Croesus experts’ 2023 year-in-review

Croesus experts’ 2023 year-in-review

2023 was a year full of twists and turns in the financial and FinTech community. Croesus experts look back and analyze some of the year’s events.

January: GenAI’s impact on wealth management unfolds

With 13 million unique users per day in January, ChatGPT’s open-source, end-to-end dialogue system is set to revolutionize financial planning and investment management processes. As technology innovators integrate ChatGPT, the wealth sector anticipated a paradigm shift with the rapid acceleration of adopting AI, big data, and cybersecurity.

“2023 marks the beginning of a transformative era in how we interact with applications. This year has seen a significant rise in the incorporation of virtual assistants within applications, streamlining everyday workflows and connecting various systems to execute complex tasks,” said Maxime Dumas, Lead Researcher at Croesus Lab, who spent part of the year researching generative AI technology.

In March, the industry embraced AI-driven solutions such as FMG Suite’s content personalization engine. Wealth management firms, including J.P. Morgan followed suit, showcasing a commitment to integrating AI for data aggregation and client interactions.

Dumas emphasized the growing ubiquity of these assistants, noting their ability to simplify interactions and enhance efficiency. “As AI continues to evolve, these virtual assistants are not just augmenting user experience but are also becoming integral in handling intricate operations that were previously challenging to automate,” he said.

Despite caution from some financial services executives, Canada emerged as a leader in AI, with research centers like Amii, Borealis AI, CIFAR, CRIM, IVADO, MILA, SOSCIP, Vector Institute, and Croesus Lab.

“As we move into 2024, the landscape of artificial intelligence is poised for another leap forward with the emergence of increasingly complex autonomous agents. These advanced AI systems are expected to be capable of performing intricate tasks independently, marking a significant evolution from the virtual assistants of 2023. This development signifies a major milestone in AI’s ability to not only assist but also autonomously execute complex operations, reflecting a deepening integration of AI in various sectors,” said Dumas.

February: Inflation surge shook markets

In February, inflation reached unprecedented levels, prompting central banks to adopt a more aggressive interest rate policy. Bonds yielded the highest returns in over a decade, while stocks, particularly value and dividend stocks, showed renewed potential.

“Post-pandemic economic growth, along with a global supply shock, caused unanticipated inflation, forcing central banks across the world to increase rates to try and combat inflation,” according to Marc Riel, Vice-President, Business Development and Strategic Partnerships, North America, at Croesus.

By August, Canada’s major banks faced challenges from rising expenses, loan-loss provisions, and deteriorating consumer financial situations. Lagging behind the overall market, these banks anticipated a hit to their Q3 profits with the impending interest rate increase. Speculations about central banks raising rates grew, fueling expectations of higher financing costs and a slowdown in loan growth.

In September, Bank of America’s outlook hinted at an equity exodus as the 10-year treasury yield hit its highest level since 2007, leading to a market adjustment. Investors rapidly divested from stocks, resulting in global equity fund outflows of $16.9 billion during the week of September 20. Despite these tough conditions, stock markets gained back momentum in mid-October, almost reaching their 2023 mid-November high.

March: A banking shockwave reshapes global finance

The storm hit on March 8, when Credit Suisse faced a 22% stock drop due to revelations from the Swiss Financial Market Supervisory Authority (FINMA) regarding the Greensill scandal. Concerns about credit default swaps (CDS) fluctuations and wealth management client departures added to the turmoil. PwC’s audit expressed doubts about the bank’s internal controls.

As the situation worsened, UBS acquired Credit Suisse for 3 billion Swiss francs, with the Swiss National Bank injecting 100 billion dollars in liquidity. This forced merger set the stage for significant long-term challenges. The combined UBS and Credit Suisse entity, now a financial giant with $5 trillion in assets under management, reshaped the financial landscape globally.

Ripples from the Credit Suisse crisis extended beyond Switzerland, causing turbulence in Deutsche Bank and renewing concerns about the overall banking sector’s stability.

The crisis also impacted the United States, with Silicon Valley Bank, First Republic Bank, and Signature Bank facing a rollercoaster ride that forced government-led intervention and some forced acquisitions. Moody’s and S&P downgraded several mid-sized U.S. banks, citing tightening financial conditions and sector stress.

“The banking crisis in the spring of 2023 reminded us of the one in 2008, and everyone wondered whether we would again be facing the repercussions of systemic risks from one continent to another. Fortunately, the crisis was quickly contained, affecting only a handful of financial institutions, and I believe that the lessons learned in 2008 have helped decision-makers to manage the 2023 crisis,” said Frédéric Le Bouar, Director, Product Marketing and Business Promotion at Croesus.

April: New regulatory body shapes Canadian financial landscape

On April 25, Tim Hodgson, president of the newly formed Canadian Investment Regulatory Organization (CIRO), unveiled the organization’s name and logo. Born from the amalgamation of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA), CIRO proposes a shift from competency assessment to an exam-based approach, aiming to enhance skill evaluations for financial advisors.

