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THROUGH THE LOOKING GLASS An executive perspective of UK wealth management in a Retail Distribution Review (RDR) world CREATED IN COLLABORATION WITH EXPERT CREATIVE EXPERIENCED HONEST PRACTICAL INDEPENDENT ETHICAL ORGANISED KNOWLEDGEABLE RESPONSIBLE PERSONAL INNOVATIVE UP TO DATE EFFICIENT SAFE LOYAL PROFESSIONAL MODERN INTELLIGENT SOLID WORLD CLASS FLEXIBLE PROACTIVE HARD WORKING FRIENDLY ENGAGING INTIMATE EMOTIONAL

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Scorpio Partnership and Pershing announces the launch of Through the Looking Glass: An Executive Perspective of UK Wealth Management in a Retail Distribution Review (RDR) world. This paper, which assesses the opinions of 342 senior professionals, demonstrates that creating a viable business model that is valuable for clients is top of the agenda for firms hoping to survive in the post-RDR world.

TRANSCRIPT

  • Through The looking glassan executive perspective of uk wealth management in a retail Distribution review (rDr) world

    created in collaboration with

    EXPERTCREATIVEEXPERIENCEDHONEST

    PRACTICALINDEPENDENTETHICAL

    ORGANISED

    KNOWLEDGEABLERESPONSIBLEPERSONAL

    INNOVATIVEUP TO DATEEFFICIENTSAFE

    LOYAL PROFESSIONALMODERNINTELLIGENT

    SOLID WORLD CLASS

    FLEXIBLEPROACTIVE

    HARD WORKING FRIENDLYENGAGING

    INTIMATE

    EMOTIONAL

  • Contents

    In briefwhat you need to know in 30 seconds 3

    the research process 4

    the state of play 5

    the health of wealth at the start of 2013 6

    Winning new clients: sharpening the value of wealth management from 2013 9

    Managing existing clients: renewing the vows in an RDR environment 11

    Personnel: it aint what you do, its the way that you do it from now on 13

    Regulation and compliance: switching a foe into a friend 15

    Pricing, products and services: determining the future worth of wealth 17

    technology: transitioning the industry into a modern era 19

    In conclusion: the future view of UK wealth management 23

    Whats on the cover?

    thought cloudThis thought cloud is based on the following question in the research programme: In the future, what words do you want the industry to be most associated with?

    EXPERTCREATIVEEXPERIENCEDHONEST

    PRACTICALINDEPENDENTETHICAL

    ORGANISED

    KNOWLEDGEABLERESPONSIBLEPERSONAL

    INNOVATIVEUP TO DATEEFFICIENTSAFE

    LOYAL PROFESSIONALMODERNINTELLIGENT

    SOLID WORLD CLASS

    FLEXIBLEPROACTIVE

    HARD WORKING FRIENDLYENGAGING

    INTIMATE

    EMOTIONAL

  • Through The looking glass 3

    the UK Wealth ManageMent InDUstRy Is

    ReDefInIng Its valUe to ensURe a ContInUIng

    vIable bUsIness MoDel. RDR has been the

    Catalyst foR thIs Change. ClIents WIll let the

    InDUstRy KnoW If It Is sUCCeeDIng.

    In bRIefwhat you need to know in 30 seconds

    the centre of gravity is shifting in the UK wealth management business model and Key Performance indicators (KPis) The importance of time-based advice fees will rise and asset-based charging will be challenged against value

    the industry is being democratised by a new dawn of consumer activism and selectivity a growing expectation of what firms must do for their fees will have a direct impact on the business model

    there is a change underway to the link between segmentation, productivity and profitability a major cause of this change has been the regulatory changes implemented since 2008, not just rDr

    the customer value proposition is being re-written by most operatorsMarket conditions are forcing a tipping point on what wealth firms do, and do not do, best

    the relationship model will have a makeover where the adviser is augmented, not replaced advisers fear their value will be diminished by technology while clients consider the value will be enhanced

    the impact of technology on the front-end and back-end business process will be dramaticThere is recognition that greater scale and efficiency will be a consequence, but the question is still how to achieve it

    the future wealth management leader is a knowledge manager at the coreThe role of intuitive and interactive CrM will level the playing field between firms of all sizes

    3

    3 3

    3 3

    3

    3

  • 4 Pershing ThoughT leaDershiP

    the ReseaRCh PRoCess

    Just before the dawn of the UK retail distribution review (rdr) coming into reality Pershing commissioned Scorpio Partnership to carry out a market research programme with senior professionals in the wealth management industry and prepare an assessment of the findings.

    the programme collated the views of 342 professionals operating in the three categories of wealth management, independent financial advice and investment management (figure 1). these three groups in turn were made of nine constituent parts (figure 2). three hundred and twenty-one of these professionals provided their views through a 15 minute highly detailed online insight survey. this was supported by a further 21 face-to-face interviews with industry leaders at selected firms.

    one quarter of the participating respondents in the quantitative survey were with institutions that managed in excess of gbP5 billion. ten percent operated at firms with gbP1-5 billion in assets under management (aUM). thirty percent were employed by businesses with gbP100 million to gbP1 billion in aUM while the balance (34%) worked at firms with less than gbP100 million in aUM.

    the survey process was anonymous and operated under the standard market research guidelines.

