Toronto, Paris – The volume and pace of regulatory change is the single largest challenge facing wealth management firms due to complexity, lack of regulatory uniformity, the increasing costs of both compliance and non-compliance, and disruptions imposed on client experience, finds the World Wealth Report 2013 (WWR) from Capgemini and RBC Wealth Management. While many firms are making tactical investments to meet regulatory requirements, more strategic decisions will be key to enabling business transformation and future growth, while minimizing negative impact on clients.
"The financial crisis spurred regulators to take additional steps to ensure clients are well-served and that wealth management firms comply with regulations and enhance market integrity," says M. George Lewis, Group Head, RBC Wealth Management & RBC Insurance. "At the same time, the volume of regulatory change challenges firms to keep pace and limit disruption to clients who have come to prefer and expect a seamless and integrated approach to managing their wealth. Looking ahead, firms should aim to minimise regulatory impact on service levels through hiring and retaining top talent, investing strategically in areas including training and technology, and through embedding a culture of compliance within all levels of the organisation."
Compliance and the bottom line
Regional variation in regulation presents a challenge for global firms, impacting their ability to provide a consistent experience and standard of client service across jurisdictions. Some firms may choose to exit certain markets due to the cost or complexity of compliance, while small and mid-size firms will struggle due to lack of scale. The report notes that large firms, especially market leaders with strong reputations, will be able to better minimise regulatory impacts on clients and derive greater value from regulatory investments, while continuing to invest in other strategic areas**.
The long-term impact of new regulation will require wealth management firms to invest in compliance for years to come resulting in continued impact on already high cost-to-income (C/I) ratios*** and constrained profitability. Compliance costs are driven by investments in legal/regulatory expertise and technology infrastructure, while firms also feel the cost of lost revenues due to lower advisor productivity. In addition, failure to meet regulatory requirements creates a range of costs for firms through fines, legal fees and reputational costs. The WWR proposes that wealth management firms use technology as a lever to help reduce cost of service, particularly as clients are increasingly seeking access to digital channels and self-management tools.
Regulation presents risk and opportunity for serving wealth management clients
Regulation is impacting the overall client experience, requiring firms to ask for an increasing amount of client information and documentation, particularly in the on-boarding process, while also imposing significant pressures on the time wealth managers have available to serve their clients. The WWR notes that it will be particularly important for firms to minimize client burdens in the areas of on-boarding and advisory services in the evolving regulatory environment.
Many regulatory changes impact long-held operating and revenue models, leading firms to re-evaluate elements of their value proposition including the target client segments they serve and the markets in which they choose to operate. This could drive some firms to move up-market in search of better returns or leave the industry entirely, resulting in possible industry consolidation and/or narrower service choices for some HNWIs.
"One alternative to counter the high costs of compliance, while driving value for clients, is for firms to analyze and segment portfolios and customer preferences and re-align offerings based on complexity and level of HNWI servicing needs," said Jean Lassignardie, Chief Sales and Marketing Officer, Capgemini Global Financial Services. "For instance, clients in some wealth bands and geographies may be well served by more standardised services, while face-to-face advice may be predominantly limited for clients with larger, more complex portfolios."
Regulatory compliance is an opportunity for firm-level transformation
Many firms are making tactical investments to overcome regulatory challenges, while a more strategic and transformative approach could enable firms to derive greater value from regulatory-driven investments and differentiate against competitors. Key opportunity areas include Technology & Process (including client relationship management, reporting, process automation, and risk management); People & Culture (including wealth manager training and enhancement of legal and compliance expertise) and Client Communications (through establishing clear and transparent product and marketing materials as well as guidance in articulating regulatory requirements and impacts to clients).
"Firms that realign their operations to incorporate regulatory change on a strategic level, stand to gain the most both in efficiencies and improving their ability to meet or exceed client needs," says Lassignardie. "In particular, strategic technology-related investments offer opportunities to separate best in class players from others in the industry and have the potential to drive additional value for both firms and clients."
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