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.