    0

    50

    100

    150

    200

    250

    300

    350 321

    Ove

    rall

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    Inve

    stm

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    Wea

    lth m

    anag

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    106

    Fin

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    Nu

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    esp

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    + 21 decision makerface-to-face interviews

    Figure 1 total sample distribution

    all participants were employed by businesses that provided

    financial services to high net worth individuals (hnW). the

    definition of hnW varied considerably between institutions.

    In broad terms, the hnW clients represented among the

    largest in asset value terms for all businesses and typically

    clients would be booking in excess of gbP250,000 with the

    respective firm as a minimum. Most firms stated a much

    higher public minimum than this figure.

    10%

    10%

    16%

    12% 12%

    7%

    17%

    13%

    3% Private client investment

    Asset manager

    Family office Wealth management division in large banking group

    Private bank

    Wealth manager

    Financial planner

    Independent Financial Advisor

    Stockbroker

    INVESTMENT

    WEALTHMANAGEMENT

    FINANCIALADVICE

    Figure 2 breakdown of

    distribution by business type

    the types of institutions selected

    were deliberately varied. the

    objective of the assignment was

    to obtain a broad perspective on

    the current status of the wealth

    management industry and its

    strategic thinking.

  • Through The looking glass 5

    the state of Play

    without a doubt, on 1 January 2013 the UK wealth management industry entered a new era. as the day dawned, the market place commenced operating under the rdr regime. exactly how this is going to affect the conduct of business for private client investors is still a topic of debate.

    the process of preparation ahead of this day was complex and cluttered with changes. While regulation such as RDR has forced an adjustment in the conduct of business what is clear is that for some time the industrys operators have been reflecting on their future business.

    thus, as the dawn approached, we asked the wealth management industry what was going through their strategic thoughts. essentially, we wanted to identify what they were planning to do next.

    > The results were blunt. > The predictions were frank.

    Put simply, the UK wealth management industry is brutally aware that it must adapt or perish. at the top of the agenda in 2013 there is a priority over deciding what the essence of their respective business model is. What, essentially, is going to generate revenue?

    Coupled to this, business leaders recognise they need to improve the positioning of their model to their target audience in order to justify the value of their products and services. once again, the respondents were aware their future rests in their ability as a business to survive. this depends on clients being convinced to come to them and, ultimately, stay with them.

    the refreshing news from this research was that the vast majority of the respondents know what is ahead of them. equally, they are embracing new ideas, new processes, new technologies and new solutions to upgrade their chances of surviving and thriving. Moreover, there is openness to accepting that while the old ways of wealth management have been outstandingly successful to get the industry to where it is today, the past is not a guarantee for future performance.

    overall, the results of the research process indicate a growing sense of enterprise and optimism among the community. Clients are pushing for more. the industry is not afraid both to adapt to this demand but also to ask along the way if the change is worth it. If not, then it is time to pull out.

    the evidence in the results here shows already that the biggest success stories before 2020 will be the firms that totally embrace a modernisation of their approach from the back-office through the front-line solutions and beyond. technology alone is not the key to this success but coupled to partnership and innovation it will go a long way.

  • 6 Pershing ThoughT leaDershiP

    the health of Wealth at the staRt of 2013

    based on the research findings, the UK wealth management industry needs a confidence boost.

    Client sentiment is at a low point but there are signs it could go lower. Regulatory intervention is at a high point but there are signs it could go higher. this is, potentially, a perfect storm. the grey clouds of change have been around for some time.

    the reality is wealth managers have experienced a period of transition that some say stretches back a decade. With this in mind, senior operators in the market are cautious about how much they want to stretch in the coming years. that is not to state they are not prepared to stretchthey know they must. but when they stretch it will be within their means.

    When asked in this research program what their priorities were in the RDR world, the industry-wide focus is on ensuring there are still clients to manage. according to the respondents, top of the list (at 46% critically important) is keeping hold of the ones that they already have. although, not far behind, is the need to win the clients they do not yet have (figure 3).

    the respondents note, however, the challenge is that clients are not just questioning the merits of the wealth model. they are actively choosing either to look elsewhere or act independently.

    nestled cosily in between the client focus priorities and client activism remains the overriding issue of managing regulation and compliance. notably, among the face-to-face interview responses digging deeper into this issue, it is clear that a mindset shift is underway. essentially, the heads of businesses recognise they must convert the challenges presented by regulation into a positive element for growth.

    > For some, cracking this riddle is a tough challenge. > But the alternatives are tougher.

    Figure 3 the most important

    priorities for the UK wealth

    managers today

    achieving significant progress in

    any of the six business priorities

    illustrated in figure 3 is not a

    simple task. the respondents are

    fully aware that to survive and

    thrive they will need to achieve an

    impact in as many of these areas

    as possible. fast.

