Daryl Roxburgh, President and Global Head of BITA Risk® part of the corfinancial® Group
In a discussion last week with a CIO, he said, “investors may be disappointed in returns – due to the market – but they do not want to be surprised”. This prompted us to write about how to avoid surprises, or “the intelligent anticipation of the unexpected”.
Identifying, understanding and mitigating portfolio risks will help remove surprises and lead to more consistent portfolio performance. This does not have to mean 100% rebalancing to a strict model, something that is not always appropriate or possible in HNW and UHNW client portfolios. More than with the right oversight and insight, managers can have freedom within a framework to deliver good suitable outcomes to their clients.
Automating the analysis of portfolios and assets to identify those that fall outside client mandate or investment policy does six things:
Focus attention where needed
Prioritises action by criticality
Identifies patterns or systematic behaviour
Enables known issues to be validated with the client and removed from the exceptions list
Reduces data prep time by 80%, effort that can be better focussed on actions
Puts the tool on the IM desk, making it part of daily portfolio management
Checking beyond basic front office system drift and client restrictions, we would suggest considering eleven different groups of monitor tests, to find the proverbial needle in the haystack before it becomes a risk:
The appropriate and relevant tests will depend on the firm’s investment proposition and business model. Often, different business units served by the same installation will only have a few tests in common.
You might know that 80% of your portfolios have a minimum of 80% invested in assets on the research list, but how concentrated is the money not invested in the research list? Are there significant positions either at the firm or branch level that are not researched, and are these a risk?
Do certain teams or branches have systematic outlier characteristics? Do certain managers have a very high proportion of portfolios with a CGT exception?
Monitoring these daily not only gives the IM the heads up that they need to check something when it occurs but also provides a trend report through time on the resolution of issues, so continual analysis helps stay on top.
Just as important is a structured process of recording accepted and known exceptions. These not only need internal checks but should also be validated with the client on a periodic basis, closing the loop.
The result of the use of this data, analysis, and process can be expected to be:
Better delivery to client expectations and suitability of outcome
Reduction in unexpected risks
Improved consistency of outcome
Demonstrable automated risk management process to attract clients, advisers and IMs
Better understanding of the relationship between risks and return in the business.
The frequent comment about Consumer Duty is that much of it is just good business practice. The management information listed above can evidence good outcomes and that the processes are in place to ensure they are being beneficial to the client and firm alike.
Daryl Roxburgh, President and Global Head of BITA Risk® part of the corfinancial® Group
A Central Investment Proposition (CIP) is no guarantee of consistency of outcome, whether measured by performance, risk, or cost. In this blog, we review two case studies where BITA Wealth helped deliver the CIP and resulted in more consistent results – key to Consumer Duty obligations.
Case A – freedom within a framework. The firm had autonomous managers, central asset allocation models and a non-mandated research list. When we undertook an initial assessment of portfolios, it was found that there was:
Little portfolio risk consistency within risk bands.
An issue with concentrated portfolios.
Patchy take up on the research list.
A high variation in portfolio performance.
Asset allocation drift had previously been relied upon as the key metric and was measured by the front office system.
Following an analysis phase, looking at the portfolio risk and construction characteristics across the book and by mandate in BITA Wealth, initial guidelines were set for each risk category. These covered portfolio risk (volatility), maximum holding weights by asset type, off-research list percentages, high volatility holdings, tracking error and asset allocation against the assigned model.
BITA Wealth gave investment managers a dashboard on which they could identify significant outliers for each metric and the tools to model portfolio changes and bring them into line. Where this was not possible, they could record a known exception and apply a deferral against a test. The governance and oversight team had information instantly available, so could focus their time on reviewing critical outliers and managers’ progress, rather than having to collate data.
Within a year, the external party that reviewed the firm’s client performance and risk against their peer group commented positively on the significant improvement in the consistency of outcomes.
Case B – rebalanced models. The second case study is a little more surprising. A firm was running 300,000 plus client portfolios, all rebalanced to model on a weekly basis.
They were consistently finding, each quarter, that around 10% of portfolios were outside the acceptable deviation from the model performance.
They had a team of six consultants working on investigating and seeking rectification. Given that in many cases, they were looking at outlier portfolios months after the event that triggered the performance deviation, there was a lot of time spent trawling through historic data.
Using BITA Wealth to analyse all the portfolios down to holding level in an analysis phase and then on data through time, a series of issues were discovered in the process that contributed to the performance deviation. Because of the quarterly review cycle, these were not identified at the time and so resulted in performance deviation. Moving to daily monitoring with BITA Wealth and exception management, would enable next-day rectification of issues and significantly reduce any performance impact.
