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The suitability race: how to drag wealth firms into the 21st century

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The suitability race: how to drag wealth firms into the 21st century

Financial Conduct Authority (FCA) initiatives are not necessarily the best way to keep abreast of what is current in financial circles, but the regulator clearly touched a nerve with its announcement in May of Project Innovate, opening its doors to tech finance firms.

With the aim of ensuring ‘the regulatory environment supported innovation’, and that ‘regulators were keeping pace with technological advancement and not playing catch-up’, the project was particularly welcomed by investment firms that have until now existed in a regulatory grey zone.

Companies such as Nutmeg, Money on Toast and Strawberry Invest have all demonstrably served FCA objectives, but until recently this was hazily defined by the regulatory framework and required guesswork about the limits of advice.

Rules of engagement

In addition to the FCA’s recent Advice Consultation, the project puts the new school of digital-first discretionaries on more solid ground, but leaves older businesses in a quandary about how to keep pace with the changing tides of client engagement in a digital world.

In a recent interview with Wealth Manager, Nutmeg’s chief investment officer Shaun Port asked: ‘How does a traditional wealth manager engage with their client digitally in the next five years? It will be materially different for the next five years than it was for the last five.’ 

In partial answer to his question, Port said his company was developing its own enhanced app. ‘Can you transact online, get information online and engage with your wealth manager online? For example, chat and get access to the person involved in your portfolio? This is not just passive information but engagement.

‘For us it is more than just an app. Some people want to know what their portfolio is worth today without downloading a PDF.’

While Nutmeg has positioned itself to appeal to a younger demographic, many more established firms face a challenge. They must keep up with the most tech-literate of their clients at the margin without alienating the late-adopting majority.

A report commissioned for London & Capital found just 17% of its clients wanted more mobile access to information, despite 71% saying effective client communication was important to hold on to their business. In addition, 43% wanted more manager engagement.

This is almost certainly subject to change, however. Research by PwC last year on US private client advice found that, among wealthy people aged below 35, online platform Mint was considered the leading ‘luxury’ finance brand, well ahead of the traditional wealth management businesses.

It added that the demographic hump of the baby-boomer generation meant this cohort was responsible for increasing levels of family wealth, with $41 trillion (£24 trillion) expected to pass between the generations during the next 50 years.

‘The question is not whether or not the baby-boomer generation adopts digital, but rather how firms deliver a sophisticated multi-channel experience,’ said PwC partner Arjun Patel. He added that in the US, mobile financial transactions were increasing at a compound annual growth rate of 116%. ‘Mobile support has rapidly changed from an optional to essential investment.’

This would be driven by wealth manager need for information as much as by clients’ needs, he said, both in terms of integrating market data with existing portfolio information and in ensuring managers had consistent and timely access to information on client circumstances.

Closing the app gap

This last point, tying in as it does with some of the historical challenges for UK wealth managers, would likely be one of the driving factors for take-up of app technology on this side of the Atlantic, said Steve D’Souza, managing director at wealth management outsourcing specialist Sales Kinetics and consultant to tech provider Wealth Dynamix.

He added that, in as much as it was commercially and technologically an imperative, several of the most significant recent contracts he has worked on have been motivated by wealth managers’ need to demonstrate and record their commitment to suitability.

‘That’s the biggest thing at the moment. They are apps you can show your client either before or during a meeting to prove you are meeting these responsibilities. It’s a way of verifying suitability and showing you are compliant.’

He said wealth managers now rushing to joining the app economy may soon find improvements in website interoperability may mean they are operating in a cul-de-sac rather than a superhighway, however.

‘The other biggest factor now is adaptive portals. A lot of big websites that have developed apps are finding they are able to tailor their existing websites for use on multiple platforms.

‘The original idea of an app was that websites optimised for computers didn’t display well on mobile. Now there is much less need to develop a separate programme because they can adapt what they already have.’   

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