This is the fourth chapter taken from a major new report by this news service on how wealth managers handle client reporting.

A more sophisticated and cost-conscious IFA segment is driving wealth managers to revamp their reporting systems as competition for Discretionary Fund Manager (DFM) business heats up, senior executives say.

This feature forms part of WealthBriefing’s new research report, “Client Reporting – Regulatory Burden or Client Engagement Tool?”, produced in partnership with Computershare Communication Services. (See the previous chapter here.)

Wealth management institutions have been scrambling to up their digital game in numerous ways in recent years, as the pressures of compliance, costs and client demands have ratcheted up. And, while client reporting might have previously languished towards the bottom of their to-do lists, MiFID II has brought the need for improvements into sharp focus – particularly, executives say, for those firms targeting the hotly-costed and rapidly-evolving independent financial advisor market.  

The UK’s IFA sector has gone through great change in recent years. Regulatory reforms have prompted waves of consolidation and dramatic business model overhauls for those remaining that have hugely benefited larger wealth management institutions. Various pieces of research have found that the majority of IFAs now outsource all or part of their investment management work to discretionary fund managers to reduce costs and business risks, and allow greater focus on providing holistic financial advice. Indeed, intermediated business is said to account for the bulk of several UK wealth managers’ private client assets under management today.

However, competition is fierce and becoming ever more so as IFAs look to reduce their cost bases while simultaneously enhancing the service they provide to end-clients; pure-play investment managers, full-service wealth managers and platforms all vie for their business. So, while keen pricing and robust investment performance are key to making it onto an IFA’s panel of preferred providers, wealth managers can fully expect scrutiny of all the finer details of their offerings. As such, senior industry executives agree that firms’ reporting capabilities are far from a side issue today.

Demonstrating value
According to Richard Charnock, CEO of Standard Life Wealth, value for money is a key driver of IFAs’ growing focus on DFMs’ reporting capabilities. This, of course, has been increasingly at the top of the UK regulator’s agenda and that of clients themselves amid today’s “comparison culture” (not to mention the proliferation of low-cost and technologically impressive DIY investment platforms). 

“The regulator is saying the UK fund management industry and retail advice space needs to demonstrate that it can deliver performance, governance, financial probity and offer true value for money for the end-investor; the same applies to a discretionary fund manager,” Charnock said. “It’s vital that everything we do for the client is upgraded to make the fee justified and show that we are offering value.”  

IFAs in turn are having to be very much more proactive in proving the value they add as introducers to investment management services, as well as providers of financial planning advice – something that will become even more of a priority when the first round of MiFID II reporting for existing clients begins in just a few months.

“Intermediaries are getting far more specific in their reporting requirements as they want to present the client with as much richness as they possibly can,” Charnock said. “They need complete transparency around what the DFM does, so that they can explain the value that that client is getting for the fee that they pay and stand by who they’ve introduced the client to.” 

As Charnock observes, the IFA is essentially “fronting” what the DFM does but can only do so effectively if they are provided with granular reporting. “IFAs are the ones sitting in front of clients,” he said. “They need to be able to explain what’s happened in portfolios and respond well to any questions that might come.” 

Higher professional standards are another key driver. As likely intended, the Retail Distribution Review has resulted in far fewer, but far more sophisticated advisors remaining. The reporting bar is therefore being raised yet further by the fact that today’s IFAs are likely to be very well placed to assess the investment performance a DFM is delivering.
 

Volatility’s back!
The changing investment landscape is likely to be another driver of increased appetite for granular reporting, according to Scott Stevens, Head of Business Development at Quilter Cheviot. As he observes, the industry has benefitted from a decade-long bull run that may have allowed average performers some cover, but choppier investment waters, alongside the granular breakdown of costs mandated by MiFID II, are likely to lead to far greater scrutiny from clients. 

“The question on investors’ minds is ‘Did the portfolio value go up and do I feel that it’s gone up enough to warrant the costs and charges being incurred for this service?” he said. “There’s been a lot of forgiveness but when firms start having to produce reports where things have maybe gone down it will start to focus people’s attention far more.”

Of course, the desire to improve reporting capabilities and finding the budgets, time and corporate energy to embark on another change programme can be very different things. The industry’s digitalisation has gone hand in hand with a barrage of regulatory challenges that must have blunted appetite to, as Stevens put it, “fix something that’s not broken today”. WealthBriefing’s 2018 Technology and Operations Trends Report found that regulatory change had held back the strategic technology investments of 44 per cent of wealth managers, while 61 per cent said that compliance had drained corporate energy to the extent that innovation had been constrained. It is no wonder that reporting enhancements may have commonly been pushed to the back of the investment queue.

However, as elsewhere, regulatory requirements are also providing impetus for firms to make long overdue improvements, with the more regular reporting mandated by MiFID II greatly increasing the attractiveness of online reporting in a DFM context. “Reporting packs can cost £12-15 each to print and the advent of quarterly reporting for DFMs means that their printing bills will double, if not more, in many cases,” said Stevens. “Suddenly you’ve got a business case that says, taking it online will pay for itself in just a couple of years - there’s a real payback here so we need to get started.” 

Powering IFA business
Of course, for many firms getting started will also require a lot of work on the connectivity front due to the patchwork quilt of legacy systems many labour under. Those acting as DFMs will also have to contend with external connectivity issues as the more sophisticated (and larger) IFAs of today are increasingly likely to have their own client portals, and even possibly apps which reporting data will need to feed into. “DFMs have to power the tools the IFA has, not just push their own tools,” said Stevens.  

On the topic of helping IFAs to power their businesses, Chris Brown, wealth management and private banking sector head at Computershare Communications Services, believes that helping advisors present clients with more cogent investment commentary is another area where DFMs [discretionary wealth managers] could work to stand out, with clarity over roles made clear by branding. There may be good reason not to white-label investment services and reports, but transparency and clarity are key, Brown says. “Potentially, there’s a lot of confusion for intermediated clients because of the multiple points of reporting they receive which might be under different brands at different times, and I think that disconnect is incorrect,” he said. “Far better to be communicating with clients in an effective, consistent way.”

While there is undoubtedly a contingent of clients who will continue to prefer paper-based reporting, there is an inexorable shift towards online and the customisability that digital reporting can deliver when done well. “I think you will see that over the next three or four years, most of the DFMs will be transforming their reporting by putting it online,” said Stevens. “Whilst investments might not be immediate, within five years we’ll be in an environment where digital delivery is almost compulsory.”

So, reporting capabilities are emerging as a key battleground as competition for IFA assets continues to heat up and regulation forces greater cost transparency than ever before. In addition to how they report directly to HNW clients, wealth managers operating as DFMs will also be looking carefully at the “vital statistics” they provide to IFAs. For both segments, wealth managers are being forced out of an “if it isn’t broken, don’t fix it” mindset and towards seizing the opportunity to make reporting a stand-out feature, rather than just a tick-box exercise.