The following brief commentary on the outlook for 2013 in parts of the wealth management industry is from Steve Young, chief executive of Citisoft, the consultancy.

Editor’s note: The
following brief commentary on the outlook for 2013 in parts of the wealth
management industry is from Steve Young, chief executive of Citisoft, the
consultancy. The views expressed here are not necessarily endorsed by this
publication, but we are very happy to share these with readers.

The wealth management industry in the UK is a
relatively cautious one, where behaviours tend to change slowly. One such area
is technology. Wealth managers have been vastly overspending on big, clunky
back-office systems for many years and the cost of ownership is incredibly
high. From the business perspective, this is the commodity end of the market
from which very limited competitive advantage is derived.

To make matters worse, most wealth management back-office
systems are very bespoke and highly embedded, therefore posing a major
operational risk where change is concerned. The vendors of these (often quite
dated) systems are unsurprisingly happy to maintain the status quo.

Meanwhile, the same wealth managers are under-spending in the
front office – an area where they compete and should be driving value to their
clients. These front-office investment process vendors tend to be relatively
small and therefore lack the market power to charge the kind of money the back-office vendors levy for their systems. As a consequence, these front-office
vendors do not have the revenues to truly innovate. Yet decision support tools
that inform the investment strategy are far more valuable to wealth managers
than clearing and settlement systems.

Industry issues such as suitability should be driving
changes to operating models, data management processes, customer relationship
management, customer communications and other front-office systems, but instead
it is generating a reactionary, compliance-focused standpoint.

As a result, the gap between institutional and wealth
management in systems investment is wider than it has ever been.

Ratios

A conservative estimate is that the ratio of back to front-office technology spending is at best, 2:1, at worst 20:1. Wealth managers that
can change their model and begin to drive their technology spend away from the
back-office and into the front-office will secure a massive competitive
advantage.

Their back-office systems should be a shared utility or be
outsourced in order for the wealth manager to compete on scale and cost
management.

The US
wealth management industry is much more front-office focused than the UK and doesn’t
suffer from this imbalance. It’s time to look to our cousins across the Pond
once again.