Liew Nam Soon: Challenges provide opportunities to innovate.

The recession may be key to much needed change - Ernst & Young explains why.

The global financial crisis in 2008 has accelerated wealth management client demands in the areas of transparency and simplicity, robust risk management practices and service quality.

As a result, wealth management firms - from universal banks with mass affluent segments to pure play private banks - are now emphasizing on improving operational capabilities, ranging from cost management to compliance to customer service and experience.

Yet, there is a lot of legacy to overcome. The lack of integration in processes and systems built up over the years, and the under-investment in operating and technology platforms have made it all the more difficult to achieve operational efficiency gains.

The key operational challenges that plague most wealth management firms are primarily in the areas of structured products processing, credit monitoring, straight-through processing (STP) and data management. These challenges, however, also provide opportunities for these firms to innovate and differentiate themselves in the competitive wealth management marketplace.

Figure 1: Key challenges and opportunities for improvement for wealth management firms

Improving support for structured products processing

Both the structured products order processing and product life cycle tend to be highly manual and require extensive reconciliations. In most wealth management firms, these pose efficiency and operational risk issues.

With proper investment in system automation of order processing and settlement, this can yield tremendous efficiency gains to the organization. And in the area of corporate actions, counterparty and market systems integration can also greatly generate business value-add. A number of firms have already begun to implement systems with built-in support for fixing, maturity settlement, fees and billing.

Implementing a credit monitoring framework

Recent events in the global financial markets have also highlighted the operational and financial risks, as well as client issues resulting from the lack of a robust credit monitoring framework.

Figure 2: Credit monitoring framework

There are therefore significant benefits in implementing a robust and comprehensive credit monitoring framework that supports credit monitoring and collateral management. In particular, this framework should provide the ability to manage multiple credit lines against a pool of mixed collateral of different lending-to-value.

Integrating platforms that support different customer segments

In more recent years, many universal banks have been evaluating the feasibility of operating a common platform or employing greater integration to service both the high net-worth and retail mass affluent segments. As a result, additional capabilities around customer and opportunity management functionality for mass affluent clients, and portfolio management and client statement reporting for high net-worth individuals, are being built on top of existing platforms to support the unique requirements of these two segments.

To a large extent, the effectiveness of such a strategy depends on the degree of its differentiation in terms of service and product requirements. This applies from front office functions such as sales and marketing, customer management, portfolio management,  to middle-to-back office operations including credit management, corporate actions, fees and billings, and client reporting.

Regardless of common or specialized platforms, these wealth management firms will benefit greatly from the consolidation of customer and security data repositories through integration and improved data management policies.

Strengthening the Advisory Framework

Aside from the key operational challenges identified above, there has also been an increase in risk and regulatory pressure on firms to review the advisory framework to address key issues like mis-selling, cross border businesses, fraud management, as well as portfolio management.

Emphasis has generally been in the:

• Operational process improvement initiatives that ensure the proper disclosure of product complexity and risks to clients and also to provide a reasonable basis for product recommendation
• Sound analysis of and creation of a cross-border framework, providing products and services that are compliant with regulatory and tax-law requirements
• Implementation of proper operational risk management and controls to ensure a culture of high risk awareness, good governance and compliance

This article contains information in summary form and is therefore intended for general guidance only.  It is not intended to be a substitute for detailed research or the exercise of professional judgment.  Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this article.  On any specific matter, reference should be made to the appropriate advisor.