“This amalgamation will streamline the wealth management framework, presenting a business opportunity for investment companies and firms. They can now cater to diverse markets with a more efficient, cost-effective structure, ultimately benefiting investors,” said Luc Larose, Vice-President, Client Experience at Croesus.

Establishing a unified self-regulatory organization is guided by the goal of providing better value to investors, promoting innovation, streamlining services for dealers and advisors across regions, and removing regulatory obstacles to business expansion. This move is particularly beneficial for businesses operating separate IIROC and MFDA platforms, as well as entities in Québec.

“Investors will have simplified access to various investment products, and the continuity of staying with the same advisor or firm as their investment needs evolve. Additionally, public protection is bolstered, since advisors will now be subject to uniform regulatory requirements regardless of the investment products they handle,” said Larose.

In October, CIRO initiated efforts to consolidate rules for mutual fund and securities brokers, harmonizing requirements and adopting principles-based, less prescriptive rules.

June: Wealth and asset managers adapt to challenges with tech solutions

Facing rising costs, shrinking margins, and heightened client demands, wealth and asset managers are turning to third-party tech solutions. A report entitled Scalable Tech and Operations in Wealth and Asset Management, published in June by Boston Consulting Group, reveals a remarkable 10% surge in third-party tech spending in the sector since 2018.

“This shift towards greater adoption of third-party FinTech within the wealth management industry is poised to significantly advantage Croesus. As a frontrunner in delivering cutting-edge wealth management solutions to both financial institutions and independent wealth managers, Croesus stands well positioned to thrive in this evolving landscape,” said Marc Riel, Vice-President, Business Development and Strategic Partnerships for North America.

June: Surge in clientele for Canadian advisors

Canadian wealth managers and financial advisors report a significant uptick in personally serviced clients, with 92% noting an increase over the past five years, according to a June study by Ortec Finance. This upward trend is expected to persist, with 54% anticipating client growth of 20% or more in the next three years.

“The number of investors has reached new heights and is expected to continue rising in the coming years, alongside total assets under management. A key driver is the extended life expectancy in developed nations, resulting in three generations being simultaneously in the investment age. Additionally, the ongoing intergenerational transfer of wealth involves several billion dollars for the new generation,” said Luc Larose, Vice-President, Client Experience at Croesus.

The Ortec study underscores the crucial role of technology, with 78% attributing effective client service to substantial tech investment. It highlights challenges and opportunities for financial professionals to meet growing demand, emphasizing the need to invest in scalable technology for managing the anticipated rise in clients.

“For financial advisors and firms, technology is the linchpin for handling this growth. It facilitates managing a large volume of clients at lower costs while preserving a human connection with them. The integration of artificial intelligence into advisors’ solutions has the potential to streamline their activities while expediting request processing. However, balancing this with data security is vital. We face an intriguing challenge requiring a thoughtful approach,” said Larose.

August: Global wealth contraction

For the first time since the 2008 financial crisis, global private wealth experienced a contraction in 2022. The 2023 Global Wealth Report, jointly presented by UBS and Credit Suisse, revealed a 2.4% contraction, totaling $454 trillion in global wealth. Wealth per adult dipped by 3.6% to $84,718, influenced by asset depreciation and the US dollar’s rise.

Countries like the United States, Japan, China, Canada, and Australia faced substantial wealth losses, while Russia, Mexico, India, and Brazil saw gains. Notably, Switzerland claimed the top spot in global wealth per adult, trailed by the United States and Hong Kong.

Canada experienced a significant 10% wealth decline in 2022, affecting both financial and non-financial assets. Despite this setback, a positive outlook prevails: The report predicts a possible 63% surge in Canada’s millionaire population by 2027, surpassing a more modest 16% increase projected for the United States. This growth is expected to contribute to a global wealth rebound, reaching $629 trillion by 2027.

Despite the challenges in 2022, the Global Wealth Report forecasts a brighter future. By 2027, a 38% surge in global wealth is anticipated, with an estimated wealth per adult of $110,270. During this period, the number of high and ultra-high net worth individuals is expected to reach 86 million and 372,000, respectively.

“For these predictions to happen we will need a very soft landing and strong economic growth coming out of our upcoming recession,” according to Marc Riel, Vice President, Business Development and Strategic Partnerships for North America.

October: Transformative journey in responsible investing

In 2023, responsible investing faced challenges but maintained significance. The Responsible Investment Association’s October 26 report revealed that by December 31, 2022, responsible investments totaled $2.9 trillion, holding a 49% market share. ESG considerations evolved, with 93% prioritizing climate-related factors and 81% focusing on equity, diversity, and inclusion.

ESG reporting gained prominence, with 57% expressing increased confidence in its quality. Despite concerns about greenwashing and data reliability, 93% anticipated the continued growth of responsible investing, driven by climate awareness and regulatory demands.

