An European Perspective on the Future of Wealth Management

The report from JP Morgan Asset Management and Oliver Wyman argues that the European wealth management is on the brink of a major change. Four main forces are driving this change: wealth created in new industries, digital innovation provides opportunities for servicing clients, but also innovative players to disrupt the market. Regulatory focus complicates things, but also provides opportunities for making the difference; transparency requirements put the offshore model under pressure.
Consequently, in summary, the report notes there are five actions that need to be undertaken within a European setting:
 Embrace and fully leverage digital capabilities to successfully compete in a changing competitive landscape.
 Develop and strengthen advice and outcome-oriented portfolio construction—the core of a wealth management proposition—for clients.
 Nurture deeper and closer relationships between wealth managers and asset managers to deliver stronger investment propositions and solutions.
 Improve the transparency of client engagement models—discretionary, advisory and execution-only mandates—for clients, while making them more efficient and automated for wealth managers.
 Boost frontline productivity and operational efficiency to address industry-wide cost increases and declining revenue yields.
“The wealth management market is competitive and continues to attract new entrants. Currently, approximately 80% of investment products in Continental Europe are distributed through banks, but this could be poised to change. Clients are becoming more familiar with non-bank providers such as financial advisers, multi-family offices (which now have over 10% share of private banking assets under management (AUM) in Germany), online wealth managers and non-financial players.” (JP Morgan, Oliver Wyman, 2015)