In some instances, the performance deviation was to be expected, such as the closure of the account mid-quarter or a client holding cash pending investment or withdrawal. However, these had not been consistently identified and marked as known exceptions previously, and so the performance team was required to investigate.
In other cases, cash had come in and not been invested on a timely basis – daily monitoring not only resolved this but enabled root cause analysis of what was causing these failures.
Lastly, the commonality of holding weight between the model and each portfolio was tested daily. This identified the third primary cause of performance deviation. While portfolios were rebalanced to the model, in a number of cases, the portfolio value was significantly below the stated minimum. Given that the portfolios were invested in a wide spread of direct equities, this meant that for assets with a large price per share, these smaller portfolios were not in line with the model weights. This was a more fundamental business model issue. Again, having been identified through the monitoring, the affected portfolios could be carved out for separate action.
These brief case studies give an insight into the challenges of running a Central Investment Proposition, gaining adherence, and ensuring that the outcomes are as consistent as expected.
By Daryl Roxburgh, President and Global Head, BITA Risk® part of the corfinancial® Group
While plans had to be drawn up by last October, Consumer Duty comes into effect on the 31st of July 2023.
The Consumer Duty
A new Consumer Principle that requires firms to act to deliver good outcomes for retail customers.
Cross-cutting rules require firms to act in good faith, avoid causing foreseeable harm, and enable and support customers to pursue their financial objectives.
Four Outcomes rules require firms to ensure consumers receive communications they can understand, products and services meet their needs and offer fair value, and the support they need
Key to meeting Consumer Duty obligations is assessing, testing, understanding and being able to evidence the outcomes that a firm’s clients are receiving – and having the management information to evidence that products are delivering outcomes consistent with the duty across all clients. Where this Is not the case, there is the need to identify clients or groups of clients that are outliers, and to understand why.
Firms have to ask themselves, are they using the same level of management information and systems to inform their Consumer Duty obligations as they are their sales and product development?
In talking to many firms, we find they have challenges in collecting the data and even when they have, it is in disparate spreadsheets. This prevents the data overlay necessary to understand patterns, problems and solutions. It is also often generated to long after the fact, to enable easy rectification of issues.
In this blog, we are focusing on foreseeable harm, value and quantitative outcome issues. We have assumed that the client’s needs have been assessed in terms of quantifying any goals and putting these into the context of not only attitude to risk, but broader suitability factors in arriving at the right investment proposition. This proposition has then been played back to the client in such a way that they can understand the risks that they will take. As a senior investment manager said, “they may have a disappointment (due to the markets), but I do not want them to have a surprise”.
Consistency of performance outcome and cost of outcome are cornerstones. Logically, foreseeable harm can then be considered as a factor that could result in a performance or cost deviation from the norm for the portfolio mandate within the firm. So, there is a two-step process, identify potential foreseeable harms – rectifying or acknowledging – and then monitor outcomes. The outcomes should be reviewed separately for those with acknowledged variations and for those expected to conform.
This process creates a feedback loop, identifying clients or groups of clients that have suboptimal returns for their risk mandate and separating out those for which there are known exceptions. By combining data from foreseeable harm factors with risk and return outcome statistics, MI analysis can lead to rectification of systematic issues and discussion of portfolio specific issues with the client.
BITA Wealth brings all of this data together at the Investment Managers’ desktops and enterprise views for management, compliance, and governance. With over 40 portfolio monitor metrics to choose from, the reporting will reflect the metrics key to the firms’ investment propositions.
While many of these foreseeable harm factors are well known as issues, not all firms are able to put them into the context of performance impact. Typically, BITA Wealth will monitor some six to ten portfolio risk and construction factors, along with asset allocation, daily.
Reasons for known exceptions are recorded and can be reported and investment managers have the tools to model rectification, where possible. This can is then overlayed on performance and risk outcomes, giving direction on factors that may have led to deviation from expected performance across groups of clients and possible routes to rectification.
We have interfaced BITA Wealth with most of the leading investment management systems to provide this first and second line of defence for many firms, and today, some £180 billion of private client AUM is monitored and checked in this way. This provides the management information not only to meet Consumer Duty criteria, but also insight into your firm and to ensure that good client outcomes are delivered.
