Invest

Staff Up or Outsource? Contending with Increased Regulations of the Wealth Management Industry

6 June, 2017
  • Adeline Tan

    Head of Investment Advisory, Mercer | Hong Kong

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“Technology and cloud computing allow wealth managers to remain competitive, improve processes, enhance service offerings and improve distribution.”

Regulations fostering greater consumer protections, tax transparency and better conflict and risk management are being implemented across the globe. Experience in markets where changes have already taken place suggests that wealth managers must adapt their business models, often at reduced profit margins, to survive. With these changes on the horizon in Asia, the region’s wealth management industry will need to find ways to adapt.

Regulatory compliance will be the Asian wealth management industry’s biggest focus for strategic spending over the next few years. The region expects to spend 42% of strategic budgets on regulatory compliance, whereas the US expects to spend 10% and Europe 13%, largely because many countries have already transitioned into new regulatory regimes1. The relative youth of Asia’s asset management industry and increasing age of its populations point to more regulations designed to protect consumers in line with what has happened in the US and the European Union (EU). Asian wealth managers can learn important lessons from how wealth managers have responded to similar changes in other countries. Fundamentally, Asian wealth management firms should prepare for increased scrutiny and decide whether to outsource compliance or bulk up their staff to avoid problems and/or penalties.

Transparency in fees and investment advice is the most important aspect of potential regulation from a client’s and regulator’s perspectives. A global CFA survey in 2015 showed transparency in fees/commissions was the most important driver of client trust in investment firms2. We can expect regulations similar to the new US Department of Labor Fiduciary Rule of 2016 that requires advisors to work in their clients’ best interests and disclose revenue arrangements clearly. Such a regulation could encourage advisors to offer simpler advisory arrangements, especially where retirement assets are concerned3. Additionally, this kind of regulation will promote competition, which could result in lower wealth management fees and put pressure on revenues.

Technology is helping to democratize the investment industry by giving smaller investors access to more investment options. This development is happening globally, including across Asia. These changes make client acquisition easier and cheaper; however, they also make regulators anxious, leading them to further emphasize consumer protections and ensure certain suitability standards are met. We expect to see more regulations around fiduciary responsibilities in selecting products and new disclosure requirements for product providers. For example, the Hong Kong Securities and Futures Commission has several pending consultations and research papers aimed at improving consumer protections and promoting competition.

Cybersecurity and privacy presents another compliance challenge. In May 2016, the Hong Kong Monetary Authority introduced the Cybersecurity Fortification Initiative, aimed at reducing the risk of cybersecurity attacks in Hong Kong’s banking sector, which includes a Cyber Resilience Assessment Framework, a professional development program and a cyber intelligence-sharing platform4. In the same month, the Monetary Authority of Singapore launched the Singapore Cyber Risk Management Project at the Asia Cyber Risk Summit.5 Although these initial efforts are mostly aimed at banks, we foresee others in the near future aimed at the broader financial sector, including asset and wealth managers, investment banks, corporate treasury operations and large asset owners. In addition to regulations aimed at protecting cyber space, we expect additional scrutiny aimed at protecting customer data.

Technology and cloud computing allow wealth managers to adopt new technologies and providers to remain competitive, improve processes, enhance service offerings or improve distribution. Because cyber risks are introduced through such arrangements, regulators will want to ensure that appropriate measures are taken to vet suppliers and monitor their privacy and security standards. It is not a matter of if cyber breaches occur, but when. Consequently, clients will want assurances that wealth managers have robust processes to identify risks, protect their assets, detect problems, respond to breaches and recover any losses.

Multijurisdictional residence/assets and tax reporting are becoming the norm. The “Panama Papers” revealed only the tip of the iceberg of offshore arrangements used to mitigate tax reporting. Countries such as Germany, the UK, China and the US have recently stepped up efforts to repatriate taxes owed from offshore citizens and corporate entities. Tax transparency and compliance with domestic and international tax laws are requisite for most Asian wealth managers; however, meeting these obligations is becoming increasingly expensive and complex.

Managing conflicts of interest is increasingly important. The financial services industry is prone to conflicts of interest, especially at large universal banks that raise and invest capital, as well as trade on the information. A PwC report found that the following types of conflicts are rife in financial services: nepotism, gifts, outside employment, self-dealing, insider trading, bribery/kickbacks, current or prior relationships with issuers and unjust enrichment6. Some Asian regulations regarding these conflict areas are weak, or regulations are not yet actively enforced7,8. To attract new capital and remain competitive internationally, the Asian markets and regulations will need to change.

