Of all the many risks facing wealth and asset managers (WMA) today, who would have thought that Reddit traders would be one of them? Yet, that was the case when day traders recently shared stock tips on the messaging site and caused hedge funds to lose billions. Many of those funds are now considering new technology tools that will enable them to determine if traders are coordinating their activities — hoping to avoid a similar situation in the future.
Reddit aside, WMA firms are dealing with more risks than ever, many of them complex or yet to be uncovered with emerging technology and sites. In an industry built on trust, a single risk event — such as a cyber attack or major regulatory fine — can destroy an organization’s reputation. This is why firms must overcome current and potential risks to stay competitive and attract investors.
Maintaining a competitive edge requires creating a differentiated advisory experience for clients that harnesses alternative data sources and insights. When you infuse your data-driven strategy with artificial intelligence (AI)-based monitoring and reporting, you can begin to address many of the risks plaguing the WMA industry today and reinforce your competitive advantage. Let’s take a closer look.
Challenges for WMA Firms
1. Unrelenting cyber threats
Ransomware remains an enormous challenge for WMA firms and financial institutions, with the financial services industry already 300 times more likely to be the target of cyber attacks. During the pandemic, ransomware attacks grew by nearly 500%, resulting in staggering losses of highly sensitive data.
Various impersonation scams are also on the rise, with the Financial Industry Regulatory Authority (FINRA) reporting a prevalence of impostor websites and documents using the names and details of real registered brokers and investment professionals who are unrelated to, and unaware of, the fraud. Business email impersonations, phishing, and other serious scams continue to proliferate.
2. A regulatory deluge
After the 2008 financial crisis, a spate of new regulations rippled across the U.S., Europe, and the Asia-Pacific region. Now, post-COVID, the same is likely to happen again. While poised to focus new laws on business continuity and liquidity management, regulators are currently demanding more information on asset managers’ environment, social, and governance (ESG) practices.
At the same time, climate change regulations are impacting company operations and consumer behavior alike, creating sudden new limits on investment opportunities and leading to more divestitures in industries that generate high levels of pollution.
3. The risk of new technologies
Besides AI, distributed ledger technologies (DLTs) such as blockchain, along with smart contracts and cryptocurrencies, are at the vanguard of financial services innovation these days, but they’re unfortunately not without risk. And understanding the exact shape and scope of the risk is proving to be exceedingly difficult.
Meanwhile, the advent of Robo-Advisors — computer-automated investment advisors, sometimes complemented by human advisors who can answer questions — have the potential to disrupt the industry. By 2025, it’s predicted that Robo-Advisory services will play a role in managing $16 trillion in assets. In the interim, however, firms that rely on Robo-Advisors face risks that extend from regulations, IT governance, and algorithm tampering — all of which can contribute to a subpar client experience.
The Business Impact and Imperative
What does all this mean for the business of WMA? The impact of these risks can include issues such as
- Data leakage or manipulation of trading systems that hurt investors, cause financial losses, and damage the brand
- More regulatory costs and the possibility of steep penalties for violations
- Data breaches that compromise sensitive customer data
- Threats to intellectual property, such as trading practices and strategies
- Loss of competitive ground to agile Big Tech companies
- Secure third-party data integration
- Localized AI-based insights and support
- Prioritized security through identification of sensitive data and application of policy-based protection, regardless of the data’s location
- Securing digital borders, sensitive data, and proprietary intellectual property
- Protecting customer information and your brand reputation
- Minimizing financial costs and damages
But trying to solve these problems through traditional approaches — that is, legacy IT systems — could become a losing battle. Legacy infrastructure can’t keep up with omni-channel data creation and usage. Nor does it allow firms to expand their AI and machine learning (ML) capabilities rapidly to meet the demands of the digital economy, while also enforcing proper ingress and egress controls. Finally, it doesn’t have an answer for the challenge of Data Gravity that’s impacting the ability of everyone in financial services, including WMA, to operate on a global scale.
Instead, today’s WMA firms require a new approach to IT infrastructure that can help mitigate risks, better serve customers, increase growth and margins, and, most importantly, optimize data exchange.
The Solution: Data-Centric Hybrid IT Infrastructure
You can better handle challenges and risks and boost your competitiveness by implementing a data-centric hybrid IT infrastructure that prioritizes data as a primary asset with apps developed around the data. This infrastructure provides
By weaving an optimized data exchange strategy into your architecture, you can gain all the advantages of the wealth and asset management sector while differentiating your advisory experience from that offered by your competitors.
Prioritizing risk management promotes growth and helps firms improve competitive advantage by
Helping WMA Address Data Gravity
With Digital Realty’s PlatformDIGITAL®, you can solve data gravity challenges by bringing users, Internet of Things (IoT) devices, applications, clouds, and networks to the data at centers of data exchange. By partnering with Digital Realty to streamline your infrastructure operations, WMA firms can realize the benefits of data-driven operations, achieve more robust security and cyber resiliency, and meet regulatory and compliance requirements with greater efficiency and ease.
To find out more about optimizing data exchange, download the solution brief “Optimizing Financial Services Data Exchange” from our Pervasive Datacenter Architecture (PDx™) library.