    27%

    32%

    34%

    39%

    39%

    46%

    29%

    32%

    28%

    27%

    25%

    25%

    23%

    18%

    18%

    15%

    19%

    12%

    18%

    15%

    18%

    16%

    13%

    14%

    3%

    3%

    2%

    3%

    4%

    3%

    0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

    Systems and technology

    Product and service capability

    Personnel and skills

    Winning new clients

    Regulations and compliance

    Managing existing client relationships

    Critically important Important Neutral Somewhat important Not important

  • Through The looking glass 7

    but the map for success is not clear. each firm is likely to adopt a slightly different route. lifting the bonnet on these priorities uncovers a whole new set of building blocks that require attention in the post-RDR landscape. here, there is a divergence of opinion on what is and is not working depending on the size of the business (figure 4).

    If size is measured purely by number of employees, the results suggest senior executives at the bigger operators believe their scale is not working to their advantage. they are conscious they can reach more clients but they may not be able to capitalise on the opportunity. they expect more but their sense is their model may either be failing them or at the very least not achieving potential.

    for instance, on the topic of information technology (It) this is most pronounced relative to the boutique players. however, reporting and portfolio modelling are also seen as sources of acute frustration, relative to the professionals at smaller firms. Respondents note that both areas are critical to future growth objectives.

    amid this change in the landscape rules, the competitive focus is turning to how to win clients.

    > The jury is out on whether one model will excel over the other.

    Intriguingly, the dawn of RDR has resulted in the weapons of versatility and scalability becoming increasingly interchangeable among all sizes of wealth management business. Distinguishing firms purely on size or capabilities is increasingly difficult.

    the reality based on the performance of the past several decades is that both win some of the time and none wins all of the time. Critically, the respondents were aware now that in this market it is the clients that decide.

    Figure 4 the major obstacles for

    the UK wealth managers today based

    on size of business

    In this context, what is clear in the

    RDR environment is the playing field

    is being levelled somewhat. Crucially,

    that does not just bring the big firms on

    to the same level as the small firms. It

    works the other way around. this is a

    fundamental change in the industry

    rule book and the respondents here

    are aware they need to adjust the way

    they operate.

    39%

    26%

    31% 34% 27% 27%

    25%

    29%

    24% 27%

    39%

    46%

    41% 38% 39%

    37%

    38%

    31% 34%

    28%

    0%

    10%

    20%

    30%

    40%

    50%

    Com

    plia

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    IT s

    uppo

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    nd d

    evel

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    Bre

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    of p

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    and

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    Clie

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    mod

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    and

    adm

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    % o

    f res

    pond

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    agr

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    Fewer than 50 employees 50 or more employees

  • 8 Pershing ThoughT leaDershiP

    this then leads to the heart of the matter. essentially, what will make wealth management attractive for future hnW clients?

    If the businesses, of all sizes, are relatively indistinguishable in terms of clear differences around their investments, the conclusion of the leadership interviewed for this research is that the focus needs to shift clearly on the client proposition and ultimately the client experience.

    In the words of one chief executive: As the industry moves from a commission-based environment to a wealth management model, the number one priority is the client proposition. Advisers must be clear about what they are doing for their fee.

    the challenge is to determine what the principal factors are that contribute to the proposition and the value of the model in the future?

    Figure 5 the core business variables of

    UK wealth management future success

    With this in mind, the following six

    sections focus on the business variables

    that contribute distinctly to this. each

    business will place a different level

    of effort on each of the variables.

    Ultimately, it is the individual firms

    combination of these variables that

    will underscore their unique service

    proposition. according to respondents,

    2013 must be the year when firms get

    the combination right.

    todays business variables

    Winning new client

    Managing existing clients

    Regulation and compliance

    Personnel

    systems and technology

    Product and services

    Pricing

  • Through The looking glass 9

    WInnIng neW ClIents: shaRPenIng the valUe of Wealth ManageMent fRoM 2013

    the first focal point in the rdr world is around the process of generating business. one of the two major sources for this is through winning new clients; the other working with existing clients.

    the tough news is that over the past several years, the industry has had a mixed record in its capacity to win new customers. the majority of respondents note that the combination of increased competitive forces, confused positioning of many firms, and ageneral lack of differentiation between all have led to a polluted market.

    With this in mind, more visionary operators recognise that with RDR there is now an opportunity to redefine their approach to the market. this opportunity to adapt is a rare one and those that do not adjust now will suffer.

    this redefinition essentially will boil down to a restatement of the values of the individual business model. this, in turn, will lead to an articulation of a value proposition.

    In essence what exactly does the firm believe and what does it do? these two points are critical grid references for new clients and even existing clients, according to survey respondents (figure 6).

    In the words of one chief executive of a boutique wealth manager: The single most important thing right now is being able to demonstrate your value. It is about being able to explain clearly what clients are paying for.

    Unfortunately, the value proposition is only part of the way forward for the UK wealth management industry in 2013. When pressed about business priorities, senior decision makers interviewed note they also need to get their focus clear on what types of clients would be the most commercially viable for their business model. once again, it is a frank admission but the reality appears to be many operations in the UK (both large and small) are struggling to find their optimal profitability level.

    Figure 6 the strategies for

    winning new business in 2013

    essentially, therefore, the results

    show most firms are now frantically

    redrafting their customer value

    proposition with a belief that this

    will re-boot the client acquisition

    process. arguably, many should

    have done this sooner, but for

    whatever reason the reality is they

    have not done so.

