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Portfolio analysis and performance reporting in the digital age

Wealth managers need the power of digital to get their game on

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Satya Iluri

Vice President, Wealth Management Consulting

February 9, 2018 - For decades, wealth managers and broker-dealers sent out quarterly and annual brokerage statements that were basically just a compilation of trading activity, inflows, outflows, positions, and balances. These transactional reports barely touched on the concept of performance. And even when they did, it wasn't easy for clients to translate exactly how their investments were doing compared to the market and their peers. The main function of these statements seemed to be to fulfill a regulatory obligation — they were not about increasing competitive advantage.

If some financial institutions were hesitant to discuss performance, that's understandable. Actively managed, fee-added portfolios tend to underperform. For other wealth managers, not showing performance wasn't a business decision. Instead, messy data and complex systems prevented comprehensive reporting.

It's true that in recent years, more wealth managers have started providing account- or portfolio-level returns. Yet many still avoid calculating a total personal rate of return. Of course, a few brave ones do so, and even offer relevant risk and return statistics. All the same, it isn't very useful to offer content without context — or statistics without explaining what they mean.

These shortcomings are no longer acceptable. Today's customers expect much more from their financial institutions. Enhanced customer experience in other areas — from retail to travel and utilities — have dramatically raised the table stakes for every industry and firm. Investors now want help with goals, as well as advice on how to navigate complex financial markets. They're looking for guidance on broad product selection — and prudent and practical counsel in general. They expect low fees, transparency, and — most of all — an amazing user experience across channels. These are not just desires. They're demands.

These new customer expectations provide a solid business justification for a digital transformation of the entire value chain. Yet many financial giants are reluctant to take the plunge because legacy environments are forcing them to deal with the following issues.

  • Data: There's too much of it — some of it redundant — floating around in a multitude of systems of record. The volume, variety, and velocity of this data is difficult to manage. Also, while standard solutions work reasonably well with structured information, they can't handle unstructured and semi-structured data
  • Systems: Legacy systems with antiquated technology stacks often don't play well with others. What's more, there are too many of these systems in place. They often overlap or provide fragmented functionality
  • External pressures: An onslaught of megatrends is impacting the wealth management industry's agenda
  • Mindset: A true digital transformation calls for changes in strategy, culture, operating model, and mindset. Without rethinking and reimagining capabilities (figure 1), re-architecting alone won't work

Figure 1: Core capabilities

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Traditional financial services firms, in their quest to meet customer expectations and compete with upstart fintechs, often haven't fully thought through overarching issues. They don't always consider, for example, how domain, design, and delivery must all work in unison. As a result, some issue reports feature a slew of statistical terms — alpha, beta, Sharpe, Treynor, Jensen — without context or personalization. That's a critical mistake. Instead of bestowing a glow of goodwill, these efforts cause confusion and misgivings. Conversely, placing risk and return statistics in context elevates the discourse and enhances the reputation of the firm and the advisor.

Savvy wealth managers and financial advisors realize the power of good portfolio analysis and that a performance report — whether it's an interactive online site or a printed statement — isn't an obligatory checkmark (figure 2). It's more about:

  • Aggregating a client's overall assets and liabilities to offer advice based on a holistic financial picture
  • Communicating to clients the value of advice and the advisor — thus, the firm — using portfolio analysis and performance reporting
  • Imparting the notion of investing for goal optimization, not just return maximization
  • Showcasing allied benefits such as tax-aware investment selection and rebalancing strategy
  • Conveying overall oversight, management, and client wealth, including held-away assets, for a truly holistic picture
  • Achieving compliance objectives with appropriate disclaimers, disclosures, and — more important — transparency
  • Making the overall workflow and experience intuitive, integrated, and easy

Figure 2: The Lego blocks of aggregation, analytics, and reporting

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In today's digital era, portfolio analysis and performance reporting are much more than just a matter of crunching complex calculations. In fact, raw returns may be the least valuable piece of information in a performance report. Are you adjusting to the new realities?

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