Third party funds spark new systems

Visit the European HQ of any private bank and one thing is clear. Sumptuous surroundings are needed to maintain and attract the custom of wealthy individuals.

Occupying the most impressive buildings in the most expensive quarters of Europe’s capitals, it is easy to assume that a high percentage of private banks’ budgets are spent on keeping up appearances.

But the reality is different. “We spend far more on IT than rent,” says Marcus Gregson, chief executive of HSBC Private Bank in London, admiring the stunning lobby of his city centre offices.

Private banking has always been an advice-oriented business. But technology platforms are fast becoming the new foundations for today’s growing wealth management sector.

As the investment portfolios of high net worth investors get more sophisticated, the need for having the support of the latest technology tools is now greater than ever. Keeping a close eye on investment performance while controlling risk and ensuring fast and safe transactions is the key to success. And the only route to achieve this is by the total or partial automation of front, middle and back office tasks.

Significant investment

The recent growth in the sector has been accompanied by significant investment in software platforms that are allowing banks to obtain the information they need to give the best advice to their clients. “I think private wealth clients are becoming more demanding, asking for information and tools that were more part of the institutional world in the past,” says Neil Craddock, head of private wealth at consultancy firm Citisoft. Software vendors have responded to clients’ demands by developing a wider range of tools designed specifically to target the needs of the sector.

“There is a much better choice of providers now, and it will be interesting to see how things develop during the next year,” adds Mr Craddock.

“There are a number of niche players in the market that are becoming increasingly well-known, probably at the expense of some of their peers. There are also a lot of examples of software providers working together to integrate their products, particularly in the front office.”

Many organisations are finding themselves using ageing systems – in many cases inherited through the years as a consequence of mergers and acquisitions – that don’t support the latest software tools. Now these organisations realise they can’t wait much longer to update their platforms.

Also, recent growth in the sector has been translated into a certain degree of optimism, and technology is being considered as something essential to secure future profits.

‘It is very difficult for our clients to manage all those relationships and to know about all the systems available. We already have the knowledge’ Neil Craddock, Citisoft

‘We wanted to have a consistent way of looking at funds and selecting them from a quantitative basis’ Julian Soper, HSBC

First step

Talking to a specialised consultancy firm such as Citisoft is often the first step that banks take when considering improving their technology capabilities. “There are more than 150 providers in the market, and around 40 of them are specialised in wealth management,” says Mr Craddock. “So it is very difficult for our clients to manage all those relationships and to know about all the systems available in the market. We already have the knowledge about the vendors and the clients.”

Although the priorities of different organisations vary, relationship managers across the wealth management sector want to have more time to manage their clients’ accounts and spend fewer hours going through the very complex investment information they receive on a daily basis.

With this in mind, software vendor Brainpower recently developed a new tool to help those managing private client assets. The ProActiv tool, launched last year, is now used by several wealth management organisations including the private banking arm of Italy’s Banche Popolare Unite (BPU).

Andrew Cohen, director of business development at Brainpower, claims ProActiv allows managers to automatically monitor events affecting client portfolios, giving them the relevant intelligence needed to deliver higher quality investment advice.

Many accounts

Because private bankers need to manage a large number of accounts, they tend to spend most of their time focusing on their largest, revenue-generating clients. This means that providing advice to smaller investors is not always possible, resulting in accounts being inactive or only recording a very limited number of transactions.

“Our tool makes it possible for a banker that typically would focus on his top 20 clients, to actually be able to focus on all of his accounts,” Mr Cohen adds.

This can also allow banks to generate extra fees at a time where finding new routes for generating revenue is becoming a priority. “We are seeing a lot of clients trying to figure out how they can generate more fees,” he says. “By using this tool, they can become much smarter and more proactive in how they serve their clients and, in some cases, this is resulting in them being able to charge a new fee for this extra service,” Mr Cohen admits.

Whether they are looking for ways of generating revenue or just focusing on cost-effective solutions for the business, choosing a software provider requires taking into account a large number of criteria.

The two main ones seem to be the new system’s adaptability to the organisation’s business philosophy, and the quality of support during the implementation process.

HSBC Private Bank also chose Brainpower’s technology to develop quantitative third-party fund selection strategies to generate a recommendation list used by their customer relationship managers globally. The bank chose Brainpower particularly because it could help service geographically dispersed groups of users.

“In terms of the vendor selection for us, it is very important to have a system that we can roll out globally,” says Julian Soper, executive committee member at HSBC Private Bank in London, who was involved in the implementation of the software tool. “We wanted to have a consistent way of looking at funds and selecting them from a quantitative basis. We looked at the systems that were available and we decided to use the Brainpower tool, that is essentially a database with a search tool on top of it,” he adds.

‘You can’t offer your clients a wider range of products if you are not technologically ready’ Luis Moreno, Banif

Standard criteria

The next step for the bank was to decide a standard set of criteria to use when looking at funds using internal expertise.

“However this is only the quantitative side of things, but there are other elements that you can’t automate,” says Mr Soper. The private bank has a team that specifically focuses on performing health-checks on the funds and their asset management houses. “They make sure their control and systems are robust, so any fund we look at has to pass that hurdle as well. And then, and most importantly, we have also a qualitative layer, that involves the fund selection team meeting regularly with fund managers and tracking them down.”

Distribution of third-party funds has been one of the main drivers behind the need for more effective technology platforms.

“You can’t offer your clients a wider range of products if you are not technologically ready,” says Luis Moreno, general manager of marketing at Banif in Madrid, the private bank of the Santander group. “We were pioneers in Spain in introducing open architecture and in offering structured products and derivatives, and we know that adapting your systems is crucial.”

Banif’s approach to technology does not follow the outsourcing route. “We have invested significantly in first deciding what it was that we needed. We also spent a lot of time and money in finding out what was available in the market, and finally it took us also a long time to implement the solution that we chose,” Mr Moreno explains.

The solution was one developed internally at the bank. “We saw a lot of tools from software providers but we decided to develop our own in-house platform,” says Mr Moreno.

Being part of the Santander group meant Banif had access to the group’s extensive IT department, tasked to generate a solution adapted to the bank’s specific needs.

In-house solutions

The results were so satisfactory, says Mr Moreno, that some of the solutions were implemented in other companies within the group. The fund selection solution, for instance, was key in the process of creation and consolidation of Allfunds Bank.

“By definition, some of the technology platforms available in the market are designed to be suitable for different clients in different countries. The cost of developing these platforms is so high that is only efficient when you know you can sell them to a large number of clients. In Spain there are not enough clients for those companies to develop platforms adapted to the Spanish market,” Mr Moreno explains.

Complex issues

“Private banking is a very complex area, because you are not just talking about financial products and information. We are also talking about extremely complex fiscal issues that are constantly changing,” he adds.

Mr Moreno explains that having their own proprietary platform allows Banif to make the changes they require when they need to, instead of depending on the support of a software vendor.

“Calling your software provider every time you have a problem or you need to update something carries a cost, and fosters a dependency that could be described as dangerous,” he says.

Mr Moreno says he is not against outsourcing and using software from external providers, although in this particular case keeping things in-house proved to be the best option.

“I don’t think outsourcing everything is good but doing everything in-house is not good either. You need to find the balance,” he adds. “It is difficult to set up standards but I really believe technology is a differential element with your competitors and it is good if you can have your own.”

Changes in regulation and taxation, along with the need for higher quality automated processing of trades (see box), will be other aspects that will force the sector to invest more in technology to reduce future costs. These developments will help wealth management companies focus on building relationships and increasing profits.