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  • I’s to be dotted and t’s to be crossed
    For most wealth managers, 2017 was about getting their regulatory house in order: firms had neither the time, nor the inclination, to innovate. It was more back to basics than big and bold. New digital apps, regulation through robo and exploring the possibilities of AI—all were kicked into the long grass. Instead, clients wanted help to tackle more mundane issues such as LEIs, the complexities of transaction reporting and cost and charges transparency. Although those tasks are largely complete, several other equally significant issues remain.

    The squeeze is well and truly on
    Between the growing demands of the regulator and the needs of their increasingly savvy investors, wealth managers are hard pressed to make any money. The increased data and processing costs for MiFID II could easily be as much as £50,000 per year—just to cover that expense might require another £5,000,000 - £10,000,000 in AUM. Then there’s the sensitive subject of fees. Under MiFID II for example, wealth managers have to reveal all underlying product costs on an ex-ante and ex-post basis. How will clients react to that? Will there be questions about whether AUM charges represent value for money, especially when an actively managed fund falls short of expectations? Maybe that prospect will make tailored models or performance-based fee structures more favourable?

    Brexit—there’s no getting off the MiFID hook
    However Brexit eventually plays out, if a financial institution in the UK wishes to do business in Europe, it must be able to demonstrate ‘broad regulatory equivalence’ with MiFID II. On top of that, when Britain leaves Europe, firms may also have to change not only their business practices but also the structure of their businesses. And is Brexit likely to make it even more complicated and costly for financial institutions to operate?

    And one more ball to juggle
    On the regulatory front, in May 2018 another authority—the Information Commissioner’s Office(ICO) —will step into the fray with the introduction of General Data Protection Regulation (GDPR). GDPR forces wealth managers to take the protection of personal data more seriously than ever before or face significant fines. Coming hot on the heels of MiFID II, it’s likely that GDPR will keep most firms busy well into Q3 of 2018.

    So if it was hard to move ahead in 2017, what are the chances of progress in 2018?
    As and when wealth managers do get the opportunity to do something positive, they will have to choose between improving efficiency or business development. On the one hand, the use of integrated workflow or robotic process automation (RPA) could help contain costs and improve conformance. Or would the investment be better spent attracting and retaining more clients?

    There is light at the end of the tunnel
    Although having to clear so many regulatory hurdles, one after the other, is a distraction for the majority of wealth managers, conformance does ultimately foster innovation. There will come a point, in the not too distant future, when wealth managers will have the time, budget and desire to innovate. They could start by harnessing the power of Artificial Intelligence (AI) and using that power to reveal the insights held within their data. AI could not only help managers deal with the regulatory conundrums they have yet to face, but also enable firms to provide a more personalised and transparent service, to a larger number of clients, at much lower costs than they currently incur.

    That’s the prospect ahead of us—once the industry’s current difficulties are behind us.

    Roll on 2019.

    John Blackman - Chief Executive Officer - JHC