(Reuters) – Heavier regulation in financial markets has pushed up compliance costs for wealth and asset managers, helping one software provider bump up sales in one key region by 50 percent this year, a company executive said.
Private banks and independent wealth managers need more powerful compliance and risk management software to ensure sales and trading records comply with stricter rules in the post financial crisis world, said Martin Engdal, sales director for Europe, Middle East and Africa at Advent Software.
"Some years back not many managers were interested in automated compliance, but tools for tracking compliance are really hot now," Engdal said.
"Firms will need to track all interactions with clients, not only to maintain compliance with the EU’s Markets in Financial Instruments Directive (MiFID) but also to show why certain products were recommended to certain clients," he said.
Engdal, whose company has around 200 wealth management clients in the EMEA region, said wealth managers were also under pressure from a growing number of clients wanting to exert tighter control over how their assets are managed.
That is seen in a significant shift away from discretionary mandates, where clients give their advisers full authority over how their money is invested, to advisory mandates, where the client authorizes the adviser for each investment.
Data from Boston Consulting group and CapGemini show the percentage of discretionary mandates has fallen from above 25 percent in 2008 to below 20 percent, Engdal said.
MiFID, an EU law regulating trading venues and practices in the financial services sector, forced advisers to invest in technology and in operations staff, adding to pressure on margins even as clients began to ask for lower fees.
Clients were also becoming choosier about who managed their assets, Engdal said.
"Before the crisis, wealth management was sticky money, clients changed adviser very rarely. Now, the number of clients that change manager is up to 15 percent of all assets, and they seem to be pretty successful in negotiating fees," Engdal said.
Fee pressure increased as clients opted for low-margin but safe products since the financial crisis, but that is changing, he said. Although private banks say clients are holding a high 30 percent of assets in cash, 76 percent of wealth managers said clients were looking to raise equities exposure.
They also want to understand products, valuations, risk, performance and fee structures better.
Wealth managers are turning to technology to achieve this goal, Engdal said: "They want procedures in place to give a clear overview of investment guidelines from clients and of regulation. If they can make this efficient, they can minimize operational risk, and the risk of regulatory fines."