What does the political, economic and regulatory outlook for the next few months mean for wealth managers and financial advisers? Amid so much economic, political, and regulatory upheaval, the wealth management and financial advice sectors face immense challenges—as well as unprecedented opportunities. In this analysis, Matt Lonsdale (pictured), Director – Consulting, at Davies, highlights why and how embracing digitisation and operational transformation is critical to advisers and wealth managers thriving in today’s evolving landscape.
The wealth management and financial advice professions have weathered some monumental events in just these last five years. The 2022 mini-budget marked the start and since then, economic, political and regulatory turbulence has been rife.
Across this period, the industry had chances to improve its efficiency by embracing technology to overhaul how it operates, but limited progress was made. Now, there are significant political, economic and regulatory events impacting the sector that represent an extraordinary opportunity for the industry to reinvent itself.
The after-effect of Consumer Duty
2023 was dominated by muted Consumer Duty preparations, which made the impact of May 2024 ‘Dear CEO’ quite dramatic even for those outside of the top 20. Some firms have already faced sanctions, and several challenges have been identified:
- A lack of data cleanliness and access meant that some firms found it hard to respond to the FCA in a timely manner.
- In some cases, procedures weren’t robust enough to ensure service delivery
- Operational inefficiency meant some firms didn’t have enough time to service all clients
- The commercial model of wealth management is built upon charging a fee for an ongoing service, but sometimes there’s no compelling reason for a client to want to see their adviser
In the context of focusing on value for money and good outcomes, the effect of the issues above is magnified.
The FCA’s high standards for firms’ self-evaluation mean there will undoubtedly be continual scrutiny on the total cost of ownership. Its portfolio letter to advisors and intermediaries on 7th October confirmed the ongoing service, retirement income and the consolidator model would remain high priorities for the next two years. In short, the regulator is making it clear that the pressure is on.
The budget
As expected, the first Labour budget for 14 years brought enormous speculation followed by a range of seemingly slightly altered policies which when studied in detail are rather substantial. Higher NI for employers might mean lower wage growth, VAT on school fees could lead to lower available amounts to invest in ISAs, higher CGT reduces the net returns and IHT on pensions could mean less left to the next generation. None are material in isolation, but combined the effects of these policies will be significant and should serve as a wake-up-call to the industry to reform how it operates.
Forthcoming challenges
With Donald Trump elected, we now wait to see what impact his presidency will have on the global economy. While the decisive nature of the results can be seen as a positive, it’s likely that widespread tariffs will be implemented which could impact global trade. As well as tariffs, Trump has been vocal regarding lower taxes and less regulation, but it remains to be seen how this will look in practice.
In Q1 we are also awaiting DORA (The Digital Operational Resilience Act) in EU and Operational resilience in the UK. By 17 January 2025 (EU) and 31 March 2025 (UK), financial entities need their operating models and any involved third parties to be performing at a higher standard of technology resilience. These include measures for protection, detection, containment, recovery, and repair. Whilst many in UK wealth will consider themselves out of the immediate scope for these regulations, either due to their UK focus or size, the fact that regulators are focusing on end-of-life software, the failure of critical third parties and cyber threats should be seen as a forewarning to others to get ready for this level of focus industry-wide.
With change comes opportunity
The above suggests a challenging outlook for wealth management. However, if the industry seizes the chance, embraces a process of purposeful digitisation and continues to advance it can reach a point of Wealth Management 4.0 and be more successful than ever.
This change needs to come in a number of areas, for example:
- Rationalising operations: Many firms manage assets across multiple platforms and custodians. What is rarely considered is the operational impact of such behaviour on the firm and the wide variance of outcomes that investors are subject to. Rationalising this behaviour for commercial and client outcomes is a win-win.
- Overhauling processes: Eliminating paper fact finds, LOAs, documents requiring wet signatures and dual keying to different systems and platforms is essential. All are all still commonplace in wealth management and get in the way of the adoption of newer technology and contribute to high costs to serve.
- Adviser 4.0: Bringing the customer experience element of wealth management into the 21st century. While some have introduced portals and mobile apps, the industry can go further with solutions such as online chatbots, data-rich digital dashboards, personalised insights and recommendations created by AI and machine learning algorithms, virtual, interactive workshops and webinars and more.
In summary, wealth management and the financial advice professions must embrace digital transformation if they are to survive and thrive amongst the changes that continue to come their way. We have missed many previous opportunities but cannot continue to do so with so many challenges coming at once. Those resistant to change will not survive, while companies that choose to initiate change will outstrip their competitors and achieve growth.