By Daryl Roxburgh – President and Global Head, BITA Risk® part of the corfinancial® Group
Late July saw the Financial Conduct Authority unveil the finalised version of its new Consumer Duty regulations, setting in motion what the regulator has termed a “paradigm shift” in its expectations of the UK’s retail financial institutions. Highly laudable though its aims certainly are, the timeframes for implementation are short and the challenges around proving compliance numerous, with firms having to have plans in place by the end of October.
I say ‘proving’ with purpose. Any reputable firm will have surveyed the guiding principles underpinning the new regime and see little that will not already be in their corporate DNA. Clear communications and meaningful customer support, fair charging, and a client-centric approach to providing financial services and products with a focus on good outcomes are nothing new to this country’s already tightly regulated – and highly respected – financial services sector. Developing capabilities to meet the regulator’s expectations for evidencing all of this may well be, however.
The FCA estimates that the implementation costs for the sector will be as high as £2.4 billion and wealth managers can be expected to bear much of the brunt of the pain due to the wide-ranging and often very long-term relationships they have with their clients. Dizzying changes to wealth demographics and investor preferences, along with an economic outlook which is uncertain to say the least, further complicate the picture.
Segments of one
Never has the old saying that each client is “a segment of one” been truer. How then to prove the consistency of outcomes among increasingly diverse client bases? With ESG considerations arguably rubbing against fiduciary duty in the time-honoured sense, even the seemingly simple matter of proving that an investment was appropriate in the first place is becoming vexed.
The wealth management industry has long had to wrestle with a paradox: while deeply personalised service lies at the heart of its value proposition, cost considerations – on both sides – must limit customisation to where it really counts. Mass customisation of portfolios facilitated by technology has long been acknowledged as the only workable path. But now, these customisations need to be factored in when considering the analysis of the consistency of outcomes and foreseeable risks under consumer duty. Whether it is a restriction on what can be bought, a restriction on what can be sold, or a desire to hold a proportion in cash, these are some of the myriads of reasons that a portfolio will perform outside its peer group. In understanding outcomes, these points must be considered.
Foreseeable harm in theory precedes outcomes, and this requires testing to evidence that a client’s portfolio is suitable. Not just in a high-level asset class check, but in terms of the assets bought and their contributions to overall risks taken. These risks naturally include market risk whether volatility or CVaR, but should go further into looking at illiquid, un-researched, high risk and concentrated positions. The first challenge is knowing that these exist in a portfolio, only when they are known can they be addressed, mitigated, or agreed with the client as acceptable.
The challenge is daunting: according to EY*, 87% of firms see a need to implement key technological change to meet it. The good news, however, is that offering the kinds of monitoring and evidencing capabilities firms need will really be nothing new to leading technology vendors. For our part, we feel there has been a great deal of prescience in how we have developed BITA Risk’s solutions over the years: Consumer Duty represents just a sort of cross-cutting complexity our products were designed to solve.
Canvassing the large and growing range of institutions which already rely on our products reveals a heartening degree of confidence in how they will cope with the new rules. Others who have perhaps held back on their investments are now feeling the April 2023 deadline bearing down. The industry is however showing itself eager to wring the maximum business benefits from this compliance challenge, as it should: rather than merely “ticking the box”, EY* has found that 60% of firms want to take a holistic, business-wide approach to the Consumer Duty rules.
What this already looks like at our client firms is very positive, with foreseeable harm monitoring, performance and yield outcome monitoring already deployed in many cases. This monitoring – with the attendant MI (management information) on trends and systemic issue identification – is backed up by a systematic approach to collecting reasons why a portfolio may be out of line, enabling management of the exceptions apart from consistency checks on the core.
Firms with our profiling solution are carrying out risk-profiling and suitability assessments at the level of individual financial goals, monitoring against clients’ capital and income requirements, and keeping a close watch on ongoing costs and charges at both the portfolio and asset level. As a result, many can already point to immaculate management information on any Consumer Duty metric the regulator might choose.
But, of course, for the best providers, all this is about so much more than fending off potential compliance concerns. They will want to be able to deeply interrogate their information to be absolutely sure that their clients are achieving optimal outcomes – and to be able to further improve their investment and advisory strategies wherever they can. From our experience, the message that duties can be readily transformed into differentiation opportunities is very much one firms want to hear.
We all know that upholding Consumer Duty will already be business as usual for any wealth manager worthy of the name; that the whole industry is now being asked to fully operationalise and evidence adherence to these principles should therefore be a welcome change – and particularly so for those organisations able to compete more vigorously on this basis. It certainly is for us.
