Why the wealth management industry can't access better risk analysis

Philip Taylor CFA, President and Chief Analytics Officer, FinMason

Thirty years ago, when I first became an institutional portfolio manager, I benefitted from access to data, technologies and experienced teams. I had the ability to generate mathematical analyses to ensure I was managing my portfolio appropriately from a strategic, regulatory and risk-management perspective. Institutional portfolio managers continue to leverage the latest technologies; however, individual retail investors, and even many of their wealth advisors, do not have access to these today – or even those that I had 30 years ago.

My vision is that high-quality tools for investment risk analysis should be available to individual retail investors and their wealth advisors, so they too can make better-informed decisions.

Wealth advisors struggle to provide institutional-grade analysis to their clients

While costs to investors have come down significantly over the past few years, the process of making investment decisions is largely unchanged. I still feel that despite the best efforts of wealth managers, most individual investors don’t receive good value for money for the advice they receive. The process of making investments is opaque, complicated and over-regulated. Many wealth advisors are smart, honorable, experienced and want to want to help their clients gain a better understanding of risk, but the tools available to them are either prohibitively expensive or have too little useful information. They mostly resort to spreadsheets, which is time consuming and prone to human error. 

So why don’t the advisors’ service providers – banks, custodians, software companies and turnkey asset management programs (TAMPs) – provide better tools?

The answer is that they want to, but change is hard. These companies have invested millions of dollars in technology, they have thousands of customers to please, hundreds of IT staff, and must comply with a ton of regulations. It’s understandable that they feel that change comes with great risk.

Research shows that corporate software projects often fail – In late 2020, BCG estimated that 70 per cent of digital transformation projects didn’t meet desired outcomes. Because of all these reasons, it’s uncomfortable to embrace new technologies and new ways of working. Many studies show that our industry is moving slowly, but that this is starting to change.

So, what are the consequences? Critically, managers who can’t explain risk to their clients risk losing those clients in a market downturn, and clients often lose confidence and liquidate their investments at the worst possible time. A 2015 study by the Bank of Canada showed that 31 per cent of US investors sold all of their non-retirement-plan equities during the great financial crisis in 2008, and many more sold part of these holdings. Even though the market rebounded, it took years for most to regain those losses. In addition, service providers who can’t provide adequate, affordable tools are finding that wealth advisors are moving to other providers who can. All of this is negative for the investors, the advisors and the service providers.

How can firms solve this? The answer is by integrating modern software components one at a time. You don’t need to start from scratch. The beauty of API technology is that it allows you to gradually add components to your existing platforms. Ideally, these are:

• Customisable, so you can use the software to tell your story in the most appropriate way for your specific products and clients

• Easy-to-implement, so you don’t end up with a two-year project

• Scalable, so that the end-user will have a delightful, fast, interactive experience

• Cost-effective, because the same infrastructure is being shared by many customers

FinMason believes institutional-grade analytics should be a part of every investment software platform.

Over the past 10 years our team of financial and technology experts have built a highly powerful investment analytics platform that delivers 1,200 analytics on 7 million securities, and currently analyses 1.5 million portfolios per month. We have seen that as API technology becomes more accepted, we’re rapidly winning clients across many industry verticals, and our clients are some of the largest financial institutions in the world. We’ve grown from a single product line to six separate products, and we’re continuing to add more features. We do a deep dive into our clients’ needs and then rapidly deliver customised solutions, and we hear back from our clients that they are delighted with the outcomes.

We future-proof our clients’ solutions by constantly adding new datasets and features, such as ESG Scores and cryptocurrencies, and all our analytics come through a single interface, so adding a new datapoint for our clients is as simple as adding a single text-code.

In summary, advisors want better tools to explain risk to their clients; these solutions need to be customisable, scalable, quick-to-implement, and cost-effective; and API technology makes this achievable.

See FinMason’s excellent, easy, flexible solutions for yourself at finmason.com