Regulators are becoming more involved. Wealth managers have important roles in advising clients and investing assets. Wealth managers and their clients regularly face risks9. Consequently, regulators are concerned with wealth managers’ abilities to work in their clients’ best interests, as well as ensuring the integrity of the capital markets. Again, we can look to global markets to see a regulatory pattern emerging, which is likely to have some impact and influence on Asian regulations.

The US Securities and Exchange Commission (SEC) and US Financial Industry Regulatory Authority are training their analysts to use big data on a real-time basis to look for patterns across the industry and time periods to form the basis of investigations and insights into system abuses against which they can regulate. The SEC has also modernized private fund registration and reporting post global financial crisis. More recently, the SEC finalized reforms for money market funds. In March 2016, the SEC released four proposed rules and one request for comment related to revising existing regulations and incorporating several new pieces of regulation. These cover data reporting for investment advisors and mutual funds, exchange-traded products, liquidity risk management and derivatives. Proposals for stress testing and industry transition-planning regulations were also issued last year10. The asset management industry in Asia is deemed to be behind in regulating this behavior. It seems likely that more regulations similar to those in the US and/or the EU are in the future for many Asian countries.

Industry experts estimate the additional costs of regulation over the next few years for the wealth management industry may add 50 to 100 bps to fees11, which the firms would like to pass on to their clients. However, new regulations promoting competition and fee transparency may make passing through 100% of cost increases very difficult, resulting in squeezed profit margins. Examination of the wealth management markets in the US, UK and Switzerland show that wealth managers bear significant portions of these incremental costs and need to consider their operating models and strategies for handling them12. For smaller managers, outsourcing compliance and reporting to third parties may be the solution, assuming they have done their due diligence on the suppliers and are committed to monitoring them. Larger industry players have already been growing their internal compliance functions. Their size positions them to set standards around cybersecurity and privacy protection, while their market clout affords them influence on regulators that leads to fairer, simpler rules. Whichever strategy firms choose, doing nothing is not an option: regulation and enforcement are only expected to increase, and with those, the consequences for falling out of step with compliance.

 

EYGM Limited. Could your clients’ needs be your competitive advantage? The experience factor: the new growth engine in wealth management, 2016, available at www.ey.com/ Publication/vwLUAssets/EY-could-your-client-needs-be-your-competitive-advantage/$FILE/EY-could-your-client-needs-be-your-competitive-advantage.pdf.

CFA Institute. From Trust to Loyalty: What Investors Want, 2015.

Sutherland Asbill & Brennan LLP. “DOL Fiduciary Rule,” 2016, available at www.dolfiduciaryrule.com.

Hong Kong Monetary Authority. “Launch of the Cybersecurity Fortification Initiative by the HKMA at Cyber Security Summit 2016,” available at www.hkma.gov.hk/eng/key-information/press-releases/2016/20160518-5.shtml.

Monetary Authority of Singapore. “‘A Bold Approach to Cyber Risk Management’: Opening Address by Mr Bernard Wee, Executive Director, Monetary Authority of Singapore, at the Asia Cyber Risk Summit on 16 May 2016,” available at www.mas.gov.sg/News-and-Publications/Speeches-and-Monetary-Policy-Statements/Speeches/2016/A-Bold-Approach-to- Cyber-Risk-Management.aspx.

PricewaterhouseCoopers. “FS viewpoint: A matter of trust: Managing individual conflicts of interest for financial institutions,” 2012, available at www.pwc.com/us/en/financial-services/publications/viewpoints/assets/pwc-financial-institution-conflicts-of-interest.pdf.

Macrothink Institute. “A Global Comparison of Insider Trading Regulations,” International Journal of Accounting and Financial Reporting, Volume 3, Issue 1 (2013), available at www.macrothink.org/journal/index.php/ijafr/article/viewFile/3269/2976.

Conventus Law. “Anti-Corruption in Asia Pacific,” 2015, available at www.conventuslaw.com/report/anti-corruption-in-asia-pacific.

Deloitte. “Investment Management Outlook 2017,” 2016, available at www2.deloitte.com/us/en/pages/financial-services/articles/investment-management-industry-outlook. html#.

10 U.S. Securities and Exchange Commission. “SEC Accomplishments: April 2013–October 2016,” 2016, available at www.sec.gov/about/sec-accomplishments.htm.

11 Robeco. The future of asset management, 2016, available at www.robeco.com/images/201604-the-future-of-asset-management.pdf.

