Managing Wealth

The business of managing wealth has changed fundamentally during the last twenty years at an accelerating rate of change. For a start there are many more rich and affluent people. In the high net worth space, the emergence of new money in economies beyond the OECD is well documented. But back in the old economies, new forms of real worth has emerged in addition to a generation of highly paid professionals riding on a wave of economic expansion, deregulation, inheritance from their peace time antecedents, lower taxes and a boom in property values wherever it is desirable to live.

However as discuss in detail below, the sector is currently quite challenged by several concurrent negative forces and will undergo a significant restructuring before regaining its lustre as one of the most desirable sectors in global financial services.

The sector is traditionally divided between the relatively large demographic group of affluent consumers and the fewer but more desirable high net worth individuals; the line itself gets drawn anywhere from circa 500K to 10 million investable assets in dollars or euros.

In theory, the HNWIs were receiving a more tailored, higher quality relationship. While Private Banks generally did offer a high quality of interaction and service through the Relationship Manager and the supporting team, outcomes for the client were sometimes diminished by product and cross selling targets. Indeed the positive transition towards Open Architecture at the HNW level (providing other firms’ products to ensure that ‘best of breed’ is being offered) was somewhat reversed post crisis in the large providers with their ailing Investment Banks and Asset Management arms to support. For some Private Banks, this has made it even harder to adjust to the steady regulation derived decline of the offshore model, that resulted in more and more clients preferring returns above cash and reasonable fee structures over discretion.

At the retail end of the market, too many customers got poorly treated. Bank sales staff knew little of modern finance in general, typically just knowing enough to carry a sales script and hit a target. Those customers that found their way to an Independent Financial Adviser were probably treated better in an incredibly varied field that at their best were treating clients as professionally as any other private wealth firm. However too often the mainstream IFAs were effectively an outsourced sales force of the handful of life and pension providers that they maintained close relationships with, sustained by a lifeblood of product commissions, business processing and other support. After six years of debate, we wait to see how successfully the Retail Distribution Review will solve these issues, when real experience will test the large volume of industry predictions, typically cast from established pro and anti positions.

A number of other Wealth Management firms operate in the affluent space, some focused on the investment portfolio itself, typically with an internal capability to research and advise on investment selection and /or manage the money on a discretionary basis. Other advisers focus more on financial planning with tax efficiency a prime objective. A small but influential group of advisers emphasize the relationship of one money to quality of life and produce a holistic plan that takes account of life long ambitions and goals.

For some individuals with the time, inclination, knowledge and confidence, opting out of the advice market altogether has been a preferred option. A self service approach using direct platforms or stockbroking accounts is becoming easier through the availability of self service planning and analysis tools and online information sharing, but it will not be the answer for the vast majority of the public with personal investment needs. A common thread of the RDR debate has concerned the assertion that millions of mass affluent consumers (below say 50 to 100k) will be abandoned by IFAs and Banks and left with no choice but DIY finance. While probably true in part, and will lead some to poor investment performance, this may still be better than the perpetuation of the myth that advice was that unique area of human commerce where lunch really was free; that your finances were managed being managed by a benevolent industry in your interests.

Much has been said of the impact of poor financial literacy and this certainly has been a major factor in poor outcomes for many customers, even at the top end of the market, at least below the ultra high net worthy who have their own advisors to manage their portfolio of banks, fund managers and brokers. However there is some indication that consumers in general are becoming a little more astute in their financial affairs. Partly stimulated by government initiatives, partly efforts by financial firms themselves and various consumer sites and forums, but also because both the Crisis and the various high profile misselling stories have prompted at least some to think they must take control of their financial future as no one else will have to live with the effects.

We will return to regulation in detail on this site, but suffice to say that wealth management players are being hit by a broad, onerous and generally uncoordinated wave of requirements to change business practices, processes and technology, originating at national, European and International levels. Beyond the direct cost of adaptation, there is also a general problem in that the pendulum has swung fully from an absence of real independent risk management, contributing to the Crisis, to an overbearing dependency of the approval of compliance functions. Getting that pendulum fixed in the middle of the range will be a major cultural challenge in this industry, but a worthy goal if it to become both untarnished and more economically resilient.

Indeed, the main challenge is economic robustness. How can you provide a Wealth Management service that meets all regulatory demands, provide advice and ongoing service on a somewhat personalised level, at least tracks a performance benchmark, priced with a transparent charge structure they will be accepted by the client…and actually make a profit? This is true at all levels of the sector, even at ultra HNW level where fees and charges are often negotiated down to institutional custody levels. In mainstream private banking, traditionally higher margins perpetuated inefficient processes reliant on large teams of people to provide the required personal servicing. At the retail end, as mentioned above, once the opportunity for loading charges into the product has gone, making a business out of face to face contact is getting tougher.

It is generally accepted that the two tiers of wealth management are converging, resulting in a heightened competitive environment in the middle. For Private Banks, the middle ground provides the scale to support the development and implementation of more streamlined or automated advice, investment management and fulfillment processes. Moreover, it appears a less crowded market than the HNW individuals targeted by all firms and provides the opportunity to capture the future wealthy first. Some IFAs and other affluent players consider their capabilities in these areas as also being suitable for HNW clients, particularly those disgruntled with product push and looking for a simpler service, with a more straightforward charging structure. For the affluent provider they clients represent attractive chunks of AUMs, which can often reduce the cost base with their providers and often provide better margins than regular retail clients.

The simultaneous challenges to adapt to changing consumer behavior, meet a growing regulatory burden and make more, or at least the same profit, is driving a large change agenda in most wealth management players. A consistent theme in their objectives is the development of more efficient, scalable and flexible operating platforms that can support a number of target market offerings from the same chassis. Hence the most significant question facing wealth managers is not what to do, but how do we get from here to there. This typical issues faced in such transitions is addressed in the Managing Change section.