8 Checkpoints for Selecting your Wealth Tech Provider

By Valuefy

July 20, 2023


A traditional approach to wealth management may not attract empowered investors to collaborate with you. The pandemic has changed investor perspectives, relationships and behaviours. To be taken seriously as a preferred wealth manager, your platform must provide investors with insightful information about their investments via AI (Artificial Intelligence) and APIs (Application Programme Interface).

Low fees, better performance, personalised service, broader product ranges, lower and transparent fee structures, and regulatory pressures, to name a few factors, have made the industry extremely challenging and competitive. The ability to mitigate challenges and provide a unique digital experience to clients is the key to success and growth.

Regulators such as FINMA in Switzerland, FSRA in the Middle East, MAS in Singapore and CSSF in Luxembourg recognise the value of digitising investment management practises in achieving their goal of investor protection. As a result, they require financial intermediaries to conduct pre-trade checks on the client’s knowledge, experience, and risk-taking abilities based on prior classification and profiling. While these pre-trade checks can be performed without the use of technology, they would be impossible to manage efficiently as the size of the business and the number of new clients onboarded expands. Regulations like these, combined with the need to improve operational efficiency, have prompted wealth managers, private banks, and external/independent asset managers to consider large investments in IT tools.

What are the questions you should be asking to make an informed decision prior to engaging a solution provider? Here’s a helpful checklist to use to support this crucial strategic investment:

1. How experienced is your business and who are your backers?

  • Are you a young start up? These businesses may be risky, immature, unprofitable and provide less functionality.
  • Are you an established company?  These organizations will have mature functionalities, profitable operations, legacy systems and less flexibility to adapt to new technologies.
  • New companies may be more attractive in their “Look and Feel” while older companies may have powerful engines and systems.
  • Knowledge coming from years of solution development, number of full-time employees, shareholders backing them and financial infusions may provide useful information in comparing with competitors.

2. Which markets do you operate in and how many relevant clients do you serve?

  • Solutions providers may have thousands of users within hundreds of clients in multiple locations. This information may be interesting but what is more important is how many clients such as yours are being serviced by these solutions providers and where.
  • This will help establish if you are in the solution vendor’s core business and market.
  • Hence ask for references to ascertain the vendor before committing for long term
  • System migration can be painful, and you would want to avoid doing that frequently.

3. How profitable are you?

  • Most wealth tech companies are not profitable. Developing new solutions is capital intensive, and can take years, before achieving the onboarding of client business sufficient to break even.
  • Some companies may not have business plans to be profitable as they operate in the low fee game to gain higher market share before cashing out either by selling to a bigger player (clients then shifting to the latter’s platform) or to a private equity firm (increase prices to optimise profitability).

4. Where are your development and support centre(s) located?

  • The wealth management industry requires extensive knowledge of banking operations. Hence, offshoring of development and support to countries with a lack of European banking knowledge and communication (English as a basic) can be detrimental to the selection of vendors in other geographies.
  • Therefore, knowledge of banking operations helps in developing functionalities related to your core business.

5. How strong is your connectivity and functional scope?

  • Connectivity is the key decision parameter in selection of a solution provider.
  • The more custodial connections and/or connections to data aggregators, to ensure most or all of the client’s portfolios in multiple custody banks are captured, will help in shortlisting the vendor for further engagements.
  • The latest trend in the EAM segment, which used to automate the download of data from banks to their PMS system, now automates the uploading of trading instructions from their PMS system to the bank mainly using FIX protocol.
  • Studying the functional scope of the project with the Wealth Tech company is paramount. As businesses evolve, complex solutions may be required to support new functions. The platform’s ability to be flexible in accommodating those scopes, rather than looking for newer systems and vendors, will ensure long term association.

6. How do you calculate performance – position/transaction based?

  • Core banking systems use transactions to calculate performance and position of a portfolio. Solutions for EAMs offer simple steps – replicating one to one the custody bank positions in their portfolio management systems and offer a picture that is exactly the same. This method is cheaper to implement.
  • This method has limitations in calculating performance contribution (TW + MW) and offers less flexibility on past modifications of portfolios.
  • It is therefore important to know the answers to these questions to take an informed decision on its implications.

7. Where do you host the client’s data?

  • Older Wealth Tech solutions still have physical onsite servers that generate high costs and security risk. Most Wealth Techs offer a Software as a Service (SaaS) solution by hosting on a public or private cloud.
  • Regulators in Switzerland in particular require data to be stored in the country and not elsewhere. Hence, the following needs to be verified before selecting a vendor: Evidence certificate, back up architecture and disaster recovery tests and location of the data (if the vendor is operating in multiple geographies).

8. How do you price?

  • Each Wealth Tech company has its own pricing modules which makes comparison difficult. Some charge based on AUM (Assets under Management) and some charge based on user licences.
  • It is therefore important to receive the complete cost structure (one time set up plus recurring costs) to analyse whether there are limitations which may increase the overall costs later. Therefore, a careful study needs to be done before taking the decision.

This eight point checklist will allow you to make informed decisions before contracting with a solution provider who you will be married to for many years.

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