In November last year, Pictet & Cie, one of the world’s larger private banks, with more than SFr365bn (E235bn) in assets under management and custody announced its decision to implement a wealth management platform from technology vendor Advent Software.
While the solution’s integrated portfolio and client relationship management capability was the main reason for Pictet & Cie selecting it, the platform’s enhanced compliance ability too helped influence the decision to go with Advent.
Daniel Ericsson, director of solutions management at Advent remarks: “Over the past two years there has been an increasing focus on compliance among wealth and asset management firms. It is a key deciding factor while selecting a technology platform.”
Regulatory burden
Some of the reasons behind this enhanced focus on compliance, he says, are the need to reduce operational risk as in the case of Pictet & Cie and end client demand.
Regulatory pressure too is a prime driver. There is a wide variety and ever-increasing of regulations around the world that wealth management firms and private banks need to comply with today. These include generic regulations such as know your customer (KYC) and anti money laundering (AML), as well as market-specific ones such Europe’s Markets in Financial Information Directive (MiFID) and Sarbanes Oxley (Sox) in the US among others.
According to local media reports, towards the latter part of 2008, the China Banking Regulatory Commission (CBRC) issued a notice to strengthen its regulation on wealth management products issued by banks in China. This move, it seems, followed on from an increase in customer complaints and disputes regarding new financial products that have recently entered the rapidly changing Chinese economic market.
“Reputation risk is perhaps the highest risk for wealth management players today. Thus, wealth managers have to ensure and contribute actively in the prevention of money laundering,” says Michel Longhini, Head of BNP Paribas Wealth Management International. Suitability too is a major issue, he adds.
Regulations such as MiFID have suitability as a key tenet to enable investor protection, which involves ensuring that investments recommended are appropriate for the individual client situation and risk tolerance.
Meeting requirements
Wealth management firms have in recent years invested in a wide variety of technology solutions to meet compliance requirements. These include trade compliance systems, usually a part of order management systems, that ensure that trades placed do not violate regulatory or ethical rules.
Operational risk compliance solutions form another group of platforms that monitor compliance with firm wide directives such as business continuity and regulatory requirements such as Sox. Then there are pure wealth management compliance systems that ensure among other things that suitability norms are met.
Email retention and surveillance systems, document retention systems, internal audit systems and AML solutions too fall under the compliance umbrella.
Early this year, Ziegler Wealth Management, a full service regional broker-dealer based in Chicago, announced that it had deployed technology vendor, SunGard’s surveillance solution across approximately 100 of its financial advisors, regional sales supervisors and branch managers in an application service provider (ASP) environment.
The solution aims to help Ziegler control internal and regulatory risk by proactively pinpointing questionable transactions and positions, improving field supervision processes, and keeping pace with regulatory changes.
Financial industry research firm, Celent, had in 2007 forecasted that the US market for automated wealth management compliance solutions would grow from $178m (E129m) in 2007 to $318m in 2011.
While these predictions had not taken into account the financial crisis which has let to a substantial reduction in IT budgets, Robert Ellis, senior analyst at Celent and co-author of the above mentioned study, says that investment in compliance has not reduced.
In fact, pointing towards the results of a survey carried out in January this year by Advisor Perspectives, a US firm serving the financial advisory industry, he states that technology investment in compliance in the US has in fact increased and a similar trend was evident in Europe and other parts of the world as well.
“MiFID is the main driving force behind the focus on wealth management compliance in Europe. In the US, it is regulation as well as scandals such as the Madoff issue that are driving investment in compliance technology,” says Mr Ellis.
The survey by Advisor Perspectives of independent registered investment advisors (RIAs) revealed that the Madoff scandal, where Wall Street financier Bernard Madoff swindled investors of up to $50bn, has sent shockwaves through the investment community, eroding client confidence and refocusing advisors. As a result, say Advisor Perspectives, compliance is poised to drive many technology decisions in the coming year.
While an average of one-in-four survey respondents said that they expect to spend more on compliance in 2009, that number came closer to one-in-three for firms with AUM of greater than $1bn. Larger firms, or those that manage wealth for ultra-high-net worth clients, said the survey, will be spending more in anticipation of a new regulatory environment and increased scrutiny related to due diligence on alternative investments such as funds-of-funds.