12 McKinsey and Company. McKinsey Global Wealth Management Survey 2014.

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"The 50 Most Influential Women in Middle East Finance," Financial News, 29 Apr. 2019, https://www.fnlondon.com/articles/the-50-most-influential-women-in-middle-east-finance-20190429. 2. "FN 50 Middle East Women 2019," Financial News, 2019,https://lists.fnlondon.com/fn50/women_in_finance_/2019/?mod=lists-profile. 3. "Rania Nashar," Forbes, 2018,https://www.forbes.com/profile/rania-nashar/#20d8136e473c. 4. Masige, Sharon. "Raising the Bar: Rania Nashar," The CEO Magazine, 27 Jun. 2019,https://www.theceomagazine.com/executive-interviews/finance-banking/rania-nashar/ 5. "Lubna Olayan Retires as CEO of Olayan Financing Co.; Jonathan Franklin Named New CEO," Olayan, 29 Apr. 2019, https://olayan.com/lubna-olayan-retires-ceo-olayan-financing-co-jonathan-franklin-named-new-ceo. 6. "Gender and Women's Mental Health: The Facts," World Health Organization, https://www.who.int/mental_health/prevention/genderwomen/en/#:~:targetText=Unipolar%20depression%2C%20predicted%20to%20be,persistent%20in%20women%20than%20men. 7. "The Cut: Exploring Financial Wellness Within Diverse Populations," Prudential, 2018, http://news.prudential.com/content/1209/files/PrudentialTheCutExploringFinancialWellnessWithinDiversePopulations.pdf.

