To meet client needs for comprehensive, personalised advice, Wealth Management Firms (“Wealth Managers”) are increasingly turning to technology to access information, conduct research, and analysis.
This is our 4th and final Part in our series of articles on the Benefits and Risks of APIs in Wealth Management (“WM”) with a focus on Order Execution and Portfolio Management and Reporting; however, the client lifecycle would not be complete if we did not touch upon Client off-boarding.
In Part 1, we considered the benefits and risks of using APIs to enhance client engagement - https://blueconnector.co/blog/2020-06-11-wealth-management-benefits-and-risks-of-apis. In Part 2, we focused on the Client Onboarding phase - https://blueconnector.co/blog/2020-06-22-wealth-management-benefits-and-risks-of-apis-and-rpa-client-onboarding/. In Part 3, we focused on the Investment Analysis and Advice phases - https://blueconnector.co/blog/2020-07-07-wealth-management-benefits-and-risks-of-apis-investment-analysis-and-advice/
Order Execution, Portfolio Management and Reporting
The client has selected the investments based on desired expected return for the acceptable risk level and risk profile, now all the Wealth Manager must do is execute the order on the market on best efforts. Well, this is true in theory; however, as complex as selecting right mix of asset classes and investment options are, executing orders for these is even more complex.
An element of complexity is the diversity of the investment asset classes and access to them. Equities are accessed via stock market and debt via the bond markets. If the offering to the client is about access to several markets around the world then this adds another layer of complexity. Derivatives such as futures, options, warrants, contracts for difference (CFDs) and other structured financing may also be available at certain exchanges and physical commodities need to be sourced through other markets. Alternative assets such as real estate, crypto currencies, SWAG (Silver, Wine, Art & antiques, Gold) are sourced from a wide variety of markets, but some exchanges are starting to offer crypto currencies.
Another contributor to complexity is the nature of the order execution, trade settlement for each asset class, deposits required to be retained with the exchanges and capital retained for potential margin calls. Some assets can be executed and settled intra-day, others 2-3 days and if the trade does not settle in time then there may be a requirement to post margin. Still other assets require extended periods of due diligence, document checks, and government approvals that can take weeks or months. All this needs to be tracked and monitored.
Wealth Managers can take one of two approaches or choose a mix of the two:
DIY (In-House) Execution
Do-It-Yourself (DIY) involves the Wealth Manager connecting directly with each exchange / market for the asset classes it chooses to offer clients.
Each exchange has different characteristics. For e.g., the New York Stock Exchange (NYSE) offers a broad and deep pool of investments in stocks, bonds, index funds and derivatives. It is also highly liquid: activity and trading volumes are high so that, at the right price, counterparties can readily be found for a trade. This is also true of other major exchanges such as NASDAQ, ICE, and LSE. Whilst smaller exchanges can offer a wide range of stocks, bonds, commodities, but the trading volumes might be lower; thus client’s investment requirements for diversity and liquidity may not easily match; however, the client might want products that are offered on the smaller / regional exchanges such as CSE or TSE for e.g. Wealth Manager would need to establish self-clearing agreements and membership with each exchange around the world to settle and clear their trades, not a light and easy task. It would also need to pay clearing fund deposit on each exchange which would tie up much needed capital. Some exchanges require self-clearing members to have a certain level of net worth. Membership requirements differs in each market and exchanges. Monitoring the arrangements for several markets would require dedicated resources.
To create efficiency, exchanges publish open APIs, which Wealth Managers and brokers could agree to use.
The Wealth Manager should consider several factors:
If client orders are aggregated, the Wealth Manager should ensure that the aggregation will not disadvantage any individual client or be detrimental in terms of overall result. Executed aggregated orders are allocated amongst the clients using a transparent price methodology and to consider the best final price for the client. If the aggregated orders can only be executed partially, then pricing methodology for pro-ration is disclosed to the clients. APIs could be set up to provide full details of the executed order.
FinnHub.io for example provides APIs for stocks, currencies, and cyrpto-currencies. Detailed financial statements can be sourced by Wealth Managers from FinnHub.io as well. Larger Wealth Managers could source market data directly via APIs published by the exchanges, news agencies such as Refinitiv, Bloomberg, Xignite, IHS Markit to provide a consolidated view of the market.
Below, illustration for the Order Execution flow in the DIY scenario with the 4.a path in the diagram:
You can imagine establishing all the connections to exchanges and with various counterparties takes time and money. Whilst these interconnections are being established and regulatory approval obtained, the firm is not making any money. Once these connections are established, they need to be continually monitored. The key question to ask is what is your core business? Is it providing end-to-end service on your platforms and by your own resources? Resource management and training would need to extensive for DIY.
Partnering and Outsourcing
Alternative to DIY is to partner with, or outsource to, firms that can perform one or more steps in the execution workflow more efficiently and cost-effectively.