As leaders in portfolio monitoring and governance, BITA Risk analyses circa £180 billion of wealth management assets every night for a range of Wealth management firms. At our core is the quick, efficient analysis and aggregation of data, with seamless and efficient workflows for governance and client managers alike. We have extended our solutions to deliver what firms need now for ESG, TCFD, and Consumer Duty together with the significant added benefit for the firm of identifying problems before they arise, reducing both compliance risk and the chance of poor client outcomes, meaning both parties can benefit from a forward-thinking approach.
BITA Risk’s study this summer on the current challenges for wealth managers in portfolio governance and management has revealed five key areas requiring action: TCFD, ESG, Consumer Duty, Central Investment Plans and Risk.
In a series of short reviews, we look at ESG to understand what it really means, and the key challenges firms are facing in delivering appropriate solutions.
So, what is meant by ‘ESG’ and what does it mean to any individual client? In discussions with investment managers, heads of sustainability and clients, it has become clear that both firms and clients view it in many different ways. For simplicity, I include Environmental, Social and Governance factors, climate and carbon factors, impact and green exposure, and then ethical restrictions (from simple issues like alcohol and tobacco through to complex research and armaments definitions) within the ESG umbrella.
Missing either restrictions or expectations can prove costly, so the definition and agreement process is key.
With this inherent complexity, how can and should client requirements be recorded, or even discussed with them? Given that this sets the foundation, it is an element of the process that must be clearly defined and understood.
There is more to this than seeing if a client gives to charity: that implies ESG investing is a charitable cause, and it’s not, it’s a thematic approach to investing that meets the dual utilities of seeking return and something that will give the investor additional utility or not give them disutility relating to ESG. These additional utilities can be very specific.
Clients mostly will have general requirements: “greener than it is now or compared to the benchmark” , “but I don’t want any GM foods or animal testing”. Here communication of the firm’s approach is key. This must explain that the perfect company does not exist, that trade-offs have to be made, and that zero tolerance can be highly constraining. So, the client needs to understand what is possible within a firm’s investment approach and what is not. This is easier with segregated portfolios but a minefield with funds.
If the client has specific requirements or a passion in a specific area, they may have more knowledge in the area than their manager and this has resulted in the rise of specialist teams that can discuss the requirements with the client. Firms need to consider how they establish or access such specialist knowledge, and also how this information is then incorporated into investment management and delivered to the IM desktop and client reports.
The most common approaches we see to sustainable preferences are, a percentage in ESG focussed investments, adherence to ESG focused buy-lists and ESG embedded in the central investment process and bespoke requirements. However, even with the more generic approaches of suitability driven buy-lists, client specific ethical restrictions and positive screening and negative screening preferences are often offered. Two things to consider: clearly state to the client the ESG parameters of their service and provide the manager with tools to identify assets that may fall short of expectations and then have a defined process of identifying, communicating, and managing these exceptions.
What is clear is that you cannot offer the client the option to select from some three thousand metrics to establish their sustainable goals. A set of thematic approaches with the question as to whether the client has specific requirements is more feasible. The client’s requirements can then be recorded in the context of the firm’s service and played back to them. This may well mean splitting requirements into different groups with different granularity – e.g., overall portfolio A+, good board diversification, no civilian armament production or distribution for direct investments and ensuring that funds bought have above average scores in these areas.
This requires the client manager to have access to an easy but structured way of recording these preferences and playing them back to the client. That is giving the client freedom within the firm’s ESG framework. The framework should be comprehensive enough to cover complex clients, as well as addressing the more generic needs of the body of the client base.
Once this structured definition of requirements is in place, checking, reporting, monitoring, managing, and governance become possible.
The challenge then becomes continually ensuring that the requirements are met. Monitoring a portfolio against preferences and restriction is key and avoids costly oversights. While a stock or fund may have been OK at purchase, its characteristics may have changed, the client preferences may have changed, and it needs to be considered in the context of the portfolio. Our approach enables firms to monitor positions automatically at three levels – client preference, firm’s sustainable buy-list(s) and policies, and portfolio metrics, with daily alerts for outlier positions. This gives peace of mind and avoids laborious manual checks and the risks of breaching mandate.
Always think about the thin red line – the small percentage of investments that score badly for one or more factors. Is the manager aware and would it be an issue for the portfolio or the client?
Many firms have invested in sustainability research and the development of focused investment offerings. We have found that most then struggle to demonstrate this process to clients, especially in the context of their individual requirements and portfolio. Where this can be done, it usually involves many manual processes and is limited to a single data vendor’s analysis.
