Operating models struggling to cope

Wealth managers could be holding back on their take up of structured products because their operating models are ill-equipped in dealing with relatively sophisticated instruments. A study of the views of chief operating officers at top tier private client and private wealth managers found that the integration of structured products and over-the-counter (OTC) derivatives, presented “a massive challenge” to their operating model over the next six months. “The challenge of supporting derivatives, structured products, and alternative investments, is usually seen as primarily technical, and our respondents are certainly concerned about finding good systems to support their needs,” explains Miriam Edelman of investment consultant, Morse, and author of the study. “However, it is also clear that people are equally concerned about operational processes to handle these instruments and products.” According to the study, new instruments and new products were mentioned most frequently by respondents, and seen as the biggest challenge to the operating model. “Wealth managers, though believing their businesses understand the impact structured products will have on the operating model, have expressed concern about the latest products on the table,” says Ms Edelman. The study also canvassed the views of traditional fund houses and hedge funds. Some wealth managers identified issues around the sourcing of new products, and one manager noted the increasing range of types of structured products with “exotic settlement requirements” as influencing future changes to operational processes. A staggering 95 per cent of respondents expect changes to their operating model by third quarter 2008. David Couch, head of the wealth management practice, Morse, says he has noticed a sea change in what clients of wealth managers are demanding in terms of the latest structured products, particularly from ‘super’ high net worth investors. “As clients become more sophisticated and diversifying, they’re requesting more complex and esoteric products from their wealth houses. Clearly, the challenge for these funds is to avoid becoming hindered by having inadequate operating systems to cope with this new demand,” he says. Significantly, wealth clients appear less likely to be concerned by the two fundamentals which have so far hit the traditional funds base this year: the credit crunch and the economic downturn in the developed markets. “Super high net worth individuals have shown very little in the way of caution in what they are investing in, and with whom they place their funds with. When you talk to them, they all say they’re expecting their businesses to take advantage of the situation and to grow, independent of what’s happening in the market,” says Mr Couch. These findings make it doubly important that wealth managers have the right systems in place to cope with anticipated high demand for structured products, especially with exposure to alternative asset classes, says Ms Edelman: “Managers generally feel the business understands the operating model fairly well, and that they can handle the latest products. But once interest increases from clients, and they start putting significant volumes through, wealth managers may find that operating systems often don’t stand up to pressure.” Morse’s David Couch says that there is still wealth out there and managers expect businesses to grow: “When you talk to wealth clients, they are not set for a downturn, or looking necessarily at costs to the extent the mass affluent market is. They won’t be chopping or changing their manager roster and unlikely to quibble about fees, more important to them is accessing products and maintaining a healthy relationship with their manager”. Unease surrounding the parading of the latest structured products to clients hasn’t stopped RBS from entering the Japanese retail structured space for the first time. The bank has launched two structured bonds in Japan, part of the bank’s Structured Investor Products (SIP) offering. “We are confident the launch will act as a springboard to success in Japan for RBS's structured products offerings,” says Robert Begbie, head of RBS SIP.