Incumbent Wealth Managers now are competing against new digital wealth management firms and with giant tech companies who are also establishing their own financial services arms to provide payment, wealth management and investment growth services. Joining one or more partner ecosystems would provide competitive advantage. A Wealth Manager could provide an integrated service and applications using their partner ecosystems; thus, enabling them to focus on the core services that are vital to their financial health and offer broader set of capabilities to meet client expectations.
Partnering with third party open ecosystem removes the need to have all in-house expert resources. Wealth Managers can look to offer traditional expertise in managing wealth and investments whilst co-innovating with fintech’s and technology partners for speed of delivery in a cost-effective manner. It would also allow Wealth Managers to develop fresh revenue streams by monetising data and through offering a wide range of investment products, access to global markets and innovative platform to millennials and clients never before reached.
The decision to in-source (DIY) or outsource is not binary. There is a spectrum from DIY to (almost) fully outsourced operations. Wealth Managers can decide where along this spectrum they wish to operate.
APIs provide the building blocks to enable Wealth Managers to assemble their own unique client experience. They can build applications that encapsulate their own techniques and intellectual property, while receiving timely updates from external providers.
Market data APIs comprise two types:
Key points for the Wealth Manager to know and be prepared for:
Variety of exchanges and marketplaces for sourcing data, frequency of reporting and valuation of disparate asset classes makes portfolio monitoring complex. However, there are vendors who can provide all-inclusive historical performance data across several asset classes.
The opportunity afforded by APIs is to mix and match data services corresponding to clients’ unique needs and present it in a way that draws both holistic and granular insights into their portfolio performance.
For example, some clients may be interested in intra-day movements and receiving alerts when certain trigger points are met. This can be obtained from real-time streaming APIs. Other clients may want end-of-day reports but have a complex array of investments across asset classes and geographies. Tailoring visualisations of client portfolios can differentiate a Wealth Manager from generic reporting by standard services.
As noted in our previous article on Investment Analysis and Advice (https://blueconnector.co/blog/2020-07-07-wealth-management-benefits-and-risks-of-apis-investment-analysis-and-advice/), data for traditional asset classes and for certain alternative asset classes may be available as frequently as daily or monthly. However, for certain alternative assets such as Art, Wine, and Antiques the data might remain static unless specifically valued.
Below, illustration of Portfolio Monitoring:
In summary, the decision to partner or outsource some or most of the activities depends on what the Wealth Manager sees as their core competence and whether they have the scale (in both execution capability and client demand) to justify doing it themselves. Although a Wealth Manager may outsource certain activities, there are some that cannot be handed off.
In many cases firms will want to retain all communication with the client, as they would see client relationships as their core strength, and recognise that it is a key driver of their profitability and value-add. Some outsource providers recognise this and offer client white label communication services that apply the Wealth Manager’s branding and messaging. Additionally, regulators hold the Wealth Manager responsible - a fiduciary duty - to put their clients’ interests first; therefore, being in touch with the clients would be critical.
The key responsibilities that the Wealth Manager retains, even when outsourcing, are:
Some thought leader articles include client off-boarding as the final phase of the client lifecycle whilst others do not. For our purposes, we will include client off-boarding as a loss / churn in the final phase. Although companies prefer to obviously continue the relationship and retain client loyalty there are clients who will want to leave. Clients could migrate the portfolio to another firm or liquidate it entirely. Key processes to capture to migrate the portfolio:
To close the portfolio due to liquidation or migration either, Wealth Manager should ensure:
Risk Management of APIs, Artificial Intelligence (AI) and Third-Party Data
In parts 1, 2 and 3 of the series of articles, we gave examples of the risks to consider. In this phase too, there are risks that the Wealth Manager should reflect on, which we highlight here. Do note this is not an exhaustive list of operational risks concerning order execution, portfolio monitoring and reporting and client off-boarding phases:
APIs can be a great tool to enable Wealth Managers to be efficient with cost, processes and time whilst allowing them to focus on their core competencies in client relationship management, diligent and responsive order execution, ongoing portfolio management and reporting. Risks need to be managed to ensure continued trusts with clients and regulators. APIs can provide Wealth Managers a competitive edge.
This is the final article in this series on the benefits and risks of APIs in Wealth Management. Other articles are:
For consultancy engagement, please write to the authors:
Jon Scheele formed blue connector with the sole purpose of leveraging digital technologies such as APIs to fast track and enable medium sized and growing businesses to meet their strategic objectives. He helps companies build customer value propositions and streamline processes using Application Programming Interfaces (APIs). Jon's experience spans the Financial Services, Fintech, and Telecommunications industries. He has an MBA, a Bachelor’s degree in Electronic Engineering, and Graduate Diplomas in Applied Finance and Digital Communications.
Alpa Parekh has worked for several years in Risk Management which includes the disciplines of Operational, IT, Credit and Compliance in Financial Service industry. She has also worked in Internal Audit and conducted a variety of audits in FinTech, Financial Service and Consulting industries. She has an MBA from the UK, CIA from Australia, CPA from the US, and CA from Australia.