By combining sources of ESG (remembering the broad definition at the beginning) with positions and preferences for all client portfolios, BITA Wealth delivers a clear report, showing what your process means to them. This narrative demonstrates value add and your investment process. Over 60% of firms spoken to have a Stewardship process in place, but none could demonstrate this. We are in the process of incorporating this data in client reports so that proactive effort is demonstrated and appreciated.
Often the comment is heard that the “data is not good enough” or there are gaps. It is research data in many cases and that is only as good as the process and the same due diligence should be undertaken as with any research data. Handling the gaps and making clear limitations is explicit in TCFD, and we have followed the same approach in ESG. Knowing the gaps can enable a firm to press vendors and funds to improve their coverage.
Many firms we speak to provide their own overlay on vendor data and firm specific commentaries. Making this data integral as part of the preference, management, monitoring, and reporting cycle delivers significant benefit to the firm and client alike.
Structured integrated data delivers a powerful insight into portfolios and delivers sustainable investing across a firm in line with its overall investment and governance processes, improving the investment narrative for the client and ensuring compliance with objectives.
As leaders in portfolio monitoring and governance, BITA Risk analyses circa £180bn of wealth management assets every night, for a range of wealth management firms. Fast analysis and aggregation of data, with seamless and efficient workflows for governance and client managers alike is at our core. We have extended our solutions to deliver what is needed now for sustainable and ESG-focused portfolios, together with significant added benefits for the firm, integrating with key data vendors and then adding analysis and client facing interpretations.
BITA Risk’s study this summer on the current challenges for wealth managers in portfolio governance and management has revealed 5 key areas needing action: TCFD, ESG, Consumer Duty, Central Investment Plans and Risk.
In the first of a series of short reviews of these topics we look at TCFD reporting, and the key challenges and opportunities that this brings.
TCFD (Taskforce on Climate-related Financial Disclosure) reporting will require investment management firms, including most wealth managers to be able to report at entity, product, and portfolio level on key carbon metrics, both on a current portfolio and its history.
The FCA has made it clear that they expect a firm to consider making this reporting available on demand to all clients in due course, but there is an immediate need to address the collection of data to support future historic reporting. Some firms already have the processes in place to be collecting this from the start of January.
A key challenge is data quality and availability of data, and this is made transparent through reporting the coverage and quality of data for each asset group. In some cases, proxies can be used systematically, and these then replaced as coverage improves. This will certainly focus attention on the data vendors to increase coverage and quality.
The foundation of TCFD reporting by wealth managers has to be a systematic approach that utilises structured data. While Excel aggregations and manual aggregation of data may work as an interim measure, these inefficient and time intensive processes will soon be overwhelmed.
Working to support firms in this area, we suggest building a data history across the 100 plus key metrics for portfolios, with sufficient granularity to enable easy aggregation, interrogation, and reporting. In this way, the year on year and longer-term historic reporting is quick, efficient, and consistent.
In discussions with firms, we found that often their data comes from one or more vendors, and they may then apply their own overlay. This creates the challenge of a single portfolio view that manages and collates these data sources, something we have already solved.
So, this admirable drive to net zero requires considerable data, married to every portfolio. A huge challenge in itself, but once the right approach is taken, there can be significant beneficial spin-offs in both client engagement and investment risk management.
With the right approach, meeting the regulatory needs of reporting can deliver further immediate benefits:
Demonstrable trend of carbon exposure across the firm and for a client
Identification of climate related risks at portfolio and asset level and joining up data for the investment manager
Business intelligence to support a firm’s carbon strategy whether majoring on sustainability or focussing on meeting the regulations.
Improving the Client experience, showing your firm as ahead of the curve, treating climate change not as a regulatory requirement, but a risk management exercise and something for the good of all.
With Consumer duty requirements fast approaching, one should consider the carbon metrics reported under TCFD as a key foreseeable harm which needs to be identified and addressed. This includes identifying potentially stranded assets and those with a high Climate VaR.
As leaders in portfolio monitoring and governance, BITA Risk analyses circa £180bn of wealth management assets every night for a range of Wealth management firms. At our core is the quick, efficient analysis and aggregation of data, with seamless and efficient workflows for governance and client managers alike. We have extended our solutions to deliver what firms need now for TCFD, together with significant added benefits for the firm, following the IA (Investment Association) template as a base and then adding analysis and client facing interpretations.
