Budget can spark wealth management reforms in UK

The wealth management industry has repeatedly missed opportunities to adapt and innovate. Labour’s first Budget provides an opportunity to do both.

Although it may not have seemed like it upon first reading, the first Budget delivered by a Labour government in 14 years offers the wealth management industry in the UK a great opportunity. Now the dust has started to settle on the biggest financial policy shake-up in over a decade, let me explain why.

Over just the last five years, the wealth management industry has weathered some monumental events. The 2022 ‘mini-Budget’ had a marked impact, as did the steady decline of markets and the rise in interest rates – since then, economic and political turbulence has been rife.

Across this period, the industry had chances to improve its efficiency by embracing technology to overhaul how it operates, but limited progress was made. Now, the Budget presents us with a new opportunity to reinvent our industry that we must not pass up.

As expected, the Budget brought enormous speculation. Chancellor Rachel Reeves’ promise not to change primary tax sources clearly meant that wealth was going to bear the brunt of the pain, particularly since she identified a £40bn ($50bn) funding gap in the public finances. There was even speculation that a new ‘wealth tax’ in the form of an annual tax on all assets above a certain threshold could come into play.

What followed was much more subtle, and taken singularly you might think that policies like capital gains tax (CGT) on assets, inheritance tax (IHT) on pensions, a relief cap on agricultural and business property, higher national insurance (NI) contributions for employers, and the abolition of the non-dom regime won’t have too much impact. But when combined, their consequences will be felt by wealth managers and their clients for years to come.

Higher NI for employers might mean lower wage growth, VAT on school fees could lead to lower available amounts to invest in individual savings accounts, higher CGT reduces the net returns and IHT on pensions could mean less left to the next generation. None are material in isolation, but combined, the effects of these policies will be significant and all clients will now be re-evaluating and planning how they manage their wealth. And, while clients are looking to their wealth managers for advice on adapting to the new rules, wealth managers need to be looking at their business plans and considering where to find the next few years of growth. In short, the Budget should serve as a wake-up call to the industry to reform how it operates.

 With challenges come opportunities

This short summary of the Budget suggests a challenging outlook. However, with challenge comes opportunity and if the industry seizes this opportunity and embraces a process of purposeful digitisation it can reach a point of Wealth Management 4.0, and be more successful than ever.

Wealth management technology has historically lagged other sectors. It’s true that regulatory complexity, cyber and data security requirements, and the need to integrate with legacy systems pose challenges to affecting change quickly. But none of these challenges are insurmountable, and we should be looking to other highly regulated businesses such as healthcare, pharmaceuticals, telecommunications and banking, which have faced similar hurdles but have overcome them more rapidly.

In fact, more powerful than the challenges of processes and technology is the cultural resistance to change. Internally, firms tend to stick to well-established ways of working and are reluctant to adopt new technology, systems and processes.

There are a number of areas in which the industry can reform, for example:

• Rationalising operations

  : Wealth managers rarely consider efficiency of their operations, and many continue to manage assets across multiple platforms and custodians. Consolidating these operations for commercial and client outcomes is a win-win.

• Overhauling processes:

  Paper fact finds, Letters of Authority, documents requiring ‘wet’ signatures and dual keying to different systems and platforms are all still commonplace in wealth management. They get in the way of the adoption of newer technology and contribute to high costs to serve.

• Adviser 4.0:

  While it’s true that some providers have introduced portals and mobile apps, the industry can go much further. Solutions such as online chatbots, data-rich digital dashboards, personalised insights and recommendations created by AI and machine learning algorithms, virtual, interactive workshops and webinars, are just some examples of how we can bring the customer experience element of wealth management into the 21

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In summary, wealth management has repeatedly missed opportunities to adapt and innovate. While other sectors are advancing rapidly in their digital transformation journeys, we continue to fall behind. This Budget should act as a wake-up call for the industry to evolve. Failure to change will leave firms overshadowed by competitors which have embraced the future and accelerated their growth.

Matt Lonsdale, director - consulting, Davies