The COVID-19 pandemic is a profound health and humanitarian crisis that fundamentally challenges the financial and operational agility of the global Capital Markets industry. But truth be told, the seeds of turmoil for capital markets firms were planted long before COVID-19 led to what could very well be the greatest recession since the Great Depression.
For years, many investment banks, wealth and asset managers have been slow to address digital disruption, shifting revenues, rising and bloated cost-levels and challenged customer service. It’s often been death by a thousand cuts, with unsustainable cost structures and organizational complexity remaining in place.
Capital markets executives have shown great concern for the impact COVID-19 will have on their business models, and now is the time for bold leadership and a plan. At some point, you’ve got to chart a course and navigate the ship away from the fundamental challenges and jagged rocks.
There are three main actions the industry should take to successfully do so:
First, bend the cost curve permanently. Firms facing profitability challenges should transform their operating models to bend the cost curve and emerge stronger. They can do this by leveraging new technologies –including applied analytics, artificial intelligence and machine learning, and distributed ledger technologies – to drive efficiencies, enhance productivity and improve competitiveness. This is a critical area for some investment banks, particularly in Europe, where many are not earning their cost of equity.
While record trading volumes in the first quarter were a boon to profits, executives would be wise to reconsider the need for large trading floors with heavy on-premise infrastructure that sit on costly real estate moving forward. Embracing the power of digital capabilities and advanced data and analytics could lead to simplified trading flows, fully digital markets with the ability to better manage collateral, and redesigned AML/KYC functions with greater security and transparency.
In addition, with social distancing in place now and for the foreseeable future, companies can revisit sales and coverage models and interactions with clients and investors. Omnichannel and ecosystem strategies will rapidly become embedded that optimize real estate footprints and mitigate sales and travel expenses while maintaining the client experience.
The elephant in the room is tough decisions around staff levels. It’s possible that business continuity issues from COVID-19 have exposed how firms can do more with less. The true recipe for success is a balance between human and machine, but firms need to develop a strong organizational culture for change that embraces new ways of working and skillsets to ensure effective collaboration.
Second, fix sales and distribution. How is your firm driving sales and distribution better than anyone else? COVID-19 has exposed service shortfalls with customer call center volumes spiking to levels where the average wait time has reached over two hours.
Fixing this requires embracing technology, including investment platforms and artificial intelligence, as well as leveraging data and analytics to realign sales, coverage and products to deliver a compelling customer experience. Doing so would strip out existing communication and interaction points, multiple legacy technologies and fragmented data sources.
Wealth managers should investigate how to incorporate true financial literacy and wellness into their advice relationships to retain and win new clients. They should not underestimate the impact this crisis will have on retail investors’ trust levels, many of whom had massive equities exposure before the markets nosedived. The depths of this crisis on investors’ retirement portfolios could make the 2008 crisis look relatively quaint at best.
Third, modernize technology platforms and infrastructure. Infrastructure and platform modernization are critical to improving distribution strategies and better serving customers. We saw firsthand last month what can happen when wealth managers or brokerage firms’ infrastructure is substandard. Temporary platform outages led to frustrated retail and high net worth investors who couldn’t make trades and potentially grow or preserve their wealth.
Asset managers, in particular, have to move with pace as our research shows that 42% believed even before COVID-19 that their operations and technology were not positioned to enable their firm’s overall strategy. The solution is replacing legacy systems, which limit growth due to manual processes, with interoperable and cloud-based platforms. Decentralization strategies for areas such as core processing, operational customer lifecycle management, security and identity management should also be considered.
Until we have a tested and true COVID-19 vaccine, we are living in a new economic reality. The industry deserves credit for quickly achieving “ecosystem resiliency” in the immediate aftermath by helping to mitigate the financial impacts, maximize access to credit and capital as well as keep our world’s economies functioning.
Charting the course now will help you emerge from the COVID-19 crisis on a better path toward recovery.
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