TCFD (Task Force on Climate-Related Financial Disclosures) reporting will be a challenge for many firms. While the initial requirements relate to larger institutions and certain client portfolios, firms with GB£5 billion-plus Assets Under Management (AUM) will also have to report with comparisons to data collected in 2023, meaning careful planning is needed now. This historic comparison data will add further to the complexity of the 100-plus data points in the Investment Association TCFD report template. In addition, this data will need to be aggregated across client portfolios for entity reporting. Lastly, there is clear direction from the regulator that on-demand reporting is expected to be made available to all clients in due course. So, there are significant challenges in TCFD reporting.
The UK’s Financial Conduct Authority helped set the pace for the global adoption of Environmental, Social and Governance standards in financial services when at the end of 2021 it became the first securities regulator to introduce mandatory TCFD-aligned disclosure requirements for asset managers and asset owners. This is already having a huge impact which will only grow.
The report content, in line with other sustainability-related regulatory required reports, has been proscriptive, which removes ambiguity, but does not necessarily make it easy. The Investment Association has published helpful templates for segregated and pooled fund portfolios. The first set of reports for institutions with over GB£50 billion in AUM will need to be submitted by the end of June 2023, to cover the 2022 calendar year; those with GB£5 billion-plus in AUM will be subject to the rules from 1 January 2023, with their first reports due end-June 2024. By that point, a full 98% of the UK’s asset management industry will need to comply with the Task Force on Climate-Related Financial Disclosures’ rules. Part of the challenge will be the requirement to provide a year-on-year comparison of the portfolio metrics reported.
A good deal of voluntary reporting has also been taking place, and pressure both top-down from regulators and bottom-up from investors will likely mean that most firms will want to get their TCFD house in order well ahead of the second-tier deadlines kicking in. This yoking together of compliance and client demands is a very welcome development for those who care about environmental action as we all should.
The TCFD report focuses on the investment organisation’s governance-related arrangements through a climate change lens and provides a consistent way of reporting the risks and opportunities faced in a portfolio as a result of it. It is safe to assume that most end-investors do very much want to be apprised of the climate impact of their financial holdings today, and it is certain that providing such insights will be a hygiene factor for tomorrow’s core client base. Research recently conducted by Compeer found that 80% of clients want access to ESG-compliant investments in their portfolio, with this figure rising to 94% for clients under the age of 40. With wildfires and floods making the impacts of climate change clear for all to see, the “E” reigns supreme among the Environmental, Social and Governance concerns investors want to see reflected in their portfolios now.
Thought leadership through technology Whether a firm provides a sustainable investment offering – and an expanded TCFD report offers an opportunity to demonstrate this to clients – or not, the key to efficient reporting and avoiding issues will be a systematic approach. This brings the benefit of information and analysis across the client base, uncovering risks, providing calls to action, and giving insight to the investment manager and central investment teams alike.
At BITA Risk, we have always prided ourselves on having a finger on the pulse of both domestic and global regulatory change and cultivating a deep understanding of where the rule books might be heading – in light of both the spirit and the letter of the law. This has served us extremely well in developing our products to help keep institutions ahead of compliance changes, rather than just reacting to them. The range of institutions we work with has also enabled us to become something of a thought-leader and conduit for conveying best practices as the industry grapples with ever-changing regulatory regimes. As such, more and more we have a highly consultative role.
No doubt conscious that the UK’s institutions are having to cope with a barrage of new rules, not least its sweeping new Consumer Duty regime, the FCA is currently asking only for fairly limited TCFD reporting to clients. However, the expectation is clearly that all investors will have climate impact information at their fingertips in short order. Clients’ expectations for ever more personalisation being as they are, we can further predict that firms will need to be able to drill into these metrics in any number of ways too.
Having considered the requirements to provide year-on-year metrics at a portfolio level and to be able to aggregate metrics across client segments, we have suggested using this data to identify stranded assets, portfolios with climate risk exposure and to demonstrate a firm’s changing exposure through time.
With a structured data approach, communicating to clients the investment firm’s stewardship activity and mitigating reasons for holding carbon-heavy stocks, not only becomes easy, but drives a demonstration of the firm’s worth to the client.
How to make climate impact information relevant and readily comprehensible is not just a matter of client satisfaction, although it certainly is that; helping people to make investment decisions which reflect their priorities in the widest sense is what the disclosure rules are all about.
The TCFD rules aim to serve the most high-minded of principles, but as we help to steer capital to more sustainable deployment, the industry must stay firmly in the realm of their practical application too. We have been delighted to offer institutions guidance on firm, product and ad-hoc reporting requirements, metrics definitions, reporting templates and more. Personally, my work has never been more interesting, or more valuable in a societal sense.
