The wealth management industry has been undergoing a global transformation due to a variety of forces, including:

• heightened regulations brought about as a consequence of losses after the financial crisis and the Madoff scandal;
• the end of tax arbitrage and the old offshore banking value proposition;
• the continued increase in transparency and the proliferation of technology that expands information and knowledge to wealth holders of all sizes.

In a sense it could be said that ‘equal opportunity’ is becoming the norm, and new vehicles have made it possible for just about anyone to access a variety of financial products to express their investment views globally. Technology has enabled insight into investment ideas and opinions like never before, and as such the price that people are willing to pay for advice, which appears ubiquitous, has been put under pressure. As in everything, the maxim ‘you get what you pay for’ applies, and oftentimes ‘cheap’ advice leads to very expensive outcomes. The other issue is that with this abundance of information, it is becoming more challenging to sort through the noisy distractions and identify what is useful, and then to apply that useful information wisely to achieve one’s objectives.

‘Weaponised’ finance
There are also a whole host of other systemic factors existing today that are driving returns on capital in a different way than in the past. Global economies are still at a significant crossroads. Developed markets are facing sluggish topline GDP growth challenged by the deleveraging of ageing populations. But also, proven technology is being applied in new ways, creating tremendous wealth in record time.

Technology has enabled insight into investment ideas and opinions like never before

The formation of new companies and their path to enormous profitability is occurring faster than at any time in recent history. Core emerging markets are facing a deceleration in their old export models and in some cases the slowing economic growth has revealed government corruption, inefficiencies, and imbalances leading to social unrest and civil wars. On the other hand, second-tier emerging markets, or frontier markets, are accelerating their growth supported by exceptional demographics and the liberating introduction of powerful technology.

Despite sluggish topline growth in developed market economies, especially relative to certain emerging markets, developed market equities have materially outperformed the rest of the world as corporate boards use the abundance of banking system liquidity (originating from QE – quantitative easing) to finance share repurchase programmes and M&A activity. Every day our mobile device newsfeeds announce at least three significant global M&A transactions. The rising tide of global QE has lifted all the risk boats since the bottom of March 2009 when the markets were pricing the end of the financial world as we know it.

Since then, the intervention of central banks around the world has distorted the markets’ ability to price risk and has reintroduced a moral risk to investors again. The same abuses that were vociferously disparaged by governments towards corporate CEOs – greedy use of leverage for self-interest and reckless abandonment of risk controls, etc. – seem now to be embraced by many governments themselves in a desperate effort to stimulate job growth and buy votes in a structurally challenged world. Shareholders put pressure on corporate CEOs to ‘buy’ their support by growing earnings. Democratic governments feeling the same need to please their constituent, and are pressured to create jobs.

Furthermore, the ‘weaponisation’ of finance has become the new policy tool for governments around the world trying to influence foreign policies through the use of economic sanctions, fines and penalties imposed by governments, especially in the US. Foreign banks doing business globally are subjected to US laws, because they do part of their business in the US and trade in US dollars. At the time of writing, BNP has just agreed to pay a record $9bn fine and will suspend its ability to trade in USD for certain countries that are subject to certain US sanctions. Digitalisation of finance is in part that which is enabling the discovery of global financial records and the ‘weaponisation’ of finance in foreign policy. Years before this explosion of information, secrecy could be maintained. This is no longer the case.

The ramifications of the digital revolution in the private banking/wealth management industry are profound and will likely have an impact over many years to come. This has lead to and is responsible for three major trends:

• increased global transparency and levelling of the playing field;
• margin pressures for advisors;
• higher demand for customisation of investment solutions.

Increased global transparency
Computer-based record keeping is now helping governments to enforce their laws on financial assets outside their borders. The US law known as FATCA (Foreign Account Tax Compliance Act) requires the international banking industry to disclose more and more information to the US authorities. This is largely a mapping exercise to help the US authorities find global assets that it will apply a tax to in some form or another. Given the rising pressure on government finances (government debt-to-GDP is globally high and getting higher), we should expect other countries to follow the US in adopting similar laws to effectively gather such information so that they can more easily apply taxation to their citizens’ wealth. The Russian Ministry of Finance has adopted similar approaches to tax undistributed profits of offshore assets controlled by Russians. Many other European countries are moving in the same direction. The banking industry, being globally regulated, has complied with these global reporting obligations, which has meant that within the industry, compliance, legal, and software/infrastructure investments are expanding significantly.

Information gathering costs are on the rise. Now, with secrecy a thing of the past, clients basically take the view that their assets are likely to be disclosed wherever they are, so they shop for a banking platform based on the value propositions of investment performance, efficiency in execution costs, service quality, customisation capabilities, and the safety/credibility of the institution and the jurisdiction in which it resides. Institutions that have the financial capacity to invest in the software and infrastructure to deliver better tools and embrace this new era of full transparency to their clients will continue to gain market share. Those that do not will lose their share.

Margin pressure for advisors
As a result of the diffusion of financial information globally (and tools for financial analysis), the wealth holder is empowered, but at the same time confused and overwhelmed like never before. This means that the old structure of the industry of intermediaries is under pressure.

Financial intermediaries used to exist because they possessed scale advantages in buying information and acquiring talent to interpret that financial information. Now, more and more clients are attempting to pick their own mutual funds, stocks, bonds, and ETFs without direct guidance from a professional financial planner. Many trading platforms offer sophisticated trading tools to small investors with as little as $5,000 in their account, and offer trading for $8 per trade. A majority of ‘day traders’ actually fail to grow capital and end up chasing hot momentum stocks based on CNBC reports, tips, tweets, and social velocity indicators only to find out that this approach is actually much more expensive than $8 per trade.

That said, the abundance of advice offered in digital channels means that old-fashioned advice is not something that many wealth holders want to pay for simply because this advice, in general, appears to be freely available. This change means that advisors need to be even more aware of their clients’ needs on a holistic level, by listening and understanding them better than ever before. Those advisors who can bring differentiated, tailored advice to clients and use technology to customise solutions will make gains.

Customisation of investment solutions
The one size fits all model is losing its edge. Large financial intermediaries need scalable solutions to apply universally to their client bases in order to have an impact on their own bottom line. Tailor made solutions are labour intensive and difficult to manage, as each one requires attentive professional service in the beginning and on an ongoing basis. Technology is enabling this to occur more effectively on smaller account sizes. Smaller private banking boutiques are gaining a natural advantage from being able to avoid mass-market solutions and apply creative service to a more focused set of clients. Those smaller banks/wealth managers staying true to customising, adopting, and using technology and tools in collaboration with clients will succeed in establishing strong and loyal client bases.

At the end of the day, the wealth management industry is still going to be driven by what drives all service-oriented businesses: trust. Trust is built on transparency, honesty, mutual respect, dedicated and talented employees, and ultimately sustainable and reliable performance. Reliable performance requires a sophisticated organisation that can interpret the complexity of dynamic global trends and apply this top-down judgement in recognition of bottom-up client needs and objectives. A client-centric mentality that is also profitable for wealth manager is crucial, because there is a requirement to continually invest in tools, technology, and human capital to enhance long-term client performance and satisfaction.