Multi-Currency Wealth Management Depends on Robust Data Management
Wealth and asset managers are under tremendous pressure to retain assets and maintain revenue streams. Today’s marketplace for wealth management and investment advisory services is influenced by a number of trends suggesting that global, multi-currency investment products are a mandatory part of the product offering and must be fully integrated into workflows for operations, legal, compliance, and other departments.
Sound data architecture, data infrastructure, and data governance are the best starting point for any multi-currency project.
This article outlines key challenges and solutions for the delivery of global investment products. The need for sound data architecture, data infrastructure, and data governance is not new with global investment products; but the new instruments, new business partners, and new operational requirements are much harder to incorporate without them.
Key trends affecting today’s market place for wealth management services:
- The rapidly growing number of high net worth (HNW) and ultra-high net worth (UHNW) clients and the strong growth in the total worth of these clients continue to drive a demand for sophisticated investment products and services. Increasingly, these include investment products traded on global markets and denominated in currencies other than USD.
- The shift of higher growth from traditional markets to the growing list of emerging markets is here to stay. The opportunities presented by emerging markets make them a compelling case, especially for today’s sophisticated high net worth investor.
- Continuing consolidation among wealth management service providers.
- Continuing trend towards holistic approaches to wealth management coupled with the increasing level of sophisticated and integrated performance, attribution, and risk reporting.
- The commoditization of many components of wealth management services which means wealth managers are looking for new ways to distinguish themselves.
For wealth managers, these trends have one thing in common – an increased demand for international investment products, traded on any of the major markets, and denominated in foreign currency. Furthermore, with increased competition and heightened regulatory scrutiny, wealth managers must be able to deliver these international, multi-currency investment products as part of their core capabilities and in an integrated fashion. Serving the international needs of sophisticated clients with manual, non-integrated workarounds impresses neither clients nor regulators and results in serious risks.
The challenges of adding multicurrency investment products to an existing wealth or asset management practice are equally significant for IT, Operations, senior management, and the front office. The importance of sound data architecture, data infrastructure, and data governance is not new with multi-currency investment products; but challenges like the ones listed below are only magnified if the starting point is not based on well structured data management approaches.
- Delivering reliable and auditable investment information including analytics, attribution, performance, and risk information – now with new data elements for currency codes, country codes, exchange rates, etc.
- Continuing straight through processing (STP) efforts while adding new business partners for trade execution, funding, FX conversion, client wires, custody, etc. If the existing business partners can deliver the necessary services, then it’s likely the interfaces will need to be enhanced.
- Supporting Operations, sales, and senior management with the right information on a timely basis and providing efficient and secure access to the new data.
- Avoiding regulatory scrutiny and potentially significant penalties.
- Enhancing pricing and investment models for the new markets, currencies, and instruments.
The main goal is to enhance the products and services offered by the wealth manager resulting in a more competitive wealth management practice. Data architecture, data governance, and the data dictionary all need to be reviewed and are likely candidates for enhancements. Both business and IT need to make experienced staff available for the effort and good collaboration between business and IT is essential if the projects are to meet with success.
A broad effort for IT:
The work starts with enhancing the data dictionary and one or more data models for new data elements regarding exchange rates, foreign currency amounts, USD equivalent amounts, etc. The data modeling includes new reference tables for currency codes, country codes, and exchange rate formats as well as tables for current and historical exchange rate values. Almost every application must be enhanced to show and use exchange rates and foreign currency amounts. All databases and interfaces must be enhanced to handle the new data elements. Statements, confirms and other client reports must be updated with new disclosures. Calculations need to be enhanced for commissions, gains & losses, attributions, performance to name a few obvious candidates. Data warehouses, Operational Data Stores and cubes are also likely candidates for changes to data sourcing and distribution mechanisms.
For many firms, the overall technology platform includes various vendor systems for compliance, portfolio accounting, performance analytics and reporting, financial advisor workstation, financial planning, etc. This means managing enhancements from many vendors and coordinating deliverables and testing. All internal and client reports must be reviewed and most must be enhanced. Many of these efforts have significant interdependencies.