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Pat Milligan | 19 Dec 2019

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Fabio Takaki | 19 Dec 2019

Influential women can make a transformative difference in a company, industry or even a nation. When women are leaders, they are more likely to contribute to education, health and community development programs in the areas where they work and live, according to Mercer's "When Women Thrive, Businesses Thrive" report. Despite the positive benefits women leaders bring to businesses and communities, female decision-makers remain difficult to find in leading financial firms around the world. Women are also significantly underrepresented on the leadership teams of companies that receive investment capital. A new report from Oliver Wyman (part of MMC group of companies) shows that globally, women hold 20% of positions in executive committees and 23% on boards, but only 6% of CEOs in financial institutions are women. However, in the Middle East — traditionally one of the most challenging regions for female leaders to scale — women are gradually being named to leadership positions in the region's financial sector.1 As women make their mark in Middle Eastern finance and, in turn, their communities and region, business leaders around the world should take notice. Women Leaders in Middle East Finance   The growing number of influential women in Middle Eastern finance includes those working in banks, investment firms, financial law and consulting companies.1 For instance, in September 2018, Ms. Rola Abu Manneh was named CEO of Standard Chartered UAE, becoming the first Emirati woman to lead a bank in the UAE. With a long experience in UAE banking, Ms. Abu Manneh has the knowledge and leadership competencies to bring important business to her bank. In her first year as CEO, she has already advised Dubai-based Emaar Properties on the sale of its hotels to Abu Dhabi National Hotels.2 Ms. Rania Nashar is another great example — she is the first female CEO of Saudi commercial bank, Samba Financial Group, one of the largest in the region. Ms. Nashar has over 20 years of experience in the commercial banking sector and was named CEO in 2017, becoming the first female CEO of a listed Saudi Arabian bank.3 That was also a moment when Saudi Arabia began implementing reforms to promote gender equality as part of the KSA's Vision 2030, and Ms. Nashar says she wants to continue doing more. "I have to not only prove to myself that a bank of Samba's size can be run by a female CEO — and can achieve the best results in its history — I have to prove it for all the women in Saudi Arabia and in the world," Ms. Nashar notes. "I hope that I can be an honourable portrait for Saudi women."4 Ms. Lubna Olayan is also an influential leader in Saudi Arabia. For more than 30 years, she was the CEO of Olayan Financing Company, the holding company through which The Olayan Group's trading, real estate, investment, consumer and industrial-related operations are conducted in the Gulf region. She has received numerous awards and recognition, including landing in Time's list of the 100 most influential people in the world, Fortune's list of Most Powerful Women and recognized as a champion of women's economic empowerment.5 Why Gender-Balanced Leadership Matters   Women leaders such as these are helping to advance and make a shift in the gender balance in the region's financial sector. While they represent progress, there is still much to be done. Governments are working to increase the gender balance but transforming the mindsets of business leaders and overcoming bias is a slow process. However, it's a process worth pursuing. For organizations and nations that are facing workforce challenges, an underutilized female workforce represents a strategic opportunity to compete, grow and win, helping to transform the entire economy. According to Mercer's "When Women Thrive, Businesses Thrive" report, women's essential roles as providers, caretakers, decision-makers and consumers make them instrumental in the education and health of future generations, as well as the development of their communities. Women leaders can also be instrumental in building stronger and more collaborative teams; retaining, developing and nurturing talent; and bringing a diverse and new perspective for organizations. In fact, the Mercer report also shows that increased participation from women in the workforce has implications for the economic and social development of communities and nations. Economists have calculated that eliminating the gap between male and female employment rates could significantly boost gross domestic product by 5% in the United States, 9% in Japan, 12% in the United Arab Emirates and 34% in Europe. Achieving Gender Equity in Underrepresented Sectors   Finding the right approach for sourcing and engaging female talent depends on the individual company's culture and needs, but there are some broad strategies that may be effective globally. Mercer research shows that the chief building blocks for achieving gender diversity are health, financial well-being and talent management elements. 1. Health   Health concerns are of special significance to the female population, as women are affected by different health issues and illnesses than men, and they experience and use the healthcare system in different ways than men. For example, there are gender specific risk factors for common mental disorders that disproportionately affect women, affecting their capacity to be productive at work. Unipolar depression, a leading factor of working disability, is twice as common in women than in men.6 To achieve gender equity in business, companies must make healthcare available to women in the ways they most need, including: 1.  Flexibility for maternity leave 2.  Physical health, wellness and mental health support 3.  More autonomy and access to health resources 4.  Psychological support for severe life events 5.  Confidential medical support dedicated for women 2. Financial Well-being   Women reportedly have greater financial responsibility and greater financial stress than men. According to a 2018 study conducted by Prudential, the average woman has saved less for retirement compared to the average man. Only 54% of women have put aside money for retirement, and on average, they have saved $115,412. By contract, 61% of men have saved for retirement, and on average, they have saved $202,859. This greatly increases the likelihood of a woman living in poverty in retirement and is exacerbated by women's longer life expectancies.7 To address this, organizations need to ensure that women receive fair financial compensation, greater coaching and educational support in planning for their financial futures, tailored retirement options for women, and encouragement for systematic and regular contributions to savings and retirement accounts. 3. Talent Management   Women need opportunities for advancement, as well as training and development opportunities. In addition, they also need flexible work options that make it possible for them to fulfill other essential roles outside of work. Attention to management positions are critical to further improve the gender participation in executive levels. These jobs are usually high demanding in working hours, requiring management of teams, clients and superiors. For women who achieve such positions, it may also coincide with motherhood period, making it even more challenging if companies do not provide adequate working arrangements — such as flexible working options leveraging technology, childcare support, mentoring and leadership support for women, business resource groups and diversity and inclusion efforts and training. Women in the workforce have an undeniable power to make meaningful contributions and expand businesses. When financial institutions and governments begin to focus on the strategies required to get talented women working and leading, they will begin to see positive results. Not only can influential women bring business acumen to help grow organizations, but their roles in societies also enable them to make significant improvements in education, communities and the transformation of countries. Sources: 1. "The 50 Most Influential Women in Middle East Finance," Financial News, 29 Apr. 2019, https://www.fnlondon.com/articles/the-50-most-influential-women-in-middle-east-finance-20190429. 2. "FN 50 Middle East Women 2019," Financial News, 2019,https://lists.fnlondon.com/fn50/women_in_finance_/2019/?mod=lists-profile. 3. "Rania Nashar," Forbes, 2018,https://www.forbes.com/profile/rania-nashar/#20d8136e473c. 4. Masige, Sharon. "Raising the Bar: Rania Nashar," The CEO Magazine, 27 Jun. 2019,https://www.theceomagazine.com/executive-interviews/finance-banking/rania-nashar/ 5. "Lubna Olayan Retires as CEO of Olayan Financing Co.; Jonathan Franklin Named New CEO," Olayan, 29 Apr. 2019, https://olayan.com/lubna-olayan-retires-ceo-olayan-financing-co-jonathan-franklin-named-new-ceo. 6. "Gender and Women's Mental Health: The Facts," World Health Organization, https://www.who.int/mental_health/prevention/genderwomen/en/#:~:targetText=Unipolar%20depression%2C%20predicted%20to%20be,persistent%20in%20women%20than%20men. 7. "The Cut: Exploring Financial Wellness Within Diverse Populations," Prudential, 2018, http://news.prudential.com/content/1209/files/PrudentialTheCutExploringFinancialWellnessWithinDiversePopulations.pdf.

