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27th July 2022

Facing the new monitoring challenges in wealth management: going beyond drift and minding the gap

Daryl Roxburgh – President & Global Head BITA Risk® part of the corfinancial® Group

Wealth Management

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.

Consumer Duty

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.

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