Wealth and asset managers look to innovate as playing field shifts

Regulators continue to define new requirements     |     ESG – beyond products and into the value chain     |     Managing change to merge workforces and new technology

Increased regulatory scrutiny. Changing client expectations. Pressure on fees. Rising expectations for sustainable investing. Demand for digital products and customer-centric services. Reshaping workforces and cultures. Today’s wealth and asset management businesses are enduring an array of challenges that will compel them to accelerate innovation in ways that ensure their competitiveness – even survival – in the digital era.

While we are seeing a few ‘front runners’ generate significant progress in today’s increasingly complex global marketplace, there remains a clear – and pressing – need to expedite sector innovation for the digital era.

Fast-evolving competitors and bold new market entrants are differentiating themselves and gaining market share via investment in digital innovation and a focus on client-centricity. As the front runners embrace technology as never before to gain competitive advantage, their success is prompting more firms to pursue new digital capabilities that will optimize operations, streamline operating models and promote the rapid launch of new products, offerings and client-centred services.

This is the age of the customer and regulators are becoming increasingly explicit about ‘duty of care’ requirements, directing wealth and asset managers to place greater emphasis on the interests of their clients. While strong governance and good conduct have long been regulatory imperatives, duty of care is now in sharp focus as regulators require businesses to place client interests before their own. Regulations are thus increasing the need to embrace game-changing technology and scalable connected models that unlock smart data use and heighten engagement with clients.

This trend began in Europe a few years ago with the introduction of the Markets in Financial Instruments Directive (MiFID II), then quickly spread to other developed markets around the world. MiFID II is widely regarded as perhaps the largest and most-significant regulatory initiative undertaken by the European Union since 2008’s financial crisis prompted MiFID I. 

In Europe, the UK’s Senior Managers and Certification Regime (SMCR) has been extended from banks to include asset managers, with the UK’s Financial Conduct Authority noting that business culture and governance are “pivotal to building public trust and confidence in the UK’s financial services industry.” The SMCR is a key tenet of the FCA’s drive to cultivate appropriate behaviors, aiming to reduce harm to consumers and strengthen market integrity. Due to the impact of Covid-19 on firms, the FCA has extended the December 2020 deadline of certain SMCR requirements until 31 March 2021.

In the US, meanwhile, Regulation Best Interest (Reg BI) under the US Securities Exchange Act of 1934 establishes a ‘best interest’ standard of conduct for investment firms when making recommendations to customers on transactions or any investment strategy involving securities. It establishes a new standard of conduct, beyond existing suitability obligations. As well, the 2020 examination priorities of the Office of Compliance Inspections and Examinations of the US SEC reflects familiar themes, including protection of retail investors and the adequacy and accuracy of disclosures concerning fees, services and expenses.

In Australia, a landmark report by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry concluded that supervision must be extended to non-financial risks related to culture, governance and remuneration. Financial services firms operating in Australia must thoroughly assess their culture and governance, identify and deal with problems, and measure whether changes implemented are proving effective. The requirement to assess whether change initiatives are indeed proving effective is a game changer and a significant challenge to the industry. The Australian government has signaled that restoring public trust in financial institutions will be one of its guiding principles in responding to the recommendations.

In Canada, the Canadian Securities Administrators (CSA), which includes the Ontario Securities Commission, has published rule amendments to implement client-focused reforms based on the fundamental concept that clients’ interests come first in their dealings with financial firms and advisors. Firms will also need to do more to clarify what customers can expect from them in terms of products and services and provide more-precise information about costs and risks.

Beyond the demands of the regulatory realm and the focus on risk and duty of care, public demand for responsible investing has moved environmental, social and governance (ESG) factors firmly into the mainstream, prompting more firms to invest in critical new digital capabilities that include data analytics tools and new customer-centric services and channels.

Today’s investors want to balance risk and return with ‘doing the right thing’ and they are increasingly keen to understand the impacts and social benefits of every dollar they invest. As younger generations become more active in the market, demographic shifts are creating a growing community of responsible investors – and asset managers see ESG and responsible investment as a smart way to achieve competitive advantage.

As a result, the sector’s business leaders are taking a far more proactive role in positioning their firms to innovate and embed responsible investing practices not only into every investment product but ideally into their corporate cultures and end-to-end value chain. The trend is serving to filter out less-responsible companies. But the critical challenge along the way is to balance the simultaneous pursuit of financial and non-financial benefits – profitable investment returns versus tangible ESG impact.

This balancing act is one that we see more and more investment managers addressing today as they look to incorporate sustainability into everything they do. Responsible investment has become key to the strategic agenda and in the wake of COVID-19, this trend will be further enhanced, not diminished.

The race is on to create innovative products, solutions and operating models that cater to and anticipate today’s evolving customer expectations. Forward-looking businesses are looking, as never before, at products, services, fees, digitization and automation through the lens of the customer to create a competitive new holistic experience for clients.

More firms are wisely pursuing smarter use of customer data, game-changing cloud capabilities and increasingly sophisticated automation tools such as artificial intelligence and robotics. They are also developing ‘centers of excellence’ to dramatically enhance client centricity, cost and service efficiencies, trading processes, investment performance monitoring, research models and more.

While the need to heighten reliance on new technology is critical, so is the need to integrate new technology with existing workforce capabilities that have delivered years of trusted experience and client service on a person-to-person basis. Enabling employees to embrace and implement enterprise-wide change is essential to success and more businesses are wisely exploring how best to ensure their employees feel both supported and properly skilled for new ways of working. As business models evolve so must workforces and mindsets. For many firms, this change-management piece is posing significant challenges that will demand strategic solutions and dedicated programs. 

Today’s wealth and asset management sector must act now on change that is inevitable for growth and success in a new era. Ultimately, holistic organizational change demands a clear and precise corporate strategy. Here are a few key questions that today’s business leaders should be asking themselves:

• Does duty of care take precedence across our organization today: at all levels, in all our activities and in all business decisions?
• Are we challenging ourselves on the value we provide for our investors and whether our disclosures are transparent and meaningful?
• Have we developed a robust ESG strategy to truly meet marketplace expectations and demands?
• Do we possess the critical insights and guidance needed to choose and implement technology that will effectively reshape our business and prospects for competitiveness and success?
• Do we have an effective strategy to manage workforce change in ways that appropriately integrate our people and technology?