Ahead of the Curve: Why Private Wealth Managers Should Adopt Composites

Date: November 18, 2021
The wealth management industry is on a rapid growth trajectory, with AUM projected to increase by as much as 50% between 2020 and 2025, according to the Business Research Company1. This means there is an incredible amount of opportunity in the space, but it also means that client demands and regulatory burdens are likely to ratchet up in the years ahead – in fact, this is already happening.

To thrive in this shifting landscape, asset managers need to provide snapshots of their various approaches to portfolio construction. As the wealth management industry evolves, providing this information is a natural development, and composites can help wealth managers achieve all of this and more. This blog will explore some of the benefits of composites, the historical barriers to adoption in wealth management and how firms can leverage technology to implement this process.

PWM-Blog-Ad-1041x1041Composites have substantial utility for private wealth managers, but firms have yet to adopt them at a rate commensurate with their value proposition. Historically, institutional asset managers have touted their GIPS® compliance to entice clients for whom the guidelines are important – but in the wealth management space, the dynamic is very different. These investors may not know much about the financial services industry, let alone the various standards that the buy side might adhere to, so there has been little demand for GIPS-compliant offerings. Also, because private wealth managers serve so many individual clients, they must handle huge volumes of portfolios and their technology budgets are often too small to support this scale. The result is an environment in which wealth managers historically did not need composites to remain competitive.

Thanks to a host of forces, this is changing quickly. As the wealth management space has advanced, so too have the regulatory and guideline-related frameworks in which these firms operate, adding up to an increasingly powerful case to adopt composites. The year 2020 saw a revision of the GIPS Standards that made it easier and more enticing for a wider range of firms to comply.

By adopting composites, private wealth managers can prepare for any regulatory shifts while also communicating to clients that regardless of how requirements may change, their manager adheres to the highest standards in the industry. Finally, building composites depends heavily on the accuracy and workability of upstream data, which has never been easier to access, normalize and query. These factors have pushed a growing number of private wealth managers to adopt composites or consider a pivot.

The reasons for adopting composites go far beyond GIPS compliance. Composites have positive effects in a wide variety of arenas and while abiding by the guidelines is a big plus, the efficiencies that they unlock would be desirable to private wealth managers regardless of outside expectations.

Composites can serve as a powerful tool for sales and marketing as firms can present their offering to potential clients who want to know more about its strategy, performance and risk. As adoption by private wealth managers continues, it only makes sense that potential clients would be next in line to demand these insights. Composites can also help ensure that wealth managers’ internal operations run as smoothly as possible. With a more streamlined process, managers gain enhanced control over and greater knowledge of the elements of each portfolio. Finally, composites provide a regulatory safe harbor to illustrate that strategies and portfolios are indeed generating returns and serving the needs of investors.

Confluence’s composites solution enables clients to achieve compliance with current and future GIPS standards. In an industry where technology is constantly evolving, hiring large compliance teams and conducting manual processes is untenable and inefficient. Confluence’s solution is centered around automation and is capable of efficiently generating analytics for millions of portfolios and tens of thousands of composites. Because it is a hosted solution, it is flexible and customizable with straightforward installation and deployment.

Unlike institutional managers, private wealth firms have historically not been penalized for not complying with GIPS standards or reporting on composites. However, this shouldn’t prohibit private wealth firms and their clients from putting a composites reporting regime in place. The benefits are vast, positioning firms for success as the wealth management industry continues to mature. As more rigorous regulatory standards and faster technology continue to shape the financial services landscape, the use of composites as a standard practice feels like a logical extension. This is especially true with the availability of highly scalable and flexible solutions offered by firms like Confluence, which make the process as simple and efficient as possible. We fully expect to see increased interest and adoption of composites and GIPS standards in private wealth across many different types of firms within the industry.


Disclaimer: The information contained in this communication is for informational purposes only. Confluence/StatPro is not providing, legal, financial, accounting, compliance or other similar services or advice through this communication. Recipients of this communication are responsible for understanding the regulatory and legal requirements applicable to their business.

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