    12%

    16%

    21%

    27%

    22%

    49%

    50%

    51%

    50%

    61%

    39%

    35%

    28%

    23%

    17%

    0% 20% 40% 60% 80% 100%

    Internal and external introductions

    Regional or international expansion

    Marketing, advertising and PR

    Clearly defining what we do and how it is different from others

    Segmenting clients and understanding their needs

    % of respondents

    This is also important This is low priority This is most important

  • 10 Pershing ThoughT leaDershiP

    this enhanced level of segmentation will be crucial to the next stage of their business.

    here, there appears to be a greater willingness to be revisionist in the segmentation approach. by the end of 2012, many operators were aware that an anybody, anytime approach to targeting wealthier customers may yield results in the short run but it has been a poor recipe for long term endurance. equally, going upstream to pursue clients with larger wallets is not necessarily a route of success for many.

    fundamentally, the industry is seeking ways forward to reach suitable clients and to ensure they know them as well as they can in order to provide the right solutions. Critically, the research findings indicate that the segmentation for new clients will now be focused more on life stages rather than wealth status.

    Meanwhile, segmentation among existing clients will adopt a much colder review of which clients are going to have the most consistent requirement of the solutions on offer. Ultimately, based on the comments from the respondents, it appears businesses now are looking more intelligently to identify which clients will represent the most sustainable revenue and, ultimately, profit.

    this concept is not newit is often the first stated objective for most chief executives. but as RDR dawned the importance of getting this right this time is very evident in the results. With rising costs and falling revenues being experienced among an alarming number of operators business leaders realise they cannot wait for results to happen.

    > Firms have to seize the initiative and act. > otherwise they will soon be operating

    on vapours.

  • Through The looking glass 11

    ManagIng exIstIng ClIents: ReneWIng the voWs In an RDR envIRonMent

    while there is a natural impulse to win new clients among UK wealth management operators, what is equally important is consolidating the relationships with existing business. indeed, the vast majority of the 342 participants consider maintainingand hopefully deepeningexisting relationships to be at the heart of future survival.

    Curiously, it appears that while many were willing to state it as a priority of action they appear anxious about actually acting in the first half of 2013. the findings indicate that with existing clients many advisers are nervous of the reaction to the outcome of explaining the new regime in relation to fees and services.

    this hesitation by some may present opportunity for others in the market. some of the more visionary operators, however counter-intuitive it may seem for many, are looking at ways to harness regulation and compliance as an ally for new business creation. In fact, they are actively seeking to use the situation to renew their commercial vows with their wealthy customers.

    to that end, when asked about what they will do with existing clients after segmenting them properly the next priority is to enhance their level of interaction. In fact, these operators are expecting to go on the front foot during 2013 in a charm offensive to cement business with current clients (figure 7).

    this was particularly notable among the wealth management business models, relative to the independent financial advisers and investment managers. a first scan of the research results might suggest this conclusion is incorrect. yet, when one considers that the wealth management firms were slightly late in their recognition they would need to adapt to the RDR regime, this result makes more sense.

    after these two 2013 calls for action around segmentation and communication, the top priorities cluster very quickly around technology and process. In essence, the industry is trending toward a better sytematisation of approach to how it prepares its capabilities and then delivers them.

    Figure 7 the leading factors for managing

    existing clients from 2013 (all models)

    Respondents expect to use the situation in

    these early months of 2013 to re-examine

    the relationship with their clients and plan a

    future that would be both beneficial for the

    client and also for the service provider.

    80%

    70% 77%

    70%

    73%

    73% 63% 73%

    88%

    78% 76%

    68% 63%

    49%

    86%

    81% 81%

    78%

    72%

    75%

    56%

    40%

    60%

    80%

    100%

    Seg

    men

    ting

    clie

    nts

    and

    unde

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    % o

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    impo

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    Wealth Management Financial advice Investment

  • 12 Pershing ThoughT leaDershiP

    the reality is that at the dawn of RDR there has been a convergence between the demand and supply of improved usability and functionality of technology to support wealth management business processes. this is alongside a heightened commercial need for these services based on both consumer and competitive pressures.

    In the past, many businesses have shied away from the big tech question. the principal reasoning has been an expectation of huge implementation costs. Many also believed, often wrongly, that their more manual approach to winning and maintaining business would be sufficiently effective. to an extent they were not wrong. at the time

    however, the changing dynamics of the marketnot least led by the requirements of compliance and regulationhave meant firms can no longer defer the modernisation topic.

    the responses by business leaders to this research program, as reflected in figure 7, point at this conclusion. according to survey respondents, wealth business must reconfigure its relationship model so that it can be delivered in a consistent and commercial manner to as many clients as its business model can profitably support.

    In reality, the respondents results state the industry is trending fast towards an upgrade in its infrastructure. this is not solely because it needs the back office to be better organised. In fact, it is mostly because there is a recognition that the upgrade will enable the front officeessentially the point of sale in retail parlanceto become a more effective component of the business model.