For many firms these efforts represent significant IT challenges. With a sound data architecture and data infrastructure at the start, the projects are far more likely to succeed and stay on schedule. The idea of trying to improve data architecture and infrastructure in parallel with a multi-currency project is a recipe for disaster.
And with all these “IT enhancements” it is easy to think that a multi-currency project is primarily a technology focused effort; however, a second look reveals quickly that the business challenges are often greater than those for IT.
There are a large number of decisions to be made, many of which have significant costs and other ramifications. Therefore, many of these decisions require executive input and approval. Key decisions include what security types to offer in multicurrency? Which markets and geographies should be included? Who will provide clearing and custody services for the new instruments and in the new jurisdictions? How will funding and client wires in foreign currencies be handled? Who will provide the wealth manager with credit lines in foreign currencies? What are the rules for client cash and margin accounts in foreign currencies?
For project teams, it is usually difficult to rush executive decisions, especially when the decisions are concerning new transaction types, foreign markets, and carry a significant price tag. The interdependencies between the various decisions does not help to speed up the process; e.g. the countries and currencies covered by custodians, lenders, FX agents, and other service providers must be coordinated. Consideration for this decision process must be reflected in the project plan if the project is to finish on schedule. If a campaign to market the new international investment products has been launched alongside the implementation efforts, then project delays can cause major headaches.
Any weaknesses or problems related to data architecture or data management at the start of multi-currency projects will only add unnecessary complications and delays. A clean starting point with respect to data architecture and data management will help with making decisions in a timely manner.
A significant number of contracts and Service Level Agreements (SLAs) must be finalized:
Once the decisions and selections have been made, related contracts and Service Level Agreements must be finalized. These contracts cover trade execution, client wires, FX conversion, clearing, custody, credit lines in foreign currency, and various other securities and transaction services. Similar to the executive decisions, legal reviews can take time, especially when they involve new types of services and foreign jurisdictions.
Almost every department in Operations is impacted
The objectives and priorities of Operations do not change with the addition of new multi-currency investment products – straight through processing, handling peak volumes, delivering quality services to clients, avoiding manual intervention and workarounds to name a few. But nearly every department in Operations will see their workflows impacted when new markets, investment products, and service providers are added.
- Reconciling performance reports, attribution reports, and statements is a challenge for many firms and is only more complicated with the addition of a currency dimension.
- Client and account on-boarding needs to be streamlined at many firms and is only more complicated when positions, instruments, and transactions are denominated in multiple currencies and include new instruments.
- Calculations for valuation, commissions, gains/losses, interest on cash balances, and margins are also more complicated with the addition of new currencies, new instruments, and new conventions.
- Responding to client and front office inquiries
- Identifying breaks in automated processes early and resolving those breaks quickly.
- Compliance rules need to be modified and new rules need to be written.
These and many other requirements demand that IT provides Operations, Compliance, and other business unit with timely and secure access to quality data in a cost-effective and scalable manner.
Anticipating where tomorrow’s investment opportunities will be is no easy task. But no crystal ball is required to predict that foreign markets are likely to play a substantial role in the global economy of the future. It’s clear that today’s investors want their portfolios positioned to take advantage of opportunities wherever these opportunities may develop. They expect their wealth managers to have a global perspective and be prepared to include securities from all major markets.
The challenges when expanding a Wealth Management practice into international investment products, traded on global exchanges, and denominated in multicurrency are complex and multi-faceted.
With the imperative to offer international investment products, the solution is not to exclude multi currency investment products and risk losing clients, market share, and revenue.
The solution instead is to realize that such projects will impact nearly all parts of the firm and to understand the dependencies between sales, operations, legal, compliance, risk management, cash management, and treasury.
Know what decisions will need to be made and be prepared to make those decisions in a timely manner. Understand the various types of risks for the firm (legal, operational, counterparty, and reputational) and have a sound risk management plan in place at the beginning of the project.
Sound data architecture, solid data infrastructure, and effective data governance are important enablers for any multi-currency project. If international, multi-currency investment products are not yet part of your firm’s core competencies, your firm may plan to add these products and related services in the near future. Now may be the best time to address any weakness in your firm’s data management initiatives.
Roland Hoelscher consults with top tier global financial firms on data management, system development, and application integration efforts. He can be reached at firstname.lastname@example.org.