thewealthnet: the 'shock' that transformed wealth management

09 February 2016

Increased regulation was a necessary consequence of the 2008 financial crisis. It sought to stabilise markets, reduce financial crime and recover public confidence in an industry that had suffered its greatest fall from grace in almost a century.

But, in reality, it did so much more. It transformed the wealth management industry and generated a new breed of service provider in order to cope.

For the most part this has been a good thing. Clients have been repositioned at the forefront, with the majority of regulation focused on better meeting their needs. However, as firms struggle to comply with this recent and ostensibly relentless influx of regulation, there is a risk that they could lose sight of the end goal – or buckle under the financial pressures – Ian Marsh, the head of asset management at Stonehage Fleming, has suggested.

“We were not good enough as an industry at explaining to clients what we were doing. I’m afraid we needed the shock. Everyone in the industry has now got the joke. Perhaps not all of them are following regulation as diligently as they could be but it’s improving.

“Regulation has driven us to do things better for clients. Overall this has been a good thing and has taught us to be more careful. But it has also driven up the barriers to entry and has led to more mergers and acquisitions as firms struggle to cope with the financial and physical burden. I think we can expect this to continue; although ours is a fragmented industry and it’s toys and egos that are currently preventing it from happening more frequently.”

Speaking at a roundtable discussion hosted by outsourced services provider Multrees last week (02/02/2016), Mr Marsh said that the present regulatory demands could not be sustainable and called for a “comfortable middle ground”.

His sentiments echoed those laid out by FCA chairman John Griffith-Jones last November, when he expressed the regulator’s concern that firms are spending “too much time dealing with regulation rather than taking care of their businesses”. He said that in the long-term “wealth management businesses will flourish if they provide valued and trusted service, so there will be less regulation.”

Yet, while on the one hand heightened regulation has proven inhibitive and consuming for firms, it has also paved the way for innovation and economic growth within the wealth management industry.

Chris Fisher, Multrees’ chief executive, said regulation had been the catalyst behind the genesis of his own firm, which launched in 2011 to help wealth managers navigate new and changing regulation by providing administrative, reporting and custody services.

“The crash and increased regulation enabled companies like Multrees to emerge and focus on these pressures, allowing wealth management firms to concentrate on outcomes for clients,” he said. “We benefited from being a new firm that could react quickly to these incoming changes.”

As the landscape has grown increasingly accommodative for these new outsourced services firms over recent years, there has also been a marked rise in the number of wealth managers looking to them as a means of offloading regulatory and technological pressures. It was estimated by Compeer research last year that half of wealth management firms are now outsourcing an element of their operations, with a further 17 percent considering doing so in the near future (see thewealthnet 08/10/2015).

This is evidence of the changing face of the wealth management industry, GAM’s head of private clients and charities, Joe McLoughlin, said; but it’s also a promising indicator of its future. With greater facilitation services available, wealth management firms are increasingly able to return to their core processes: a reassuring prospect for both the regulator and clients.

“It’s important to pick your battles,” said Mr McLoughlin. “Firms should be focusing on the client and it’s about taking that step and realising what you are as a business and outsourcing what you’re not.

“It’s very brave but it’s crucial. Too many firms are trying to do it all and it doesn’t work. Clients will be reassured by seeing that there is a separate outsourcer in place, enabling you to stick to the knitting.”