    > This finding was a crucial element of the entire research process.

    looking to the future, it is apparent that wealth managers, investment managers and advisers alike recognise that the relationship management process must be fast, efficient and accurate. human error, as the saying goes, is not an easy option to manage but human effectiveness is.

  • Through The looking glass 13

    PeRsonnel: It aInt What yoU Do, Its the Way that yoU Do It fRoM noW on

    there is a broad acceptance among UK wealth managers of the need to upgrade systems and processes to meet the post-rdr world. what is equally clear is the wealth business still, at its core, relies on the effectiveness of its people. the decision around the allocation of the human resource within the business model is a vital variable in the future success of the wealth management company.

    > simply said, but when it comes to people matters nothing is ever that simple.

    to an extent, this is unsurprising given the different motivators and impulses of the executives depending on their areas of responsibility. the differences, however, do also tell us a great deal about the state of the corporate mind in UK wealth management. they also hint at the development road map of the industry for the next 12-36 months.

    focusing on the views of strategic managementtypically the office of the Ceothe priorities of action are centred on keeping staff and essentially raising their productivity. the Ceos are evidently not focused on adding more staff. to achieve their goal of getting more out of the current resource, the Ceos are expecting to need to be more creative about how they do this as they can no longer just increase the wagesmost likely because their resources do not permit this option.

    What is interesting on this point is there is a growing school of thought that the non-financial benefits are generating a higher level of business productivity. but the popularity of this concept may not be shared by all. notably, the business development professionals that took part in this research take a diametrically opposed view. to an extent, this is not surprising as they are effectively hardwired to generate revenues and the profile of business developers is attuned to a more instant form of financial reward.

    Figure 8 different perspectives on the

    way forward from within the model

    the survey results reflect this complexity

    of the human factor. When different

    decision-makers were pressed about the

    prioritisation issues in their business to

    ensure they had the right mix of people

    and skills to achieve their strategic

    objectives, the results identified a

    breadth of opinion.

    71%

    76%

    69% 59%

    65%

    60%

    88%

    76% 71% 68%

    38%

    47%

    81%

    71%

    55%

    67%

    76%

    41%

    78% 78%

    89%

    56%

    56%

    33%

    20%

    40%

    60%

    80%

    100%

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    % o

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    sta

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    Client facing Operations Business development Strategic management

  • 14 Pershing ThoughT leaDershiP

    however, the business development group of the UK wealth management community is also acutely aware that such an approach can impact on behaviour. this might, they acknowledge, at times be damaging. In fact, it is notable the business development officers are strongly in favour of reducing the product-related bonus incentives that are felt still to be prevalent in the industry.

    When considering the client facing professional viewpoint on this topic, it appears they do not disagree hugely with the view of the business developers on either point. however, it is worth noting that non-financial benefit option is in fact their third highest priority for the future. In fact, when looking at the results in relative terms, it is only a few pips away from being the second most important priority for the future.

    It could well be, therefore, that the Ceo and strategic management are on to something and it may also suggest that business development executives may need to up their game to justify their position and economicsparticularly when many of them have arguably struggled in recent years.

    While these results do not suggest we are in a mend and make do environment, it is clear the heads of this industry are conscious they will not be able to solve problems purely but throwing more people into the mix. this does not mean, equally, that they are in financial spending lockdown as most leaders openly recognise they must improve other areas of the business to keep competitive.

    Figure 9 headcount expectations

    over the next five years

    Ultimately, the results do point toward a strong desire

    to enhance the productivity levels of the existing

    resources in the business. Indeed, the plan for future

    growth is essentially being plotted against a relatively

    moderate increase in headcount with 58% of executives

    anticipating a slight rise over five years.

    17%

    58%

    12%

    11% 2%

    Increase a lot

    Increase a little

    Stay the same

    Decrease a little

    Decrease a lot

  • Through The looking glass 15

    RegUlatIon anD CoMPlIanCe: sWItChIng a foe Into a fRIenD

    with a recognised pressure to increase revenue and a much reduced budget for growth, the challenges of the wealth decision-maker are hard enough before the ingredient of compliance is added. For the vast majority of participants, the financial burden imposed by regulation remains a major factor, in their mind, for their challenges in terms of business effectiveness and profit margin.

    the past 24 months indicate, however, that the pace of regulatory adjustment is unlikely to decrease. In the words of one chief executive of a large private bank: The cost of regulation is putting pressure on the business to focus on its existing processes.

    > This issue of focus is an interesting one.

    solving the financial drag of compliance on business performance remains a riddle to most in the industry it seems. for some it appears to be the focal point of paramount frustration with the only solution being cutting costs to keep the business ticking over.

    naturally, some of this cutting is reasonable but as 2013 began it appears a growing sense of trepidation is emerging that reductions in headcount will have a much greater impact on the capacity for the business to continue to be effective. some even now wonder whether the reductions may make the business even more exposed to non-compliance in the future.

    In the words of one head of investment management at a mid-tier wealth manager: If we get regulation wrong then it is game over.

    Interestingly, based on this point, there is a rising tendency to re-focus on the core practices of the business and who is going to be required to do the roles. this is resulting in a refreshed and potentially less protective debate around outsourcing.

