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Wealth management, like many other banking sectors, experiences regular regulatory changes. These changes frequently lead to major shifts in procedures and may hinder the operations of institutions that are not well-prepared enough. Therefore, in this article, we would like to take a closer look at the impact of such changes on this sector and the potential ways to mitigate them.
The Risks Regarding Regulatory Changes in Wealth Management
To begin with, let’s discuss the potential risks that come with regulatory changes in wealth management. What are they, and how can they affect your organization?
Changes in Procedures
One of the main risks regarding regulatory changes is that they enforce large-scale shifts in how an organization operates. Even a small one may result in the need to update and upgrade the software and train wealth managers. This increases the operating costs significantly.
How to avoid that? Software as a service (SaaS) becomes handy here. When working with an external provider of your wealth management software, you don’t have to worry about costly system improvements. Instead, this is taken care of by the provider, who ensures that their platform remains compliant with the current laws.
Tax Changes
Tax changes also play a crucial role in wealth management, as they impact the profitability of certain investments. This is a multi-layered problem.
On the one hand, a rise in capital gains tax may decrease the attractiveness of certain investments in your strategy, forcing you to rethink the plan and inform the client about the changes. On the other hand, it may lead to a decrease in the value and attractiveness of the investments in the client’s portfolio, lowering their trust in you.
Naturally, to avoid this, you should diversify your clients’ portfolios and keep up with the changes. Additionally, educating the client about the potential risks regarding tax changes is also a good way to prepare them for potential drawbacks from certain investments.
“Local” Law Changes
By “local” regulatory changes in wealth management, we don’t mean the law applied to a certain area. Instead, we mean updates to the legislation regarding the particular industry in which your client invested.
This applies specifically to highly regulated industries like healthcare. These market sectors experience many changes in legislation every year, each of which may visibly reduce (or increase) the value of the investments.
Political Law Alterations
If you plan investments in foreign businesses, you need to consider the political regulatory risks. Here, you should evaluate the relationship between your country and the country of origin for the given business (and its target market). For instance, take the TikTok ban—just the rumors that it led some advertisers towards other social media. Had it been implemented US-wide for all citizens, the consequences would be much more severe. The same can happen for any other business associated with countries entangled in political quarrels.
This can, however, be prevented by opting for investments that are safe from political attention.
Data Security and Management Standards
You should also pay close attention to the requirements regarding data security and data management. The rise of AI has opened the door for much more accurate, data-driven decision-making, which is now the domain of the world's main national and international institutions.
The law regarding AI and data processing is bound to be reshaped in the upcoming years to fit the situation and provide ethical yet efficient wealth management. Thus, you need to be careful and pay close attention to the agenda of the main regulatory bodies in the US, UK, and the EU.
How to Mitigate Risks Related to Regulatory Changes in Wealth Management?
So, how can you prepare your organization for the regulatory changes and mitigate the damage? There are a few ways to do that:
- Invest in third-party software—As mentioned before, IT solutions for wealth managers provided as a service are updated by the provider, so they don’t generate additional costs when procedure-related legal changes occur.
- Diversify the portfolios—You can reduce the risks associated with regulatory changes in wealth management by diversifying your customers’ portfolios. The more diverse the portfolio, the smaller the impact of each type of law change should be.
- Stay up to date—Additionally, you need to be aware of all the current and pending changes in the legislation.
Conclusions
Different types of regulatory changes impact wealth management significantly. Therefore, as a business or individual wealth manager, you need to ensure that you are prepared to handle them immediately after they come into power and to reduce the negative impact of those changes that you cannot avoid. Only this will enable you to provide excellent services and keep your operating costs satisfying.
You may also read: Personalizing Client Experiences in Wealth Management
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