Amy Scissons | 28 Nov 2019

What does it take to lead successful international teams? Successful teams are often united over a common goal and a shared set of experiences. But, as the workforce becomes more distributed and business travel becomes increasingly burdensome to the bottom line and detrimental to the environment, leaders need to be more creative in developing and fostering positive team dynamics. With fewer face-to-face meetings, how are international leaders coalescing their teams? Here are four habits I have adopted that you should consider in managing international teams: Habit 1: Remove the Mentality of "You Need to Be There"   Technology is, without a doubt, the game changer when it comes to international team effectiveness. Yet, human-led organizations often struggle to accommodate and leverage the speedy and persistent nature of change brought by digital technologies. There are, of course, times when face-to-face meetings are required; however, Mercer has noticed clients are demonstrating an increasing comfort level with holding seminars, conferences and other traditional in-person interactions via online meeting platforms. Though the virtual workforce trend is nothing new, it has reached an inflection point where clients often prefer to partner with companies that actively internalize the power and practicality of being agile, versatile and virtual. Today's transformative Chief Marketing Officers (CMOs) urge their C-suite peers to adopt have this mindset and leverage differentiating new technologies. As managers, marketing leaders will find that their employees and marketing teams are more productive and online more, if allowed to do their work on their own time. People react well to not only managing their work but also having the flexibility to set their own schedules. At Mercer, we have seen our people work with more excitement, passion and collaborative enthusiasm when provided the freedom to excel according to their personal cadences. Let talented people do what they need to do to get stuff done. Habit 2: Cross-Cultural Communication With International Teams   With the direction set and the team empowered to find their path forward, it's time to focus on communication. Different cultures, of course, perceive, process and interpret information and context differently. These differences can create communication breakdowns that are extremely costly in terms of time, quality and money. Effective messaging is direct and only refers to limited but critical pieces of information that necessitate a particular email, phone call or conversation. Inspiring leaders find their voice and communicate in a way that is simple, memorable and supportive. All correspondences among international teams should be carefully packaged, contained and well thought out. Don't underestimate the power of repetition. Often, when dealing with team members from multiple cultures and languages, repetition of established goals, processes, timelines and expectations is vital to successful outcomes. Repetition, when done with tact and clear intentions, is not disrespectful or seen as micromanaging. It bolsters the ability of everyone on the team to achieve their goals (honestly, I find repetition extremely helpful. By the time I'm reminded what we're trying to get done three or four times — especially in a few different ways — it sticks!). When you're dealing with cross-border teams, never assume that everyone fully understands the strategy and desired results on the first two or three discussions. Using repetition creatively helps the team focus on the north star. Habit 3: Be Succinct and Culturally Aware   Cultural awareness is learned. It took me a while to appreciate and understand the nuances of each member of my team, not only in their approach to solving problems, but the influence of their culture on their overall outlook. Our research on diversity and inclusion points to the value of ensuring all voices are heard on the team. As a matter of fact, there are a range of products today designed to enable employees to share their perspectives (separate from employee engagement surveys) — and many of these are being tailored for D&I purposes. With international teams, this lesson is particularly punctuated. When team members in Tokyo, Taiwan and Mexico City are speaking to each other, ensuring they use the same direct, simple and familiar language increases efficiency and the likelihood of success. Being culturally sensitive and aware is incredibly important. Years ago, I used to feel very concerned if people were not speaking up in marketing meetings or weren't instantly on video conferences showing their face, but I realized over time that people need to communicate in ways that make sense to them. As a leader, I've learned it is my responsibility to respect other people's learning and working styles and that — if I did that — these individuals would become increasingly more open and trusting of me. Marketing leaders have to earn trust, just like everyone else. It is important to not expect that people think and act the way you think and act. People come from different perspectives and have different personality types — from introverts to extroverts and everything in between. And that diversity is instrumental to success. Habit 4: Lead With Genuine Positivity   My favorite habit, is bringing my whole self to work. As leaders, we must make a conscious effort to be encouraging and find genuine, sincere ways to boost people's confidence. This takes time and awareness as each person behaves according to varying types of motivations, instructions and sensibilities. As a company, we have to be demanding, because we have aggressive goals. However, the most effective and rewarding route to achieving those goals is by making the conscious decision to encourage employees as they execute their responsibilities — especially during challenging times. Regardless of gender, race or nationality, I think that one overriding universal truth is that people respond more graciously, productively and passionately to authentic positive feedback and encouragement. I know this personally, because I have benefited from positive reinforcement many times in my career — often when I needed it the most — from my peers, colleagues and fellow team members. It really helps. In fact, the most successful leaders I know and have worked with are extremely positive people. Teams and individuals need to be reminded, particularly during tough times, that they are doing excellent work and they are moving in the right direction. Never underestimate how much a genuine comment, like "You're doing a great job" and "Keep going" can do for someone who feels overwhelmed, underappreciated or unmotivated at a particular moment in their career. Positivity is all about appreciating the time and work employees invest into success and giving them credit for their efforts and accomplishments. Originally published in Thrive Global.

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