Wealthtech Report: End-to-End, Third-Party Operating Models Deployed by Wealth, Asset Managers Are Transforming the Industry

After a long period of consistent profitability, the wealth and asset management sector is “facing rising costs, shrinking margins, and intensifying consumer demands.”

Firms are looking for ways “to accelerate their digital transformations, bring more of what their clients want to the table, and bolster assets under management—all in the most cost-efficient way.”

According to a new report by Boston Consulting Group (BCG) and global end-to-end wealth platform provider FNZ, a new breed of end-to-end third-party operating models deployed by wealth and asset managers “could deliver significant cost savings, create new and innovative business models, and generate new revenue streams.”

The report, titled Scalable Tech and Operations in Wealth and Asset Management, is “based on unique insights derived from illustrative case data and research from more than 33 major asset managers and 20 major wealth managers across Europe and North America.”

It also draws “on additional data sets” from Asia Pacific and other world regions.

The report highlights “both evolving regulatory requirements and how growing investor demand for personalization is making it crucial for wealth and asset managers to pursue digital and operating model transformations.”

Akin Soysal, a BCG managing director and partner and coauthor of the report, said:

“Wealth and asset managers are faced with a myriad of challenges, and it’s clear that partnering with end-to-end third-party operating models can yield benefits and create competitive advantage if done right, despite running counter to certain long established practices. Customer demands for personalized wealth solutions are steadily rising along the value chain, requiring wealth and asset managers to make further investments.”

According to the report, the first step “toward efficient and cost-effective transformation by wealth and asset managers is understanding the current industry drivers—forces that are exacerbated by high market uncertainty, elevated interest rates, and slower assets under management (AuM).”

Despite largely favorable market conditions over the past few years, industry cost to-income ratios (CIRs) “have risen.”

While larger asset managers witnessed “a gradual increase between 2018 and 2021—with a rise to 74% in 2022—smaller asset managers with less than $300 billion in AuM saw a more pronounced increase to 78%.”

CIRs for larger wealth managers “have been stable at 71%, while smaller wealth players, with AuM below $150 billion, on average suffered a steep increase to surpass 82% in 2022. Technology spending has been a key driver of increased CIRs.” The average share of technology in total operating expenses “reached over 15% across both wealth and asset managers in 2022, up from 13% five years earlier.”

Over the same time frame, IT spending “has particularly been on the rise in application development (+25%) and hosting (+19%), mirroring the expansion of new requirements as well as large investments in cloud migration.”

For the first time since the 2008–2009 financial crisis, global AuM declined in 2022 (by roughly 15%). With wealth and asset managers “facing continuous margin compression driven by the increasing share of passive investments, rising competition from digital players and the consolidation of large incumbents with significant scale advantages, return on assets fell by 3% per year from 2018 through 2021.”

While advisory fees have “remained relatively stable, product fees have been hit by fierce competition and increased cost transparency, with declines of 11% for active funds and 35% for passive funds since 2017.” Finally, asset servicing margins “for clients with more than $2 million have decreased by 16% since 2017.”

At the same time, client demands “are steadily rising along the value chain, requiring wealth and asset managers to make further investments in areas such as hybrid advisory, direct-indexing, and managed-portfolio services.” Clients are increasingly “demanding full transparency of their investments to ensure alignment with their personal values and goals (e.g., sustainability).”

Continuous margin pressure, ever-evolving regulatory and cyber-security requirements, as well as growing investor demand “for personalization, make it imperative for wealth and asset managers to pursue digital and operating-model transformations.” Firms are turning “to third-party technology providers to help them achieve their goals.” The share of third-party technology spend has “risen by more than 10% since 2018 across both run-the-bank and change-the-bank initiatives at wealth and asset management firms.” Industry players are leveraging third-party operating models in various ways:

  • Moving significant, non-differentiating parts of the tech stack to an end-to end platform, supported by the emergence of vertically integrated platform providers that cover substantial parts of the value chain.
  • Outsourcing middle-office and operations functions to gain operating leverage and focus more internal resources on core activities. Wealth and asset managers see benefits ranging from serving more end clients to operating direct-to-consumer models at low cost. The report indicates the potential to realize operating cost savings of up to 30% compared with more traditional approaches.
  • Pursuing a “best-of-breed” approach for institutions with significant existing capabilities. This may allow for the selection of specific solutions from different vendors depending on the use case and layer of the technology stack, giving institutions more flexibility and reducing dependence on a single vendor.

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