Addressing these concerns, Broadridge Financial Solutions launched the ESG analyzer on January 23, aiding companies in transparently benchmarking their ESG practices. It became pivotal amid the growing significance of ESG disclosure, enhancing transparency and accountability.

However, challenges emerged as Vanguard, managing $8 trillion, departed from the Net-Zero Asset Managers initiative in late 2022. CEO Tim Buckley’s skepticism about the value of ESGs set a challenging tone for 2023. By March, the iShares ESG Aware MSCI USA ETF, the largest ESG index fund, suffered losses of nearly $6.3 billion year-to-date. Political backlash and return concerns led to a $5.8 billion collective loss for domestic ESG-labeled ETFs.

Moreover, a Greenpeace report in March highlighted environmental responsibility, revealing that the top five Canadian banks contributed 20.4% of global fossil fuel financing. This emphasized the need for regulatory frameworks aligning banking practices with ESG goals, showcasing the broader impact of ESG considerations beyond portfolios.

“The primary aim of financial institutions is to deploy capital and funding strategically, aiming for substantial returns on their investments. By operating on both ends of the spectrum, they essentially wield two sets of cards, allowing them to thrive regardless of the outcome. While renewable energy companies, with their capital-intensive nature, have faced challenges amid the upsurge in interest rates, fossil fuel energy and oil and gas companies have emerged as top performers in the post-pandemic era, benefiting from the surge in oil prices,” said Marc Riel, Vice President, Business Development and Strategic Partnerships for North America.

November: Slow progress towards Open Wealth in Canada

Canada’s progress towards Open Banking faced challenges and delays in 2023. As the financial industry eagerly anticipated advancements, impatience grew within the sector. With the federal government’s November announcements, the pace could seriously pick up in 2024.

“The first steps towards open banking will be in the payments and banking space. It might take a bit longer for wealth management to start leveraging such a model, but we know it’s coming,” said Raghid Nami, Product Leader and Open Wealth Expert at Croesus.

The announcement of the third delay in the roll-out of the Real-Time Rails payment system in June bears witness to the difficulties faced by the Open Banking Advisory Committee, which had to request an extension to its mandate.

In August, the Financial Data and Technology Association (FDATA) of North America expressed disappointment with the lack of progress in Canada’s Open Banking initiatives. Simultaneously, The Open Finance Network Canada (OFNC) issued an urgent plea to Finance Canada, urging the establishment of a definitive deadline for Open Banking implementation and the formulation of a comprehensive roadmap.

Concerns deepened in September when the federal budget made no mention of this transformative initiative, casting doubts on the government’s commitment. Responding to these uncertainties, industry groups and FinTech companies took collective action in October by launching the Choose More campaign, urging faster modernization. By November, a Conservative private member’s bill pressured the government to advance stalled legislation.

By the end of November, the federal government presented its Fall Economic Statement. This included a policy statement on consumer-driven banking that announced framework legislation, to be introduced in the 2024 Budget. This legislation will prescribe a “phased-in approach to scope, oversight of the technical standard, and a timeline for phasing-out screen scraping.” According to the statement, the Department of Finance will collaborate with the various parties involved to have legislation in place by 2025.

While an estimated 9 million Canadians currently share their financial data by providing confidential banking credentials to service providers and seem increasingly willing to share their financial data, Canadians’ lack of awareness of Open Banking is another challenge that would need to be addressed.

“I believe that Open Banking, once it gets implemented in wealth management, will bring a ton of value to advisors and ultimately investors. Wealth managers should prepare for such an ecosystem, since we expect business models will have to adapt. That’s what we do at Croesus. We are ready to support your Open Banking projects with APIs that you will need to complete your implementation,” said Nami.

December: US Federal Reserve maintains status quo

In its December 2023 meeting, the US Federal Open Market Committee (FOMC) opted to keep the federal funds rate steady for the third consecutive time, maintaining the target range at 5.25% to 5.50%. Noteworthy was the central bank’s acknowledgment of a slowdown in economic activity and a commitment to return inflation to its 2% objective.

“The FOMC and other global central banks are navigating the delicate task of managing inflation without stifling economic growth. The recent signals from the FOMC unmistakably suggest a shift from contemplating interest rate hikes to closely monitoring the impending economic slowdown,” said Marc Riel, Vice-President, Business Development and Strategic Partnerships for North America.

The FOMC’s decision was met with positive market reactions, interpreted by some as a dovish pivot. The updated Summary of Economic Projections revealed a tentative plan for three interest rate cuts in 2024, signaling a departure from the Federal Reserve’s previous hawkish stance.

“FOMC has even indicated a readiness to implement rate cuts if necessary. The markets, in response, are not only digesting the current rate increases but are also surging ahead on the anticipation of future rate cuts,” said Riel.

The central bank remains vigilant, assessing various factors, including labor market conditions, inflation pressures, and international developments, as it aims to achieve its dual mandate of maximum employment and stable inflation.


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