Five hot trends are dominating industry discussions in Singapore’s burgeoning wealth market. Together they will shape the industry for years to come. How well firms manage to adapt to the changes will have a major influence on their future success.

1

ESG

THE EVER-INCREASING FOCUS on environmental, social and governance (ESG) issues among clients and regulators, and the challenges involved in meeting those expectations have become impossible for wealth managers to ignore. And the demand drivers are only set to strengthen, with global ESG assets forecast to exceed $53 trillion by 2025, more than a third of the $140.5 trillion in projected total assets under management.

Adhering to an ESG-aligned investment approach is no simple task. It requires ESG capabilities become engrained in every facet of the investment management organisation, from portfolio construction and risk management to client engagement and business operations.

Data poses a major challenge. Identifying ESG-oriented investments and calculating the investment risks demands a varied mass of data points to assess the impact and report results to investors and regulators.

One big problem is the lack of agreed data, taxonomy and standards. Divergent approaches mean the ESG-related financial and non-financial data corporates and investment managers provide are neither consistent nor comparable.

Efforts such as the European Union’s Sustainable Finance Disclosure Regulation (SFDR) and taxonomy for sustainable activities, the Task Force on Climate-related Financial Disclosures (TCFD), and the Monetary Authority of Singapore’s (MAS) proposed disclosure standards for ESG-oriented retail funds aim to promote standardisation and transparency. But until standards become more universal and better embedded, investment firms will need to capture and analyse ESG data from multiple sources to support their investment and reporting processes.

“Investment firms will need to capture and analyse ESG data from multiple sources to support their investment and reporting processes.”

Collecting, organising and sharing the growing mass of external and internal ESG-related research is another priority. As is identifying and integrating ESG-related risks into firms’ risk management frameworks.

Wealth managers need to incorporate companies’ and funds’ ESG disclosures and performance into their portfolio monitoring and management processes too, adding an extra layer of complexity. Automating portfolio construction, model management, order creation and account rebalancing would enable managers to adjust portfolios and strategies quicker and more efficiently in line with their ESG policies. It would also free them to create bespoke portfolios that better reflect clients’ ESG priorities.

Capturing those client ESG priorities is not something wealth managers had to worry about historically. Onboarding questionnaires will need to be adapted to generate risk profiles that reflect a client’s ESG preferences. Suitability assessments will then enable firms to match the right product to each client’s investment objectives and risk profile.

Automating that process through a digital portal will create faster, more tailored results. Online communication channels also allow advisors and clients to discuss any ESG-related investment issues and enable instant access to portfolio information.

2

ALTERNATIVE ASSETS

ALTERNATIVE ASSETS HAVE BEEN GAINING FAVOUR among investors for some time. Faced with elevated equity valuations and high bond prices, alternatives offer an attractive way to increase diversification, boost returns and generate long-term revenue streams. The spectre of high inflation and geopolitical uncertainty—with their impact on global growth and volatility—will reinforce the trend.

Private markets have attracted particular interest. Refinitiv data shows private equity deal values in Asia hit a first-quarter record $46.5 billion in Q1 2022, a 340% rise on the same period last year.

It follows a banner 2021, when Bain reported the value of private equity investments in Asia-Pacific reached a record $296 billion, with dry powder in Asia-Pacific-focused funds at a new high of more than $650 billion. Over the past decade, assets under management focused on the region have grown 2.4 times faster than for North America and three times faster than for Europe.

Complex asset classes such as private equity and private debt bring significant operational challenges though. Relying on a mix of spreadsheets, legacy platforms and in-house built technology, as many investment firms do, won’t work.

Providing investors with full transparency into their portfolio constituents and the performance achieved demands systems that can combine portfolio accounting with investor accounting records for both onshore and offshore funds. Tracking and reporting on investor capital activity, and calculating management fees and waterfall distributions takes specialised functionality. Delivering comprehensive look-through reporting for investors is critical.

As portfolios continue to diversify, having a single solution that can provide complete instrument coverage in the same platform will be key for wealth managers. With a consolidated infrastructure, firms can maximise control and efficiency, streamline costs, monitor portfolio-wide positions and risk exposures, respond quickly to market movements, make better-informed investment decisions and produce the detailed, 360° reports investors have come to expect.