    In this context, senior decision maker interviewees express a willingness to consider every aspect of the business process as potentially up for review. as long as the ends can justify the means, then there is likely to be little argument against this in the post-RDR environment.

    Figure 10 the top areas where the effective cost management will be applied

    as a result of the requirements imposed by compliance the management knives typically slash out at people costs

    and usually this is in the middle and back office. although notably there are now almost as much favour towards

    more adjustments being made in the front line than many would assume.

    36%

    Managingcompliance

    costs

    32%

    Managing headcount in

    support functions

    31%

    Reducingmarketing

    costs

    30%

    Managing front office headcount

    28%

    Outsourcing back office functions

    % of respondents

  • 16 Pershing ThoughT leaDershiP

    In reality, the historical arguments against outsourcing solutions were sharpened by the past 24 months which have helped many in the industry recognise what they consider to be core to their business. as a result, in the next 2-5 years there will be a clear recalibration in the comfort levels of management around what is internal and external to the business model.

    alongside the cost management theme of the decision makers in wealth management there is, notably, a rising sentiment around how compliance aligned to outsourcing might in the long-run be seen as an ally to the revival of the industry.

    While it is not a widely popular theme given the daily processes of conducting business now, there is grudging acceptance that the regulatory requirements in some areas of business are forcing an upgrade in the levels of connection with the customer base. the manual processes are not efficient in resolving this nor are they as accurate, it seems.

    In essence, the focus on strengthening the client engagement processes cannot be seen, ultimately, as a bad thing for the individual business or for the reputation of the financial services industry as a whole.

    In the words of one chief executive of a major private bank: One of the key challenges is going to be coming to terms with the new regulatory framework but I feel a lot more positive about how this is going to shape the industry than with the old regulatory regime.

    the transition of enemy to ally will not be sudden and may ultimately never be fully embraced. however, the necessity of the market will impel wealth managers to work out how to operate on commercial terms within the regulatory guidelines.

    the early grumblings during 2011-2012 that RDR would be the death knell of parts of the wealth management industry have been replaced by a more muted tolerance of the situation coupled to a more outspoken effort to help shape future regulatory initiatives so that the industry can continue.

  • Through The looking glass 17

    PRICIng, PRoDUCts anD seRvICes: DeteRMInIng the fUtURe WoRth of Wealth

    the burdens of costs have a direct impact on the decisions made around pricing. at the heart of this factor for UK wealth managers is how to ensure they can demonstrate the value of their capabilities to clients that is at a fee level on which they can operate commercially.

    the challenge faced by all operators is the assumption that, overall, the fees that they can charge to private clients will continue to be reduced. the concern is no-one ultimately knows how far these reductions will go. based on historical evidence, the area where the greatest decline in fees will be experienced is in the sale of investment products.

    this explains why most operators now position themselves a non-product pushers and much more oriented to solutions. setting aside any component of their solution which actually involves intellectual skills, this terminology, they feel, either enables them to justify retaining higher fees as competitors reduce their fees or puts a brake on the downward fee trend. or both. neither is that sophisticated and both fail to grasp that renaming a product a solution does not change it from being a product.

    Whatever the terminology, the industry must recalibrate its economics in 2013. as a first step, the response of business leaders surveyed is, as a priority, to re-evaluate the commercial terms on which they operate with external platforms. however, while this is inevitably felt to be a sensible move by most Ceos in the industry, it is worth noting the other areas of focus to ensure the business remains competitive when it comes to products and services. (figure 11)

    Figure 11 the top areas to

    maintain a competitive product

    and service in 2013

    for instance, when considering

    the three core different models of

    the industry, the slight variances in

    approach to competitiveness are

    noteworthy. both the investment

    management and financial advice

    models adjudge the review of

    platform arrangements are a central

    plank of their competitiveness for

    the near term. this represents a

    key plank of their strategy in 2013.

    Meanwhile, wealth managers are

    unconvinced on this matter the

    expectation of many respondents is

    this will change during 2013.

    86%

    57%

    71%

    64%

    79%

    64%

    64%

    79%

    74% 69% 66%

    58%

    84%

    91%

    75% 74%

    63%

    35%

    20%

    40%

    60%

    80%

    100%

    Ass

    essi

    ng p

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    inte

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    our

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    Out

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    Dec

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    % o

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    spo

    nd

    ents

    sta

    tin

    gve

    ry/ c

    riti

    cal i

    mp

    ort

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    Wealth Management Financial advice Investment

  • 18 Pershing ThoughT leaDershiP

    equally, while maintaining competitive pricing is a priority for wealth managers and financial advisers the investment managers are less focused here. In this area the focus of most wealth managers and financial advisers is to identify a common pricing standard that is universally accepted. this is so they can be compared fairly between each other when it comes to the client making the choice. they are acutely concerned about the pricing model for their intellectual skills such as financial planning and wealth structuring. this is currently why many define these skills as part of a solution.

    however, as several investment managers wryly note, once a common pricing standard is arrived at, the next phase of pricing evolution commences as there is downward fee pressure imposed by market forces. they have, as many commented, seen it all before.

