The ability to continually support increased volumes of business without disproportionately adding headcount or other overheads is a true measure of scalability, and a key goal for Operations and IT departments to deliver growth and profitability. Achieving scale is one of the main and most difficult challenges currently faced by wealth managers. Indeed the majority of firms have NOT been able to grow in a scalable fashion over the past 5 years. Although revenues have increased during this time for over 80% of firms and almost the same number (80%) are profitable, the majority of firms have actually seen their margins decrease. In fact, total revenue has increased by 19.8% but this is out stripped by the rise in costs of 23.8% over the same period.
One of the main reasons for the decrease in margin is the cost of (maintaining) inefficient IT and Operations.
Why are firms NOT scalable?
Most firms are burdened with multiple legacy IT systems that were not designed to integrate with other third-party systems. As a result, firms have had to make do through a number of patches and manual workarounds which are time consuming and error prone. Firms have had to keep building around and on top of their current systems with the knock on effect of adding people and processes. Bearing this in mind, it is not surprising that the industry is currently woefully inefficient with respect to IT and Operations. This is reflected in the wide range of the cost of IT and Operations as a percentage of revenue. Compeer’s latest data shows that although the median for IT spend is close to 11%, the range is from <6% to>30%. Overall, there is currently a negative correlation between IT spend and profitability in the market.
How will digital change help?
Firms know that changing and simplifying their IT estate is necessary to enable scale. They also realise that the traditional (often high risk) ‘big bang approach’ to change is no longer the only option: there is a shift in the market to consider flexible modular architecture. During a recent Parkwell webinar, Objectway shared some insights on how one of their clients has recently successfully scaled their business through incremental change. This involved a multi-phase approach whereby an integrated front and back-office replaced a legacy system to enable automation and end-to-end straight-through processing. The result was that Investment Managers were given back time to spend on value-added client-facing tasks, also monitoring client preferences and rebalancing in real time, to offer a more personalised service at scale. Their AUM more than doubled over the past 5 years, with profits increasing by more than 30%. Crucially their headcount has not had to increase in that time leading to scalable growth.
Overall, there is a massive opportunity in the sector to improve efficiency and scalability through digital change. Firms who embrace this are likely to have a major competitive advantage with respect to achieving growth and scale. Firms who do not will certainly lose out and be left behind by clients.