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GOODNEWS July 2013

Can modelling come in from the cold? managers looking to improve investor outcomes, while remaining compliant with regulations and coming to terms with an altered income base. Rather than being overly prescriptive or inflexible, models should resemble investment strategy and guidelines, so that they can be used to ensure compliance with regulations and with client mandates. Modelling can be used as a tool that supports the wealth manager’s investment decision making rather than a tool that automates that decision making. The reality of even the most bespoke of service offerings is that a number of clients will present very similar requirements and profiles. Treating them differently is as hard to justify to regulators as treating all clients exactly the same. For too long, modelling has taken a back seat to manual processing. But in the current climate, justifying the operational burdens involved in rebalancing portfolios by hand is becoming harder and harder. The technology is available that enables personalised modelling, helps create a more streamlined and efficient service, and gives firms deeper foundations on which to build future growth. The changing investment climate suggests that wealth managers would do very well to investigate it further. 11 The traditional wealth management business model is coming under attack from regulators and clients who are demanding more but paying less. Steve Martin, Senior Business Consultant at Dion Global Solutions, suggests that it is time for high-end wealth managers to re-evaluate the contentious topic of modelling and model portfolios and assess whether they can deliver essential levels of accuracy and efficiency without compromising the tradition of highly personalised service. If there was any need to highlight the regulatory challenge faced by wealth managers, the FSA ‘Dear CEO’ letters have made the issue strikingly clear. As the letters showed, the industry has yet to reach the required standards to capture, monitor and – equally important – prove suitability. With investors pursuing lower risk and more passive invest-ment vehicles, wealth managers are facing substantial downward pressure on margins. The issue of suitability highlights an underlying problem: if all clients are invested in fully bespoke portfolios, maintaining compliance with suitability requirements demands a level of attention that hinders both growth and the delivery of high-touch client services. Modelling has provided at least part of the solution. If it is based on a full understanding of the individual client and if there are a sufficiently diverse range of models available, then it starts to look like an attractive option for wealth


GOODNEWS July 2013
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