Big names in the US wealth management and family office sectors discussed technology implementation methods at a conference organized by Family Wealth Report last month.

The topic of technology in the wealth management sector – an industry built on trust and demonstrated success – has come to the fore in recent years as firms face a raft of choices and dilemmas when thinking about how they should innovate.

There are several forces at play, including shifting investor demographics, the regulatory landscape and issues around cost-to-serve, with family offices, RIAs and private banks each having to addresss their own unique set of needs and requirements.

With this in mind, industry executives discussed five common technology adoption methods used by wealth managers at the Family Wealth Report Summit in New York City last month.

Chaired by Stephen Harris, publisher of this publication, the panel consisted of: Jason Brown, chief executive at Archway Technology Partners; Charlie Carr, executive director of private client services at EY; and Michael Cole, president at Ascent Private Capital Management.

Build versus buy

The first question thrown to the panel was: Are there any firms today with such specialist needs that cannot be provided by an “off-the-shelf” solution?

Cole of Ascent tackled this question first by highlighting that how firms across the wealth management sector create and deliver their client experience varies greatly, resulting in a strong desire for front-end customization – the interface that clients actually see. Back-end and middle-office systems can be more off-the-shelf, he said, noting however that legacy assets and systems often need to be “cobbled together,” which requires customization.

But there seems to exist, at times, a "psychological bias" toward bespoke technology in the industry, it was said. In an attempt to unpick some of the reasons for this, Carr was asked to state what he sees as the main dangers of proprietary technology builds, and whether wealth managers are cognizant of these.

“The problem is that, if you build it, you have to support it – it's not a one-off expense,” Carr said. “One of the families I work with built their solution 20 years ago. They grudgingly acknowledge that they've fallen behind, but they've continuously enhanced it. They don't want to know how much they've spent on this system over the years. They've invested so heavily in it that it would take something incredibly compelling to get them to walk away from it.” Time spent on maintaining legacy technology systems could, or should, be better spent on other crucial areas such as helping to keep the family's mission alive, he said.

However, part of the reason why there is an industry bias around build relates to the quality of client service from vendors, Carr added. “That is a huge issue,” he said. “Families are saying vendors are slow to return their calls, and are receiving inconsistent information after talking to two different people.” In some cases, they therefore decide to go and build their own solutions, which is not the right answer as “they're compounding their problems,” according to Carr.

Upgrades

Technology upgrades are clearly necessary for a lot of firms in order to cope with the changing regulatory landscape, as well as innovations in the mobile sphere and greater expectations around performance reporting, to name just a few driving forces. So what kind of upgrades are firms focusing on today?

“I can certainly speak about what they should be working on,” Carr said, “and that's security. We have not hit the peak of that conversation yet – we're probably still a couple of years away from that.” Indeed, during the very week of the Family Wealth Report Summit the global technology giant Apple was hacked. “Right now families should be focusing on that, and ensuring they have a chief security officer,” Carr said. Some families are even refusing to work with firms that don't have a full-time security professional on-hand, he added.

Besides security, Carr said he'd like to see vendors spending more time focusing on their ease of use. “That's another huge issue, and one of the reasons why families are opting to build their own solutions,” he said. Still, the panelists acknowledged that the industry by and large continues to be hampered by issues concerning legacy systems and poor technology integration, which can negatively impact a firm's ability to upgrade its technology.

“Having worked for three large financial institutions that have grown up through many years of mergers and acquisitions, there is this 'potpourri' of technologies that are disconnected at some firms,” Cole said. It can be very hard to move away from this, particularly among firms that have a “better the devil you know” mentality. There is also the simple issue that people get used to a certain way of doing things, which is compounded further by fears of the costs associated with change. “We've had to implement a budget for upgrading and changing technology,” Cole said. “That is something that firms like ours didn't do in the past.”

