on person-to-person relationships face increasing pressure from competitors who are creating better digital experiences for clients and from digital disruptors that deliver better services at a lower price.”

These new wealth management firms have the potential to transform the wealth management industry thanks to their use of cloud computing, social media and mobile applications. New entrants or challenger firms are adopting disruptive technology faster than traditional wealth managers unburdened as they are by legacy system constraints.

One of the most frequent requests that I hear is that clients want direct access to portfolio information. They don’t want to wait for an account manager to produce a report for them. Customers will expect access to their accounts, portfolios and reports “on demand’ and via multiple channels and devices and transparency will also become the norm.

Wealth managers can significantly enhance client satisfaction and better manage fixed costs with the adoption of smart technology, but this will require further investment if the underlying technology platform cannot meet the new requirements.

Old tech
Many wealth managers are traditional firms often with legacy systems in place dating many years. Companies operating legacy technology will be the most under threat in this new and some might say harsher market environment.

Wealth managers that rely on outdated systems that have not been modernized will find it increasingly harder to bring new products to market with the speed and flexibility required to compete effectively.

However, technology offers wealth managers the chance to get closer to their customers, improve the user experience, and build better products and services whilst simultaneously lowering costs in the back office. All this and meeting the latest compliance regulations, too.

Sounds easy, but the path to picking and implementing a technology platform is not a simple challenge.

The starting point has to be a review of whether the underlying private banking and wealth management technology platform is fit for purpose. If not, then this needs to be addressed immediately.

Modern platforms
Technology has an important role to play in meeting each of the pillars outlined above. Having an effective IT strategy is critical in enabling institutions to capitalize on the continued economic recovery. In fact, if organizations don’t adapt quick enough, they risk losing ground.

Achieving successful differentiation and delivering efficient customer service whilst focusing on cost minimization are key goals for a modern technology platform. Indeed, it underpins the very product offerings and how they are taken to market.

With attractive long-term return on equity on offer, it is an industry that can accommodate a number of companies. It is clear today more so than ever before, that if organizations do not have a proactive approach to managing or even embracing change, they risk losing share or taking a hit on revenues.

For many years now, The Bahamas has had the luxury of not having to open its doors to the risk of new banks, but as consolidations often dictate closures in one jurisdiction or another, The Bahamas has not kept pace in this space. The Bahamas must capitalize on its inherent attractiveness to high-net-worth players, as well as its proximity to the continental mainland of North and South America.

Most wealth management firms rely on their advisors as the best way of finding new customers. Effectively embracing the digital revolution will enhance and complement the expertise of your advisors and relationship managers and that can only be a good thing.

Digital marketing can also have a positive impact on the customer acquisition process. Prospective customers are increasingly conducting their research online, where peer reviews are carrying greater influence. Firms must develop new ways of thinking that tap into social media as part of building a more rounded, 360-degree view of the customer.

Given that delays, indecision and inaction are likely to have a detrimental effect on future business performance, it makes more sense than ever to act now. As Darwin once observed, only the strongest will survive. Wealth managers need to act today in order to ensure that they are one of the institutions that not just survive, but thrive.

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