FINcastle’s CEO Bevin Crodian Shares Thoughts in a blog contribution titled
Embracing Change:
Wealth & Technology

Bevin Crodian, CEO, FINcastle Consulting

With the entrance of roboadvisors, wealth management firms with actively managed products are forced to take a closer look at finding ways to reduce fees and automate reporting. The opportunity to gain a competitive advantage through a scalable and efficient technology platform has never been greater.

From the perspective of mass affluent investors, the wealth management industry is still considering the direction that the so-called roboadvisors will pull the industry.  A couple of items are clear though, which is that the roboadvisors are driving an increasing focus on fees and technology, and that this trend will ultimately trickle up to the higher net worth markets.  If nothing else, full-service providers will have to equal or exceed the client-facing technology of these new entrants, and full-service fees over time will have to move closer to those of the roboadvisors, at least for parallel products and services.  Specifically for the actively managed allocations of separate accounts, fees will likely come down substantially.

If there is a positive outcome that stems from this fee compression for wealth managers, it’s that the industry will likely take a renewed look at fees and may come away from it with a better sense of best practices and greater standardization. There has been so little attention paid to the accurate description of fees in the wealth management industry that some have claimed advisors themselves consistently underestimate the total fees being paid by their clients. The roboadvisors are sometimes equally unclear about the total fees charged to clients.  In fact, when many in the industry refer to fees, they are just talking about the advisor’s share, rather than the total cost of ownership.

A cost-effective strategy
Currently, the institutional channel is exploring multi-factor and smart beta investing.  This makes sense from the standpoint of finding ways to inexpensively gain adequate market exposure and risk control while still accessing the factors that tilt the portfolio toward alpha generation.  An important first step in this process is to view the total allocation as a bundle of factors.  In this process, the portfolio manager or manager of managers has to be able to look through the individual securities to their underlying factors.

However, this approach requires a lot of intellectual capital in the areas of market data, portfolio construction, implementation, and supporting technologies.  Managing this process is more readily achievable in the institutional channel because of the relatively smaller number of accounts that have to be managed.  Institutional allocations are often saved from the challenge of processing new strategies by this fact alone.  Fewer accounts allow cost effective human intervention.

This is not true in private wealth, however.  Assuming all other conditions being equal, the major problem in this channel is dealing with the scale created by managing thousands of accounts. This will require a specialized technology platform to provide low-cost management of these more complicated portfolios.  However, the larger issue may be in translating these portfolios back to the investor in a readily interpretable report, as doing so presents challenges in engineering and design.

From an architectural perspective, the bulk of the securities will need to be held in a single custody account, but the portfolio accounting and performance measurement systems will require the ability to hold subaccounts that can be combined variously, including rollups into a variety of report views.

The design challenge will be in constructing an intuitive user interface that can accommodate diverse client views of the portfolio’s performance, and doing so efficiently and at scale.  Also, the advisor dashboard controlling this reporting service will have to be highly customizable within compliance-approved constraints.

It is obvious that the observable trends toward increased automation and fee reduction for wealth managers are in place. The only real debate now is not whether fees must decrease while automation increases, but rather how quickly these changes are needed. Those that adopt a solution that fulfills these needs, coupling the right architecture with intuitive design, will enjoy a competitive advantage that pays dividends well into the future; those that don’t may find themselves on the other side of the technology revolution.

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