The Current Context in Romania: Risks and Opportunities
Here are some interesting facts that are relevant in the European context and now taking this at the country (Romania) level. Information about the conservative approach that the typical Romanian investor can be extracted from a recent article in Romania’s leading business journal – Ziarul Financiar (August 2015), which shows that in light of yields reaching down to zero, investors are willing to change their historically overcautious approach and invest in a more internationalized manner, once they gain confidence in their service provider. The journal references what Romanians with investable assets of at least half a million euros in ING Bank (now NN) are thinking in terms of capital market investments. Bonds, investment funds and shares attracted nearly 80% of their assets, three times more than four years ago. The head of wealth management division of ING Bank mentions a substantial change in customers’ investment appetite. If in 2011 the share of bank deposits in total assets managed by wealth management division was 78%, now it dropped to about 27%. It should be noted, based on ING data, that the Division of wealth management within ING Bank currently has a total of 370 clients with an average portfolio of 800,000 euros. Total managed assets amounted thus to about 300 million euros. The entry threshold is 400,000 euros. This gives a reference also in terms of market potential.
More specific to the country, the author can reference the fact that the infrastructure in emerging markets such as Romania is mostly underdeveloped thus creating an interesting paradigm. On one hand, it is to be noted that applying international standard services in an emerging market must require some adaptation. In Strategies That Fit Emerging Markets (Khanna-Palepu-Sinha, 2005), it is noted that companies must adapt to the lack of infrastructure by maintaining their core competency and competitive advantage uncompromised, however taking the required adaptations for the lack of a surrounding universe which is common in the developed world. This would be applicable also in the case of financial services, as one tries to implement what is virtually a developed world model enhanced with the benefits of latest technological developments. One has to account for the potentially underdeveloped legislation, lack of market evaluation services, lack of transparency in evaluating the performance of competitors, etc.
In terms of risks, in addition, it can be noted that the capital and financial markets in developing countries, including Romania, is lacking in sophistication and thereby it can be considered as immature or undersized. There is one reliable stock exchange (Bucharest Stock Exchange), which is very small in terms of size (total market capitalization approximately $32 Billion, as of December 2015). There are certain governmental regulators, which oversee the main markets (insurance, securities, banking). As with most developing countries, there aren’t many reliable intermediaries like credit-rating agencies, investment analysts, merchant bankers, or venture capital firms (Khanna-Palepu-Sinha, 2005). Multinational firms will not be able to utilize Bucharest Stock Exchange to raise debt or equity capital in Romania if their financial needs should require it to do so to finance their operations. In fact, given the small size of the market, it is quasi-unheard of for local firms to be utilizing the capital market for financing purposes. In fact, most of the companies listed on the local stock market are former state owned companies having been privatized under the guidance of international institutions, and a lot of them see the public listing status more as a burden than a benefit. Both creditors and investors can in many instances lack access to accurate information on companies, be it privately owned or listed on the stock market. It is very difficult for businesses to assess the creditworthiness of other firms or collect receivables once they have offered certain credit benefits to their customers. Certain companies may even practice willful bankruptcy to get rid of financial obligations to their suppliers, only to transfer their assets on a different company and remerge and conduct the same operations but with a different company, thus having a potentially unethical action towards their business partners. Corporate governance is also notoriously poor in emerging markets.
It is to be noted, as per the research that in terms of financial actions, multinational companies, in many instances, can’t trust their partners to adhere to local laws and joint venture agreements. As a result of business relationships based on friendship and/or blood connections, in most developing countries, as well as Romania, multinational companies need to consider various reasons for the actions of their partners, as opposed to the typically profit-focused approach which governs their business in their country of origin.
These inefficiencies in the capital market in the country can be viewed as both a challenge and an opportunity at a micro-economy level. It is a challenge because the potential implementation of the business development strategy needs to consider the limitations of the environment, which can be quite taxing for a company that is purely focused on the achievement of success in a similar manner as in a developed market. But, also, it is an opportunity because these market inefficiencies are creating the pre-conditions for the market positively impacted by a new player who can improve on the current incumbents’ offering and thereby also helping the general environment becoming more competitive. An industry association with international boards and institutions can also help. If these are being established in the country, it will allow a further improvement of the environment and also allow the company to be at the forefront of the establishment of the appropriate “rules of the game”.
However, there is an additional risk associated with the environment: Harvard Business School professor Jan Rivkin ranked industries by profitability, noting that the correlation of industry rates of profits across multiple of countries was close to zero, which means that the attractiveness of an industry varied widely from country to country (Khanna-Palepu-Sinha, 2005). Therefore, an attractive industry in one market may turn out to be unattractive in another country. That piece of study is important in the context of Romania’s institutional environment, because it indicates that the institutional context can play a significant role in the ability of the market to generate yields for the market participants.
Further risks may be extrapolated from the fact that when compared with developed financial markets, the emerging markets in Central and Eastern Europe suffer from an unjustifiably high level of rewards to private fund managers, a lack of transparency in their selection, and the immaturity of the investment proposals, as noted by Karsai Judit in a Hungarian study in 2015. This means increased risks when dealing with local investments; this can be mitigated by a diversification of the resources proposed to the customers, thereby acknowledging a reduction in risk.
Some academics (Rutkauskas, Kvietkauskiene, 2015) argue that in times of intense globalization (such as the times we are living now, with technology as an accelerating factor), the behavior of financial markets is converging. They argue that the globalization enables the investors to expect similar yields to investment opportunities in different markets. Consequently, in order to expect analogous opportunities for multiple investors, the globalization should lead to a certain homogenization of market behavior. This means, among others, that if an investor wants to invest successfully in different markets or choose a portfolio of investments from different stocks from different industries, he or she should be able to use a universal tool for investment decisions. This brings about the necessity that investors in Romania look at a globalized market more so than just focus on the Romanian market as is the case for a significant proportion of them at this moment. Consequently, there are needs for further investment opportunities for Romanian investors.

As referenced earlier, the advent of robo-advisers can be of great help. This will leverage some of the ideas into projecting some benefits for the greater scope. This idea becomes more and more prevalent and a recent article in the New York Times shows how a recently developed application – Kensho, managed by a Harvard graduate is able to perform certain tasks for Goldman Sachs at a fraction of the cost and in a fraction of the time (Popper, 2016). The application is able to go through huge amounts of data and extract in a matter of minutes all the criteria that may impact a certain asset class and consequently create a report which is more comprehensive and more objective than the similar review performed by a human analyst. More importantly, Goldman Sachs relies on this data which warrants to the quality of the data analysis. If this is valid at Goldman Sachs now, one can only extrapolate that this will be more and more the case along the entire spectrum of the financial industry.
Furthermore, in should be said, in a more macroeconomic context, that as per a paper published in 2013, two academics issued a claim stirred a lot of debate by concluding that 47 percent of current American jobs are at ‘‘high risk’’ of being automated within the next 20 years. (Frey, Osborne, 2013). So this can be expanded even beyond the financial sector. However, the financial sector is perhaps more at risk because of the degree to which the industry is built on processing information, these processes can be digitalized. Therefore it is being evaluated that the finance sector has more jobs at high risk of automation than any skilled industry, about 54 percent (Popper, 2016).