Another portfolio monitoring lens While climate impact disclosures are important from humanitarian and environmental perspectives, there is a regulatory drive to report soon. We like to emphasise to firms which may feel daunted, that this is just another lens through which to view portfolios – and therein arguably lies our particular strength. We have spent decades now enabling firms to master their metrics on performance, risk, suitability, and costs, meaning that we have abundant transferable insights on how to make TCFD reporting work optimally in everyday operations too.
Firms’ first concern will undoubtedly be how to avoid manual processes and being dragged back to “Excel hell”; then, relatedly, they will want to know which processes need to be in place to facilitate portfolio analysis and change. With profitability remaining under pressure, adviser productivity has to remain a top concern. Running analysis for individual portfolios and collating historic data will take time, as will aggregating across groups of clients for entity reporting. Creating structured data and an automated framework will alleviate pressure on the adviser and give the client a better experience.
These are undeniably challenging times for business leaders, but we see a gratifying proportion keeping the competitive advantages available from these pioneering reporting requirements front of mind. Here, we have been assisting institutions to develop trend reports to demonstrate progress on positive investment practices at both the client and entity levels to great effect. Helping the individual know the impact they are making will be a very powerful thing for both client satisfaction and retention. Being able to demonstrate the difference the firm as a whole is contributing is, in my view, a ready-made marketing campaign. I know that many Chief Marketing Officers agree.
In all, the TCFD requirements represent a particularly novel kind of compliance challenge, but one which we are seen leading firms rapidly embrace as an important differentiating factor. Sophisticated clients can already see that espousing ESG credentials is one thing, but that evidencing them robustly and acting on them is quite another. We look forward to working with even more firms in the latter camp as the industry moves to make its mark on climate change.
As leaders in portfolio monitoring and governance, BITA Risk analyses circa GB£180 billion of wealth management assets every night for a range of Wealth management firms. At our core is the quick, efficient analysis and aggregation of data, with seamless and efficient workflows for governance and client managers alike. We have extended our solutions to deliver what firms need now for TCFD, together with significant added benefits for the firm, following the IA (Investment Association) template as a base and then adding analysis and client-facing interpretations.
By Daryl Roxburgh, President and Global Head BITA Risk® part of the corfinancial® Group
Daryl Roxburgh – President & Global Head BITA Risk® part of the corfinancial® Group
Living through 2022 is underscoring an eternal truism: that life’s challenges are seldom episodic and often come piling on top of each other in a way that is most challenging. This is very true for those managing portfolios in the wealth management space.
Long gone are the days where asset allocation drift, and possibly asset class risk, were enough to satisfy suitability and ongoing portfolio monitoring requirements. These are just one slice of a large – and growing – portfolio monitoring “pie”, and there are several portions I fear firms will find hard to digest without modern technology designed for the purpose. These coalesce around two core themes: sustainability and the highly tricky business of not just doing right by clients but proving one has done so. Spreadsheets and manual data manipulation are just too time consuming, labour intensive and risky to be fit for purpose.
So, the challenge of properly monitoring portfolios has become multifaceted, requiring the checking of numerous metrics, both individually and across your entire client base – and all of the time. These metrics can often be client or proposition specific and at both asset and portfolio levels adding further complexity. This requires automation and exception management if it’s not to become a drain on the front office’s time.
The acknowledgement of change is supported by recent research carried out by Compeer which found that 46% of firms are now reviewing suitability on a continuous rather than an annual basis. From a compliance perspective, but more importantly from that of clients themselves, this is no small thing, although the industry as a whole clearly has some way to go still.
Putting the customer first is a movement which has been gathering pace globally for some years building on TCF and which will reach something of an apotheosis in the UK when, at the end of July, the FCA publishes its final “Consumer Duty” rules. The regulatory focus is now on firms tracking and measuring the investment journey to ensure both consistency of outcomes and how these are best achieved. We will need to map and document such that even if clients choose slightly different paths and different vehicles (pun intended), those with similar objectives still arrive at the same place or it is clearly documented as to why not.
You may think that this is solved by Centralised Investment Propositions (CIPs), but research has shown that this is not always the case. Firms must be able to ensure and demonstrate that Centralised Investment Propositions are working as intended for each client’s objectives, and alert and document where not. Being able to identify early on and rectify reasons why performance, and yields, aren’t quite meeting an individual’s expectations and needs will help head off all manner of risks apart from those related to compliance – not least that of losing the client.
