Margin pressure, an ever-evolving regulatory landscape and growing investor demand for personalization are pushing wealth and asset managers to pursue digital transformation initiatives in a bid to cut costs and provide more value to their customers.

Since 2018, the share of third-party tech spend across initiatives at wealth and asset management firms has risen by more than 10%, showcasing that wealth and asset managers are filling the tech and IT gap by collaborating with third-party tech specialists, a new report by Boston Consulting Group (BCG) and global end-to-end wealth platform provider FNZ says.

The report, titled Scalable Tech and Operations in Wealth and Asset Management, looks at the state of wealth and asset management, arguing that firms in the sector are increasingly using end-to-end third-party platforms to run their operations.

Approaches to third-party tech implementation in wealth and asset management, Source: BCG Expand, Boston Consulting Group and FNZ, June 2023

These end-to-end platforms deliver complete or near complete functional solutions covering a process from beginning to end. They allow wealth and asset managers to reduce the need to develop a proprietary technology architecture and, in some cases, lower the need for in-house staff.

These platforms deliver a multitude of benefits, the report says, including lower maintenance costs, automated regulatory and stability upgrades provided by the vendor, lower interface complexity, higher ease of integration, greater flexibility to execute operating-model changes, lower requirements for upfront capital expenditures, and a higher share of variable costs.

The report highlights several trends that are pushing wealth and asset managers to turn to third-party platforms, naming rising costs, shrinking margins, and intensifying customer demands for digital solutions as key drivers.

It notes that since 2018, wealth and asset managers have been witnessing a gradual increase of their cost-to-income ratios, which indicates that their operating expenses are too high. Smaller players are the most impacted by this, the research found, and suffer much steeper increases compared with their larger counterparts.

Cost-income-ratio of wealth and asset managers based on their size, Source: BCG Expand, Boston Consulting Group and FNZ, June 2023

At the same time, firms are recording a decrease in their profitability, with return on assets falling by 3% per year from 2018 through 2021. Declining profitability can be explained by a number of elements, including shrinking global assets under management (AUM), rising competition from digital players, the consolidation of large incumbents with significant scale advantages, and sluggish economic growth that’s expected to persist through 2025.

Wealth and asset managers income:total AUM 2018-2022, Source: BCG Expand, Boston Consulting Group and FNZ, June 2023

Additionally, product fees have been hit hard by fierce competition and increased cost transparency. The report notes declines of 11% for active funds and 35% for passive funds between 2017 and 2022, while margins on model portfolio services and asset-serving for clients with more than US$2 million decreased by 12% and 16%, respectively.

Margins in wealth and asset management per offering 2017-2022, Source: BCG Expand, Boston Consulting Group and FNZ, June 2023

Simultaneously, clients are demanding superior digital experiences and improved transparency, in addition to advanced capabilities and novel propositions such as hybrid advisory, direct indexing and managed portfolio services.

To make its case, the report shares three case studies that showcase the key benefits of end-to-end platforms.

In the first case study, a mid-sized wealth manager was able to achieve an overall reduction of 25% in operating expenses through platform outsourcing. This was made possible by moving a significant portion of its middle-office and operational applications from the legacy tech stack to an end-to-end wealth platform, the report says.

Costs and savings before and after platform outsourcing, Source: FNZ, Boston Consulting Group and FNZ, June 2023

In the second case study, a large-scale European wealth manager achieved a more streamlined operating model and captured a higher share of discretionary management fees by migrating to an open wealth platform and leveraging model portfolio services. The platform allowed the firm to witness a significant uplift in pretax profit driven by an increase of over 50% in net asset inflows per advisor in the first two years following the program launch, the report says.

Finally, in the last case study, a global asset manager was able to launch a direct-to-consumer offering in a new market in under two years by leveraging an end-to-end platform. The app-based digital investing proposition included both an option for self-directed fund trading as well as a managed portfolio account based on simple profiling and strategy selection.

Wealth and asset management firms have increased their investment in technology considerably over the past years and will continue to invest heavily in digital capabilities and infrastructure enhancement efforts.

A survey of 500 wealth and asset management firms conducted in 2021 by think tank and economic research firm ThoughtLab found that while total IT spending made up for 6.9% of total revenue in 2021, that proposition is expected to increase by 1.5 percentage points to 8.4% by 2023.

Companies will continue to invest in all core technologies, the study found, with the biggest increase expected for artificial intelligence (AI) and machine learning (ML), open platforms and API architecture, and no-code/low-code platforms.

IT spend in wealth and asset management, Source: ThoughtLab study, 2021

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