Tips For Selecting a Suitable Portfolio Management Tool

The majority of the 2500 financial intermediaries in Switzerland do not yet use any tools that perform functions such as CRM, compliance, or portfolio management.

Instead, they use Excel spreadsheets or MS Access databases and rely on technologies which have been in existence for more than 25 years. Even a number of larger independent investment boutiques managing a few billion dollars have assured me that they still employ very simple methods or rely fully on online banking tools.

This does not come as a surprise since for years, the wealth management industry has been resistant to transformative digital technology. Earlier this year, Deloitte also stated that despite profitability being on the downturn for years, the Wealth Management business model has remained unchanged, suggesting a substantial innovation gap.

One of the biggest challenges for external asset managers is that banks are lacking standardised interfaces. Medium to larger financial intermediaries often work with more than 10 custodian banks. This can make it difficult to monitor their investment and ensure that the investments match the client’s risk capacity and tolerance established by its relationship manager at all times. The industry will eventually develop common API specifications for banking. In Switzerland, the most important Swiss software houses have decided to develop a so-called common API specification for banking but only quite recently.

Digitalization will not stop at the gates of financial intermediaries; our industry needs to speed up its progress as there are many disruptors attacking the value proposition of old and established wealth management players. In many banks, FIM departments have lost their way a bit. Banks pursue more regional strategies and as a result, the FIM segment lacks resources to develop new solutions. Other banks introduce new online banking systems with new interactive features that are not designed for larger settings and financial intermediaries have to endure slow performance. Similarly, you would expect the largest online bank in Switzerland to provide the FIMs with more state-of-the-art solutions. Yet they provide a very poor quality e-banking platform for financial intermediaries. Furthermore, their banking forms in one of Switzerland’s national languages are full of typos.

The good news for our industry is that even a relatively small financial intermediary can, with limited resources and with the right partner, provide better solutions than one of many private banks. Moreover, an added advantage of a smaller institution is the assurance of an outstanding customer experience.

We have been evaluating different providers over the last few months and would like to share with you what we feel are the seven most important things that you will need to consider when selecting a CRM, portfolio management, or compliance tool:

1. Who will be still around in 3-5 years?

There is a wave of new fintech companies popping up like mushrooms in Switzerland. Many started out with relatively small seed capital but have now already had their second or third funding round. There are around 2500 FIMs in Switzerland. The market for PM tool provider is, however, much smaller. I estimate that around 200 FIMs already have a PM tool and I do not expect that many more than 1000 FIMs will eventually make use of one.

We have come across more than 20 different PM tools in Switzerland and we are still counting. A PM tool provider usually reaches break even after bringing about 50 clients on board, unless the PM tool mainly serves a family office and is now also marketed to external clients. The market will not be equally distributed and five or fewer tools will probably take most of the market share. Check who backs the new start up and verify their objective. Ask how many (paying) clients they have. Some of the providers have employed many sales professionals and IT consultants (check the provider’s website or LinkedIn) and it is only a question of time before they will need to reduce their costs.

2. Pricing

New start-up businesses have set their prices very low in order to attract customers. As a result of the fierce competition, prices have come down significantly. Responding to the aggressive prices, some of the old established providers have also introduced new rebranded solutions at lower costs in order to stay competitive and continue to milk their old cash cow solutions. We advise you to negotiate a cost ceiling for the project implementation including business consultancy and all your customized settings and reports. Prices will most likely go up again as providers cannot yet scale their businesses and the onboarding of each client is a lengthy process.

Get Our Overview of Portfolio Management Systems in Switzerland

3. How old is their technology?

You do not have to be a tech expert. But looking at the GUI of PM tools will give you the answers. Some tools have clearly reached end-of-life. They may have a large client base but do they have enough resources to develop? Have they merely given their tool a superficial facelift? Do not get too excited by fancy or modern designs often seen on browser applications. Be sure to make a thorough analysis of all functions and test the flexibility of a PM tool during a demonstration.

While some of the tools and providers have strength in calculating very exact performances or producing consistent reports, they may not yet cover basic PM functionalities or newer aspects such as suitability and appropriateness checks that modern client interactions entail. It is important that the PM tool be tested for more than two years with live clients. One of the relatively new PM tool providers recently demonstrated a revamped product after two years of development and being live with a dozen clients. The improvements they made were very impressive.

4. Regtech and Fintech combination?

Many Swiss systems or platforms have announced joint initiatives with well-known law firms. You will most certainly be invited to attend large-scale launch events. Unfortunately, these kinds of partnerships are very loose and often not implemented in the systems. They mainly serve marketing purposes and provide you with little benefit. I feel you need to, reach out to larger systems that have gone live with MIFID for some time already (e.g., a tool that is strong in France or Germany) and are ahead of the game. They have integrated compliance and regulatory workflows allowing your strategic compliance outsourcing company to perform direct regulatory and compliance monitoring on the system. Uploading cross-border manuals on the tool will not do the trick. For specific regulatory advice on investment products, you will need to purchase services from tools such as Investment Navigator, Bloomberg, Reuters, or FactSet.

5. Interfaces

Automation will be key in the future. However, even if providers advertise that their system works plug and play, you will realise that the reconciliation process will be much more cumbersome than portrayed. Each interface will need to be configured. Since not many banks have global core banking systems yet, separate interfaces may need to be built to connect to a Singapore and a Zurich branch of a bank. It will take some time until banks support automatic APIs, so you need to reduce the number of custodian banks first before implementing a tool. Our company maintains a relationship with more than 40 custodian banks. Note that some banks will not be able or willing to support your automated processing, even if your tool relies on SWIFT messages.

6. Reconciliation

Some providers (sometimes through associated companies) offer reconciliation services and facilitate the consolidation of assets by manually replicating bank account movements. You have to consider the reconciliation costs, whether done in-house or by the PM tool provider. As margins are going down in our industry, we believe that this labour-intensive reconciliation work is not sustainable and may only pay off for large pension funds, private clients, or family offices. A lot of PM tool providers try to fix the shortcomings in the background, so it is not obvious how much can actually be reconciled automatically.

7. Cost for market information

As a financial intermediary, you most likely provide your employees with access to market data terminals and therefore already purchase real financial market data. Normally, you will need to separately find an agreement with a financial data vendor. The additional costs are quite substantial. We have only come across 2 providers that have included the daily market information in their offering. These providers are able to achieve economies of scale and provide market information at reasonable costs.

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