Wealth management in the age of analytics: The challenges and the opportunities

By: Chris Mak, Technical Architect, Financial Services, SAS Canada

In 2014, Canada’s Anti-Spam Legislation, or CASL, came into effect. It was a sea change for online marketers, demanding wholesale changes in processes and procedures, and the validation of relationships between companies sending e-mail offers and the consumers they were targeting. The wealth management industry faces a similar disruption in the form of the Client Relationship Model Phase 2 (CRM2), a regulatory change under the supervision of the Canadian Securities Administrators and being phased in over a multi-year period.

For example, in July 2014 the Ontario Securities Commission (OSC), required wealth management firms—including banks, mutual funds, and independent advisors—to provide pre-trade disclosure of transaction charges and report on compensation from debt securities transactions. In the summer of this year, phased in a requirement to provide expanded reporting of the consumer’s cost position. By July 2016, the industry will have to provide even more detailed reporting on compensation and performance of customer portfolios.

Current reporting provided by most advisors, details like fees and genuine performance, as opposed to performance that includes new contributions to the portfolio, are obfuscated. In Canada, frankly, we’ve trailed Europe and the U.S. in terms of transparency of portfolio reporting. CRM2 helps bring Canada in line with those other jurisdictions.

Of course, it’s a material challenge in terms of data management and dissemination. What’s more, it’s not the only wind buffeting the wealth management industry. Three trends pose potential competitive challenges to the wealth management firms:

* CRM2. We’ve outlined the data management and reporting challenges above. More specific detail can be found on the OSC Web site. As the management fees are more clearly disclosed, demand from clients to justify the advisor and/or product fees will be more pressing on the industry.
* The rise of “robo advisor” services in Canada. These automated services—from companies like Wealthsimple, Wealthfront, Nestwealth and Assante Asset Management—help portfolio holders with basic asset management tasks at a lower cost than consulting an advisor. They have been gaining popularity in the U.S., and though Canadian conservatism has made the uptake slower here, the trend is beginning to gain traction. The Bank of Montreal is one of the first financial institutions in the country to recognize the trend, creating its own automated advisory service. This model could erode the business of traditional advisory firms.
* More technologically-savvy customer base. Clients want a more automated, do-it-yourself approach to managing their investments. After all, online investing has been part of the wealth management landscape since the dotcom days with the rise of self-directed investment firms. But perhaps more critically, they are expecting science behind their investment advice. “Prove it” is the portfolio-holder demand. “Trust me” doesn’t cut it anymore.

These trends are changing the role of the financial advisor, especially those newer to the game. As Kendra Thompson wrote on the Accenture Capital Markets blog, advisors with less than 10 years under their belts face different demands than established advisors with long-term clients. The junior advisors are more likely to have clients question their fees, provide digital tools their firms don’t have and demand a social media presence. They’re also twice as likely to see online investment management as a threat to their business.

There’s an increased demand to meet regulatory reporting for CRM2, increased automation options via digital online robo advisors, and increased technological savvy customers. While these all loom as potential threats, if you look at the technology that’s driving those trends, opportunity knocks.

* Increased data collection. The volume of data that we create and capture increases logarithmically year over year. The wealth management industry has been capturing structured transaction data for years, while relying on analysts to predict the impact of non-structured data—political events, weather variations, natural disasters, and more. Now, with a near boundless range of information sources that contain this unstructured data—social media, web sources, text—and the ability to incorporate them into an analytical model, there’s more science than ever behind asset management decision-making.
* Processing power. All that data only becomes useful if it can be processed in a timely matter. Fortunately, Moore’s Law—the one that says the power of technology will double every 18 months, while its cost declines—is marching on uninterrupted in the fields of data storage, processing and networking. The deluge of data can now be processed in near real-time using Big Data technologies for further insights that traditionally was nearly impossible to process.
* Analytics tools are becoming more democratized. They’re no longer the exclusive domain of the IT department or in the case of the investment industry for the use of the analysts. In the past, business experts designed models while the advisors built the corresponding queries for reporting purposes. Now, with visual analytics tools and accessible graphical user interfaces, advisors along with their clients can run their own models against the data, eliminating possible disconnects between modeler and query designer.

These technologies allow advisors to turn the burden of data collection, disseminating and reporting for the purposes of CRM2 into the opportunity to add value to the relationship with the customer.

The advisor community can leverage analytics to provide additional value to their clients. The power of these tools can provide as many value-adds to the client relationship as the advisor or the firm can discern from the nature of the data they hold. For example:
* Comparing real performance—internal return not including deposits—against industry and economic benchmarks.
* Modelling overall portfolio performance such as impact of individual asset class performance. Impact of investing certain asset classes in registered vs non-registered investment accounts. Or perhaps forecasting scenarios that involves the impact of contribution frequencies.
* Perhaps most significantly, optimizing the asset allocation of a portfolio based on life events. Depending on the age, demographic and situation of the client, how do you best invest their money? Are they just out of school and saving for a car? Planning to buy a home, or move within a few years? Planning on retiring? Advanced analytics can help forecast for short-, mid-, and long-term strategies that can help accomplish their life goals. Applying optimization algorithms for asset allocation mix can be a valuable tool during the investment lifecycle of the client. These capabilities compliment the trust factor earned by the advisor. The two-pronged offer of trust plus technology becomes a differentiator. Analytics can automate many of these value-added processes. But the trust factor is a baseline to which analytics adds value. An advisor that knows a client’s life situation can use analytics to make better decisions for them.

So CRM2 forces wealth management advisors hands in one way—demanding more transparent reporting based on more data—while offering an opportunity on the other hand. The advisor community is collecting, analyzing, reporting, slicing and dicing this data anyway. Why not turn it into better outcomes for your client and as a competitive differentiator and value add?

About the author

Chris Mak is a Technical Solutions Architect at SAS Canada and has spent over 15 years in various capacities in technical consulting, project management and knowledge transfer. Chris' extensive client base experience ranges from retailers to manufacturers to financial services organizations across North America. He has served each client by relating the value of technology to solving a business problem, but more importantly tying it back to business value. Chris draws on his wealth of experience, innovative ideas and expert technology skills to architect, to design leading edge solutions.


Read More