    Meanwhile, alongside these two points it is interesting to note the tendency among all models to believe that in the immediate future value and pricing will be augmented by increasing the product and service range on offer. this is coupled, in our view to an equal desire to create more internal capabilities for products or services or both. the purpose of this is to ensure a greater margin is secured in the revenue relative to what may need to be paid away to third parties.

    Figure 12 the top areas to maintain a

    competitive product and service by 2018

    this latter point is critical when one

    considers what the industry believes

    will be important for their commercial

    value by 2018. by then, the debate over

    outsourcing will be resolved, it appears.

    In fact, the main priority will be to

    enhance the capabilities of the business

    to generate internal products.

    77% 77%

    62%

    77% 77%

    69%

    71%

    69% 69%

    52% 47% 48%

    81%

    68%

    75%

    72%

    53%

    34%

    20%

    40%

    60%

    80%

    100% D

    evel

    opin

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    from

    with

    in

    Incr

    easi

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    of p

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    Ens

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    Ass

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    prod

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    and

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    to a

    dis

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    iona

    ryfu

    nd m

    anag

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    % o

    f re

    spo

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    Wealth Management Financial advice Investment

  • Through The looking glass 19

    teChnology: tRansItIonIng the InDUstRy to a MoDeRn eRa

    as the debates rage around how many people to employ, where they should be working and what types of product and service they should seek to sell, there has been a steady undercurrent around the question of the role of technology in the future wealth management model.

    for most respondents in this research, technology remains a thorny topic. historically, it was often approached with about as much enthusiasm as when firms talk about the role of branding and marketing.

    Ironically, all three topics (branding, marketing and technology) are cited in independent research surveys of client interests as the major features which private clients consider as central factors in both why they chose a wealth management and why they continue with them.

    notwithstanding the client perspective, what is notable now is that many more of the market leaders recognise technology can be a positive agent of change. for many, it is enabling firms of different scales and propositions to compete on a relatively level playing field. Indeed, if the technology had not been in place, many of the smaller players would have little chance of maintaining a stake in the private client wealth management race.

    thus, there is a groundswell of opinion that technology developments in the context of the wealth management model have initiated a democratisation of the industry.

    In the words of one managing director of a mid-sized wealth manager: Technologythat is where the big opportunity lies to get greater leverage from your infrastructure.

    Figure 13 the top areas of business capabilities frustration in 2013

    Indeed, when it comes to infrastructure it is worth noting where the major pain points are in the current models. While

    compliance has been addressed earlier in this report, over half of the remaining top issues of pain in the business models

    have a technology element to them in terms of solutions to alleviate constraints.

    45% 43%

    37% 35%

    38% 35%

    37% 38% 38%

    31% 35% 33% 33%

    35%

    27% 27% 25%

    28%

    23% 25%

    35%

    26%

    32% 31%

    29% 28% 27%

    22% 21%

    20%

    30%

    40%

    50%

    Com

    plia

    nce

    IT s

    uppo

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    Clie

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    Bre

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    Acc

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    and

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    % o

    f res

    pond

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    agr

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    Wealth Management Financial advice Investment

    22%

    Areas where technology increasingly plays an additive role

  • 20 Pershing ThoughT leaDershiP

    In one particular area there is a growing attention among wealth managers around what technology can do. this is in client relationship management (CRM) systems. the majority of operators now openly acknowledge that they currently possess CRM systems that are either not fit for purpose or are not effectively linked to the rest of the business and client relationship process. all accept this is not a sustainable mode of conduct for the future.

    as a result, CRM development is widely accepted now as the key to the future success of the wealth management model (figure 14). the face-to-face interviewees consistently remark that a centralised resource on all elements of client knowledge and activity is an obvious benefit. Many more claim it is a necessity. but, more important to many is the idea of a centralised information management resource that will be able to efficiently stimulate the relationship model into activity with a commercial focus.

    In the words of one chief executive of a smaller private client investment manager: Most firms have not understood that managing data is vitalgetting the systems in line is going to make a big difference going forward. In his view, CRM was at the heart of this development.

    for those that did have CRM solutions linked into the business process, they frankly admit that they had not yet adapted to the new solutions. In their defence, for many it is typically a recent introduction so the processes are still being embedded into the relationship model.

    for those that have fully adapted to their solutions, they are also now reaping an additional benefit which is business data on productivity levels of their advisers. at a management level this type of data will increasingly become a cornerstone of evaluation on the future of their business strategy, according to respondents.

    essentially, the data is going to enable businesses to plot which types of clients are doing the right type of business while, equally, they will be able to determine which advisers are the most valuable to the model and why.

    Figure 14 the top areas where firms are prioritising

    systems and technology enhancements

    therefore, the survey results are hinting that the age of

    the rolodex banker may at last be coming to a close.

    94% 89%

    72%

    87% 81% 74%

    90% 87% 80%

    60%

    80%

    100%

    Impr

    ovin

    g cl

    ient

    rel

    atio

    nshi

    pm

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    capa

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    Wealth Management Financial advice Investment

  • Through The looking glass 21

    alongside CRM, the improvement of access to product and market information as well as improving custody, administration and reporting capabilities all rank high on the business critical agenda. What is relevant is that across all three business types the sense of importance is constant.

    finally, what is clear from the responses given is that the industry is seeking constructive ways in which to improve not just its impression of what it does for clients, it also seeking to transform the reality of what it does for clients.