3

DIGITAL ASSETS

SINCE BITCOIN’S EMERGENCE IN 2009, digital assets have gone from a tiny, highly-speculative niche on the outer edges of the investment universe to a major talking point and prospective portfolio allocation target for institutions, high-net worth individuals and retail investors around the world. Wealth managers and regulators have been left trying to figure out how best to respond.

Allocations to digital assets among investors across Asia Pacific remain small. For now. But they look set to ramp up.

Cryptocurrencies have been at the forefront of the digital asset trend. Huge value appreciation in recent years has underpinned the surge in investment interest. The sector remains beset though by enormous price volatility. Effective research management and collaboration tools will be particularly important for any wealth managers considering dipping their toes into the cryptocurrency space. Sophisticated risk modelling/management, performance measurement and reporting capabilities to keep investors apprised of portfolio movements are likewise crucial.

The nascent tokenisation market offers greater potential for digital asset take up. Digitalising assets—especially illiquid asset classes such as private equity, infrastructure and real estate—allows them to be fractionalised and traded on secondary markets. That would slash the investment minimums investors need to commit to, increase liquidity and transaction speed, and open up the sectors to a much wider investor pool.

As Ken Yap, managing director, Asia at Cerulli Associates, noted in a recent Cerulli report: “The key will be not to think of digital assets as a separate asset class, but another way of getting access to existing assets.”

4

EMBRACING THE CLOUD

“THERE USED TO BE A VIEW WITHIN SOME QUARTERS that MAS does not like the cloud,” the Singapore regulator’s managing director Ravi Menon observed in a speech back in 2016. “Lest there be any lingering doubt, let me reiterate: MAS has no objections to FIs [financial institutions] using the cloud.”

In the years since, use of cloud-delivered technology and outsourcing services has gone from strength to strength as the capabilities have evolved and become more secure. Firms are increasingly engaging outsourcing providers to support their middle- and back-office operational tasks. Players in Singapore’s thriving external asset managers sector are among those showing the most openness to a cloud-delivered, outsourced model.

This embrace parallels the swelling support for outsourcing and cloud adoption highlighted over the years by the WealthBriefing/SS&C Advent Technology & Operations Trends surveys. The most recent report found four in ten firms now outsource some if not all of their middle-/back-office activities (including an increased openness to co-sourcing), while less than a fifth are against it. Resistance to technical outsourcing and cloud services has also sunk to negligible levels, with half of wealth managers using cloud services by 2019.

The cost advantages and shift to a variable cost model—the benefits of which have been underscored by the pandemic—are major factors in firms’ decisions. Enhanced operational resilience and the ease with which users can stay current with the latest technology innovations offer additional advantages.

The freedom outsourcing/co-sourcing gives wealth managers to focus on their core competencies and elevate the client experience further strengthen the case. This ability to concentrate on revenue-generating front-office activities and hive off complex middle- and back-office functions that offer little competitive differentiation suggest the trend has a long way to run.

5

CYBERSECURITY

SECURITY CONCERNS—especially worries that firms’ most sensitive data would be compromised—long served as the biggest barrier to cloud and hosted technology acceptance. Security fears though are increasingly a key reason why asset and wealth managers should embrace cloud and outsourcing solutions.

The wealth management sector is a prime target for cybercriminals, providing lucrative opportunities to hijack accounts, and steal funds and sensitive information from wealthy clients. The pandemic-induced increase in remote working and adoption of digital technology by wealth firms has heightened the risk. Meanwhile, the Cyber Hygiene Notices—legally-binding rules issued by the MAS that took effect in 2020—require all financial institutions to strengthen their cyber resilience against the growing cyber threat.

With the sophistication and scale of cyberattacks multiplying all the time, investment firms are facing an arms race they will struggle to keep pace with alone. Dedicated technology and service providers are better placed to meet the challenge. Third-party vendors have considerable technological and security expertise developed through years of focus on the field and from working with diverse institutions in multiple jurisdictions. Hosting and outsourcing allow asset and wealth managers to share in this expertise.

Given the financial and reputational damage that can ensue from any security breaches, wealth managers must mitigate the risks wherever and however they can.