Over the past 18 months there has been a lot of (maybe too much) discussion and hype about the rise and imminent takeover of the ‘robo advisor’ within the wealth management market. This hasn’t fully materialised yet so Will Smith can rest easy for a while longer, but whilst there is undoubtedly a market for an automated online service, it is also evident that the need for the bespoke human service is as strong as it ever has been. The total wealth of individuals across the globe grew by 12% in 2014, and is projected to grow by 6% per annum over the next 5 years. The challenge facing those managing the wealth is how to stay ahead of their competitors and grow their client base, whilst maximising profits, and all in a shifting industry landscape.

Operational challenges

Inevitably wealth management firms need to embrace the digital world to engage their customers, whether that is multi-channel, omni-channel or uber-channel. This in itself is less of a differentiator now and more of an expected norm, as it has become across retail banking and many other industries. Even the UK’s oldest bank has announced they are joining the fray. However the spend required to deliver a truly modern digital presence is compounded by the continued cost of adhering to wide-ranging regulatory change, especially with the behemoths of CRS and MiFID 2 on the horizon. In this scenario it is very difficult to generate positive impact on margin through the reduction of operating costs, and there is only so much one can reduce without compromising service and risk alienating the customer.

With the current downward pressure on fees, most firms are looking to increase assets under management (AUM), organically or through acquisition, to drive revenue increase and overall profit growth. The key is being able to do this in a scalable manner without proportional increase in operating cost. In the discretionary and advisory domains this can be achieved if wealth managers are able to manage more clients without detriment to the service they provide. This is where ‘proactive portfolio management’ comes to the fore, letting technology do more of the work and facilitating that scale.

Proactive not reactive

A good proportion of wealth managers’ time is spent undertaking portfolio reviews across their client base, and there are a variety of approaches to this process, which I will refer to as ‘reactive portfolio management’. These range from:

• The manual approach – extracting portfolios to spreadsheets, analysing the construction, and manually collating the required bulked orders, to;
• The more automated system approach – using software to recommend the appropriate rebalancing orders, place orders into the market, and create a complete audit trail along the way.

The current frequency on which clients’ portfolios are reviewed varies according to the organisation and the level of service which the client receives. The common theme is that portfolios are reviewed and consequently rebalanced on a more frequent scheduled basis than they were just a few years back, which is not surprising given attention to regulatory change and the market volatility we have seen. Though in these fluctuating markets, with the increased focus on suitability, and with greater transparency to the client proposed under MiFID 2, it’s debatable as to what should be considered frequent enough for the portfolio review process.

However, rather than look at the frequency and work in a reactive manner, shouldn’t the norm become proactive?

Let modern computing power do the work, directing the wealth manager to focus on the critical client and investment issues, and providing the insight and potential solutions to enable them to make the appropriate decisions. One example of this is to systematically monitor all portfolios under management as part of the nightly process, alerting the wealth manager to those that require priority attention. This can be looking for breaches of defined criteria such as asset allocation drift, risk boundaries, over-concentration, but can ultimately extend to any properties of the portfolio (e.g. insufficient cash forecast to support fees or income payment). With MiFID 2 proposals in mind, this approach could also be used to monitor performance on a continuous periodic basis.

The proactive approach can yield a number of benefits. Wealth managers can be immediately notified, at desk or away from the office, of the portfolios that contain exceptions and are in need of evaluation – enabling them to act in the moment rather than wait for the situation to potentially get worse by the next scheduled review. In addition, time can be focussed on the clients’ investments that need it most, being more responsive to suitability, putting the customer first, and ultimately facilitating the wealth manager to manage more portfolios.

Do more

Taking this process a step further, automated workflow can be used to enable the wealth manager to immediately address those issues that they have been proactively alerted to. In the case of asset allocation drift this could display the portfolio’s current distribution vs model, highlight the outliers, and propose the orders required to bring the portfolio back in line, automatically factoring in the individual’s circumstances such as trading restrictions, cherished holdings, CGT restrictions etc. To ensure compliance all actions and data can be systematically tracked and captured in an audit trail.

Investment rationale is another area where the technology can really lighten the burden on the wealth manager, whilst improving the client experience and ensuring regulatory compliance…but I will explore that in more detail in a future post.

Computers won’t always have the complete answer, however technology can undoubtedly alleviate a lot of the previously manual tasks and help direct the wealth manager in making the right decision with greater efficiency and consistency. A lot of the technology that forms the robo advisor’s DNA can also be used to significantly improve the human advisor's way of working.