    What is crucial about the above statements and technology is that with technology the business can act more consistently and the business management can also regain a level of control on how their business develops.

    the commentary from face-to-face interviews for this research shows a greater awareness of this in the UK than in the past. historically, the senior management have often found themselves hostage to the dictates of their client advisers and with limited line of sight of the end client or their true needs. In fair weather and positive markets this is manageable, but in foul weather and negative market circumstances this is no longer a viable option.

    the perfect storm leading up to the dawn of RDR underscored the sense of foul weather which is prompting leadership to re-equip their business models for the future.

    as a result, it is becoming more widely accepted that technology is a better ally in the process of delivering the relationship model than previously considered. In the past, it has been seen as a challenger (or worse) to the fabric of the modelrelationship management delivered by a person.

    Figure 15 Primary descriptors which the industry wants to be associated with in the future

    the ambition of how the business wants to be perceived is relevant in this context (figure 15). It becomes more difficult

    to underscore this reputation if the relationship model breaks due to poor content management, poor reporting and

    administration, poor connectivity levels and so on. Indeed, these factors are widely recognised as of equal, if not greater,

    importance to the client relative to the investment performance of the underlying funds managed by the advisers.

    EXPERTCREATIVEEXPERIENCEDHONEST

    PRACTICALINDEPENDENTETHICAL

    ORGANISED

    KNOWLEDGEABLERESPONSIBLEPERSONAL

    INNOVATIVEUP TO DATEEFFICIENTSAFE

    LOYAL PROFESSIONALMODERNINTELLIGENT

    SOLID WORLD CLASS

    FLEXIBLEPROACTIVE

    HARD WORKING FRIENDLYENGAGING

    INTIMATE

    EMOTIONAL

  • 22 Pershing ThoughT leaDershiP

    the research insight indicates that increasingly the decision makers are becoming aware that technology is not able to replace this model and nor should that be the objective. In reality, technology should make that model more effective and more commercial.

    > it should also make it more delightful to the client and this is, ultimately, what they will pay for.

  • Through The looking glass 23

    In ConClUsIon: the fUtURe vIeW of UK Wealth ManageMent

    the findings of this research program reveal that UK wealth management is conscious of the obstacles and opportunities it faces. rdr has been a watershed moment for many operators in realising what they should, and should not, prioritise to maintain their commercial viability.

    the conclusions drawn by participants are not, by any means, universally consistent. this suggests that most are still trying to find their footing in the new world order of wealth management in the UK. some still believe their essence of success will be the absolute emphasis on personal touch while others believe they will get ahead of the pack through an improved systematisation of their business.

    all accept they need more business and that the sources of this are going to be a combination of new and existing clients. Crucially, all realise the clients they are targeting are more able now than ever to vote with their feet and are more conscious than ever that they should consider the economics of the relationships they have with financial providers.

    Figure 16 the primary drivers of change in the wealth management models of tomorrow

    69% of respondents believe thatfee transparency makes good client

    management much easier

    65% believe that client facingstaff must be supported by

    technology rather than replacedby technology eg. good CRM

    capabilities

    59% of respondentsbelieve that the business needs of

    the firm are best met by workingwith external specialists that focus

    on technology systems

    58% believe thatit is the service thatdifferentiates awealth manager

    65% believe that goodpeople are more importantthan good systems andtechnology in a wealthmanagement business

    66% think that wealthmanagement needs to be competitive with other partsof the financial servicesindustry and do not view itas a premium service

    A

    B

    C

  • 24 Pershing ThoughT leaDershiP

    RDR is driving that mindset. Indeed, regulation more broadly may have forced this issue of value and fees onto the table of discussion faster than many firms would have liked. but that discussion was bound to arise and in reality it has been occurring for some time now in the UK.

    one reality of all of these views is there is obviously no universally accepted answer to the right way forward. another reality for the industry is that the future is not going to become less competitive or less demanding.

    In fact, the expectations on the wealth management business modelwhichever strategic paths the respective decision-makers choose to takeis that the future processes are going to need to be faster, more efficient and more accurate in order to win market share.

    the optimism reflected by many that participated in the research programme is clear. there is a sense that the growth rate of the wealth management sector is sufficiently robust such that they can thrive. equally, they all felt the mistakes would be made by others.

    this optimistic conviction is a necessary part of the business world. although not everyone will be right! With that in mind we would encourage paying close attention to the results and comments reflected in this report. In doing that there is less of a chance of falling on the wrong side of the success equation.

  • Through The looking glass 25

  • aboUt ScorPio PartnerShiP

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    scorpio Partnership has conducted more than 300 global assignments across wealth for institutions in the banking, fund management, regulation, iT and technology, insurance and charity sectors.

    scorpio Partnership has been voted best global consultancy to the wealth management industry for the three consecutive years and has been runner up for agency of the Year two years in succession*. The firm is independent and owned by management.

    For more information go to www.scorpiopartnership.com

    For further information please contact scorpio Partnership +44 (0)20 7811 0120 [email protected]

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