ESG and Ethics
It is in the sustainability sphere, however, that things are getting really thorny in portfolio monitoring. Our research with Compeer found that 80% of clients now request some access to ESG-compliant investments in their portfolio, with this figure rising to 94% for clients under the age of 40. Demand, in the purest sense of the word, is most certainly there and will only grow to ubiquity. It is just as strong (if not stronger) from regulators, with SFDR and TCFD headlining an alphabet soup of frameworks, rules and regulations requiring carbon, ethical and other non-financial metrics also be part of what institutions monitor, measure and report on. This starts to become complex, as not only does the ESG (in the broadest sense) data need to be managed and applied to portfolio positions in et context of client preferences and restrictions, but a number of metrics need to be looked at through time.
Compeer found that a lack of personalised reporting and portfolio updates are a deal-breaker for two-thirds of clients and firms clearly see that ESG reporting is shaping up to be a real differentiator in these conscientious times: 43% already report on ESG metrics to clients and the remainder are working hard to catch up. Ethical restrictions have been simplistically applied for years, but now that there is detailed data on companies and funds, there is the opportunity to apply these automatically both pre-and post-trade. No longer does the front office have to spend time manually checking each month, this along with sustainability metrics can be constantly monitored.
Multifaceted Solutions to Multifaceted Challenges
These slices of the monitoring pie may seem to be largely compliance, but the reality is that more and more of it takes up front-office resource. Indeed, Compeer tells us that for a quarter of firms as much as 80% of a compliance project is performed outside of the compliance department – and this at a time when margin pressures mean front-office efficiency is more important than ever. The more automation in portfolio construction, monitoring and reporting which can be achieved, the better both direct and indirect compliance costs can be kept down – and high standards of provision kept up. These tools provide managers with decision support as well as calls to action in investment management Managers must be freed up to manage and build their client bases.
All of this is to say that when faced with multiple challenges, wealth and asset managers need to be seeking truly multifaceted solutions. That way, multiple problems which threaten to become an entangled mess can actually be solved pretty much at a stroke. Future-proofing can then also come into scope. Once you have a cutting-edge portfolio monitoring solution in place, then it doesn’t much matter what regulators, clients, senior management, or anyone else requires you to measure and report upon. You could even choose to break with the pack and look at portfolios through an entirely new lens. I know some of our clients are already thinking about this.
Our BITA Wealth® solution has consistently stayed ahead of the market and encompasses a wide range of risk, portfolio analytics and decision support tools to monitor suitability and outcome meeting today’s challenges. Now servicing over £180bn in client AuM, we can confidently say that we’ve helped get a large part of the sector to a position where proper guardrails are always on.
That, I would argue, has to be the spirit in times like these: you can seek resilience in the face of a regulatory onslaught and wring business benefits from compliance challenges. Our client stories give ample evidence for how that’s already been done. If you would like to receive our updates on Consumer Duty, please subscribe here.
London, 31st March 2022 – BITA Risk® (part of the corfinancial® group) announces that it won the coveted ‘Best Innovative WealthTech Solution B2B’ award at the Tenth Annual WealthBriefing European Awards 2022 for its BITA Wealth® ESG Manager private client solution.
Showcasing ‘best of breed’ services and solutions in the European region, the awards were designed to recognise outstanding organisations grouped by specialism and geography which the prestigious panel of independent judges deemed to have ‘demonstrated innovation and excellence during the last year’.
ClearView Financial Media’s CEO, and Publisher of WealthBriefing, Stephen Harris said: “The organisations and individuals who triumphed in these awards are all worthy winners, and I would like to extend my heartiest congratulations to the winners.”
BITA Wealth ESG Manager supports evolving ESG strategies by helping firms to understand, manage and monitor portfolio ESG exposures, enabling the integration of ESG analysis and reporting within a firm’s investment proposition. Climate, impact, and ethical restrictions dovetail with investment policies to deliver analysis and governance to compliance teams and the wealth managers. This key differentiator enables client managers to deliver a better service to clients in the world of sustainable investing.
Commenting on the firm’s triumph, Daryl Roxburgh, President and Global Head of BITA Risk, said: “We are delighted to have won this award in recognition of our innovative approach to managing the complexities of ESG investments for private clients. While many firms have built sustainability into their central process, only a few can embody it in day-to-day portfolio management and demonstrate this clearly to a client while monitoring that they are in line with the client’s preferences and restrictions. This is what our innovation delivers.”