- Uncertainties about the outlook for global growth driving change
- Client experience and digital delivery remains top priority
- Regulatory environment remains top challenge for industry
- Preference for outsourcing technology development
New research from Citi Business Advisory Services, in partnership with Citi Securities Services, released highlights the need to transform business and operating models amongst wealth managers as declining fees, low margins; and increasing cost of regulation and compliance continue to pressure the industry.
The global study “Disruption and Transformation in Wealth – Future-proofing Service and Operating Models” found that 71% of participants surveyed identified the overall client experience as a top priority. This heightened focus on client experience and more specifically the digital client experience stems from evolving client expectations and the threat of digital disruptors.
Structural shifts including the emergence of new wealth, coupled with uncertainty in global markets and a fluid regulatory landscape, have pushed the wealth industry to address the fundamental challenges of maintaining and growing relationships with their end clients.
In order to effectively deliver an enhanced and digitally-enabled client experience, wealth managers and private banks should focus on transforming their operational, technology and service models, the report suggests. When asked about their preferred technology development strategy, an overwhelming 75% of survey respondents prefer to work with external parties.
The study also found that there is a clear distinction on which functions are more likely to be outsourced or considered for outsourcing.
- 46% of respondents prefer a hybrid model, upgrading their in-house systems with third-party tools
- 66% of respondents either already outsource or are likely to consider outsourcing post trade services
- The top three areas that respondents are unlikely to consider or outsource include most of the client-facing activities such as onboarding and KYC (56%), client services, reporting and data (50%), and compliance, regulatory and tax reporting (54%)
“The emergence of new technologies, demands for a native digital client experience and the largest intergenerational wealth transfer in history pose significant challenges to the entire wealth industry,” said Okan Pekin, Citi’s global head of Securities Services, in a statement. “Our research outlines ways in which we can re-imagine service and operating models to deliver solutions to wealth managers to address these challenges.”
The three most important areas of focus for technology and operations were identified as:
- Digital client experience (67% of respondents)
- Trading and execution services (53%)
- Global operating and client service models (39%)
- Almost half (43%) of survey participants ranked budget constraints as the top barrier to transforming their technology and operations
As we look to the future of wealth, the drive for scale and efficiency is accelerating consolidation across the entire industry.
“Based on our study, it is clear that the wealth industry is at an inflection point, and it is critical that wealth management providers servicing the mass affluent to ultra-high net worth clients need to get their operating model right. Moving forward, we see trusted partnerships as key to success as consolidation continues,” said Andrew Pitt, head of Research and Content for Citi’s Institutional Client Group.
Securities lending
Much attention has been paid to the opportunities associated with democratizing access to products and services in the wealth management industry, especially to the previously underserved retail segments. Besides private markets, securities lending and separately managed accounts (SMAs) are also examples of higher margin products and services that could be offered to more clients or cross-sold within the same client base. A wealth management firm was cited in the report stating: “The true value proposition today is in delivering trading and execution and post-trade services at an industrial and institutional scale to retail clients.”
For post-trade services, wealth managers’ focus is increasingly focused on building an end-to-end operating model that can streamline the whole post-trade process. To maximize the efficiency and ease of implementing an outsourced solution for trading and execution services, some wealth managers may choose to select a provider with global presence and scale in both trading and post-trade services, including execution, custody and securities lending.
By bringing these functions together through a single provider, wealth managers can minimize expansion costs and implementation challenges, reduce total number of counterparty relationships, streamline issue resolution processes and ultimately reduce the complexity that drives operating expense for their trade and post-trade teams.
Additionally, as a number of major markets begin to converge around a T+1 settlement cycle, including the US and Canada, the benefits of vertically integrating trading, clearing and settlement will not only deliver an integrated operating model and cost efficiencies, but will also contribute to significant risk reduction, particularly for those firms trading from Europe and Asia. A wealth management firm was quoted in the report stating: “A whole process of trade and investment will become more integrated and more real-time. We will look hard at how much we can save at scale, what our use cases are, and how can these things be optimized.”