The panelists then considered the governance element of technology implementation and upgrades, thinking about, for example, how many firms even have a CTO on their board. When it comes to talking about technology-related issues at the board level, a number of factors need to be addressed, and efficiency isn't always one of those, Brown said. “Technology shouldn't narrowly be viewed as 'this is something that is going to completely automate my office'. It often brings its own challenges that need to be accounted for,” he said, adding that technology can in fact increase certain aspects of cost in some cases. “Taking a holistic approach to understanding the sleeves of value that technology can bring is the most effective way of explaining why something should be adopted.”

Likewise, Cole noted that technology issues raised at the board level are no longer centered solely around creating efficiencies, but are equally focused on protecting clients in different ways, while keeping in mind the impact of regulation. “It's complex because it's an escalated spend, but one that isn't necessarily boosting productivity,” he said.

Licensing

The wealth management technology sector has matured significantly in recent years and many firms have garnered extensive expertise from their work with clients. The panelists were asked how much value they believe there is for wealth managers in accessing this kind of expertise today.

One of the benefits of this industry is that it's small, Brown said. “It lags behind nearly every other sector in how technology has evolved to support businesses. But the reason I position that in a positive light is that we have the benefit of observing other industries that are far more technologically mature as a roadmap for our own future.”

The private wealth management industry has three forces working against it that has resulted in a lag in technological innovation, Brown continued.

Generally speaking, for vendors to commit resources into technology advancement for any industry, the industry has to first be large enough to be able to produce a meaningful ROI for the vendor. Second, clients have to be willing to pay for those solutions, and, third, clients in the space have to do things in a consistent manner. “These are not three hallmarks of the private wealth management industry. This is an industry that is very confident with the way you do things, and that translates into not always being open to new ways of doing things,” Brown explained.

This certainly doesn't mean that technology is not evolving in the space, it just means it has been slightly slower compared to larger, more homogenous, industries, he said. The consolidation of cross-functional vendors in different technology disciplines is a positive trend, Brown added, as the wealth management industry can benefit from the experience of others and, by adopting those technologies over time, costs will come down.

Outsourcing

Research by sister publication WealthBriefing has found that two-thirds of firms expect their spend on outsourcing technology solutions and hosting to increase in the next three years, and a big part of this relates to costs and speed to market, according to Cole. “Building technology and creating infrastructure within a firm to build technology is extremely costly,” he said. “You can be prone to lots of errors. If you have to build it yourself, you have to make huge capital investments upfront, and that takes a lot of time and energy and expense that's not scalable.”

But the sheer number of vendors with distinct areas of expertise makes it challenging for firms to fuse together the services they each provide. “The key issue is how to build a front-end interface that integrates all the outsourced vendors together,” Cole said, adding that he sees a need for more proprietary technologies.

On a slightly different note, Brown agreed that the outsourcing trend has leveled the industry playing field, allowing others to enter the space and compete. “To truly address the control and security requirements today would be enormously costly for one firm to try and handle all on their own,” he also added. “Even for a large firm to try and do that all on their own is quite an initiative.”

Hybrid

It was then acknowledged that hybrid technology models seem to offer the “best of both worlds” in many senses, but that, realistically, those that have taken this approach typically have stumbled into it, Carr said.

On this point, Brown said that rationalizing where to integrate is key, as, for example, it probably won't make sense to spend tens of thousands of dollars on integrating once-a-month entries. “We also have to consider business process outsourcing,” he added, noting that many clients will want to maintain some business functions in-house, cash management being a good example here. “Other business functions are very easy and desirable to outsource, such as when you have integrations with banks and custodians – someone has to manage that data and reconcile back to source,” Brown said.

He added that the wealth tech space is not “plug and play.”

“A layer of caution I would advise everyone to consider is that, just because two platforms have been integrated before, this can be highly dependent on how they're configured,” he said. “Applications are configurable, but what that means from an integration standpoint is that no one integration suits the needs of everybody else.”

Brown's advice to the industry is to ensure that vendors are “friendly” to integrations and that they have proven experience with this. But perhaps most crucially, he said, is to remember that even if the former two are fulfilled, “don't expect that past experience will apply to you.”