Wealth management – an industry in transformation

Several surveys and studies in 2010 have found that as a result of the financial crisis investor behaviour is changing and the wealth management industry has to respond.

The wealth management industry has gone through a turbulent period and witnessed dramatic changes since the financial crisis. Immediately after the crisis in 2008, assets under management in the industry depleted. Investors who previously had seen their wealth increase year after year had to face up to significant losses. As a decade’s worth of equity gains were wiped out and volatility in the markets reached record levels many investors started to question the proficiency of their financial advisors.

Investors sought to reallocate their assets to safer investments, while investment advisors scrambled to restore the trust and confidence of their clients.

Two years later markets and economies are recovering and the industry’s investment performance is corresponding. Yet, the industry is still correcting the losses from two years earlier.
A survey by Scorpio Partnership revealed wealth management industry returns of -15.7 per cent in 2008 and 17.0 per cent in 2009.

Meanwhile the industry’s key performance indicators of profitability dropped on average 35 per cent, as cost-income ratios increased to 78.2 per cent, “continuing a worrying trend from the previous year (72.4 per cent) where most banks faced a decline in efficiency”, the study said. 

“The wealth management engine is still misfiring for many. On the one hand the asset management machine is working and this is shoring up numbers. While, for virtually all banks, in terms of attracting new business it has been a case of Net No Money,” said Sebastian Dovey, Scorpio Partnership’s managing partner. “Significantly, our global HNW [High Net Worth] data shows there are strong signs of wealth creation even in these complex markets and yet new clients are still holding back from opening accounts with the industry.”

Wealth managers confirm that investors continue to be nervous and at times overly cautious.
While the population of high net worth individuals is growing and their overall wealth is increasing again, it becomes clear from shifts in asset allocations to more predictable forms of cash flow like those in fixed-income products, that investors are still “taking a cautious approach to investing and risk-taking”, the World Wealth Report by CapGemini and Merrill Lynch has found.

The study concluded that the lessons learned from the crisis have changed the way private wealth clients will think about investing for the time to come. Many have taken a hands-on approach and are much more involved in investment decisions, asking for more specialised and independent advice, demanding full product disclosure and transparency, the Wealth Report said. “They are more educated about investing and about their own needs. They now understand that when weighing potential returns, they must weigh the risks more thoroughly.”

Clients, who have become more educated, demand independent advice and seek to confirm and validate this advice through other sources including peers, the internet and research alternatives.

They also do expect the advice to be tailored to their individual risk profile and personal investment objectives.

In addition wealth management clients want increased transparency and simplicity together with improved client reporting to better understand products, valuations, risks, performance and fee structures, the survey noted.

Clients would also like to see more in-depth research around products to better understand the risks involved. Product disclosure documents and financial risks are much more scrutinised than in the past. All this supports a trend to only invest into those products that clients can understand, CapGemini said.

The lack of a real-time view of their investment during the crisis has led many to demand better and more timely reporting.

The overwhelming majority of wealth management clients regard effective portfolio management and risk management as important after the crisis and as a result increasingly expect scenario analyses with regard to proposed asset allocations tailored to their own individual investment goals, the survey found.

“For instance, many wealthy clients are very concerned about their exposure to markets and want to limit their downside risk. At the same time, they know they need to diversify and have global exposure, particularly to fast-growing markets. As a result, they want evidence through risk-scenario analysis to facilitate investment decisions that meet their goals while remaining aligned with broader volatility and risk-appetite limits.”

Overall this necessitates a shift toward more personalised and customer-oriented services.

Yet, the perception that wealth management has a boutique element within the financial services is outdated, said Scorpio Partnership’s managing partner Catherine Tillotson of a global industry that  manages US$20 trillion of private client assets and generates a fee income of US$110 billion in total annual income for over 220 institutions.

“We feel it is time the fashion to retain the cottage industry perception is laid to rest. The benchmark data points clearly toward the fact that the industry can, and must, take on the mantle of being the market leader of industrially managing the assets of the world’s wealthiest. Those businesses and professionals that cling on to the past are likely to be marginalised rapidly and the current benchmark data suggests their days are numbered,” she said.

Going forward the financial crisis will not be the only catalyst for change in the wealth management industry.

The impending retirement of 76 million baby boomers in the US alone, half of whom have accumulated significant wealth and are represented in the mass affluent segment, will demand from the industry a move from accumulation to income and risk management, the McKinsey report ‘The Asset Management Industry in 2010’ argued.

While the demographic shift will be a driver for growth in the industry, the financial products and advice demanded by these investors will shift dramatically, from an almost exclusive focus on savings and accumulation, to a much heavier emphasis on income generation and principal protection, McKinsey noted.

“This presents a distinct challenge to asset managers, as the business models of most are still firmly rooted in accumulation mode, with the primary focus on products, not customer needs,” the report said.