Gazing into the future of wealth management

The battle for clients in an increasingly complex and demanding wealth market will leave more and more casualties at the side of the field, believe consultants and leading financial players.

“To succeed, wealth managers will have to be strong advisers, sound risk managers and highly efficient,” says Stefan Jaecklin, Geneva-based leader of the global wealth and asset management practice at consultants Oliver Wyman.

Clients are demanding sharper investment capabilities and consistent, above average performance. This requires a greater focus, and less of the slapdash approach which has characterised Europe’s wealth management industry to date. Those managers, which will ultimately succeed, are expected to focus on a smaller number of client segments and markets.

Finance, banking and investment are the most significant industries employing ultra high net worth (UHNW) individuals, making up more than 20 per cent of their global population, and the segments which the most ambitious wealth players should focus on.

“We expect finance to remain dominant in the foreseeable future, although the location of individuals involved in this industry is likely to tilt more towards Asia,” says Mykolas Rambus, CEO of global intelligence firm Wealth-X in Singapore. The expected deregulation of China’s finance industry, he believes, could be a major factor favouring “further wealth creation in the world’s second largest economy”.

Sophisticated profiling techniques will be vital to deliver solutions to these carefully targeted customers in a lean and efficient manner, believes Oliver Wyman’s Mr Jaecklin, addressing economics of salesforce effectiveness, pricing, segmentation and book purity.

Lowering the bar

Groups active in the top UHNW tier – previously working only with the world’s richest family groups – are now expected to spend more efforts in attracting business further down the chain, in a bid to boost profits.

This is partly due to the expansion of the high net worth segment as wealth continues to migrate to the UK from emerging economies. This trend could result in attrition as clients quickly discover which firms have their interests at heart, claims Iain Tait, head of the private investment office and partner at London & Capital.

“The successful managers in this space will be those who can identify long-term potential from clients,” he says, highlighting the ability of wealth handlers to grow with the client, eventually moving them up the ladder to the ‘ultra’ space.

“In my experience, clients do not want to receive a commoditised offering and need to feel they matter to their wealth manger,” says Mr Tait. “When large houses move down the chain, they’re typically not very effective at personalising their offering to clients.”

Large banks including JP Morgan have invested heavily in penetrating mid-market tranches of wealth, while rivals are planning regional UK hubs for the affluent segment, in response to potential clients perceiving a lack of quality and good names in this space.

This contrasts with the top end of the scale, where an influx of increased professionalism from private and investment banking refugees, defecting to a growing coterie of multi-family offices, has made the UHNW segment a tougher territory to explore for new players. “The economics of the top tier have for many turned out to be less attractive than often postulated,” claims Mr Jaecklin.

It is the core wealth management band, populated by clients with up to €2m to invest, that will be up for grabs and become a key industry battleground, according to Oliver Wyman.

This space will be targeted not just by banks previously active at the top of the tree, but also by the universal banks, moving upwards. These branch networks will race to rebuild ‘Premium’ and ‘Premier’ services for an expanding mass affluent class, dissatisfied with poor service from retail bankers and brokers.

But the balance is likely to shift towards a digital offering, believes Mr Jaecklin. “The client will be able to explore investment opportunities using the bank’s online toolkit, then use the adviser to verify their decision. Of course there will still be room for a fully advised relationship model, but the costs of this will become increasingly explicit.”

Returns vs regulation

If anything, wealth managers are increasingly facing conflicting economic and regulatory pressures and client-led challenges.

On one hand, clients will be asking for higher returns, which often require more trades, missing since the crisis first hit wealth management. “This is going to be good for wealth managers because more activity typically means more revenues,” reveals Lorne Baring, founder of multi-family office B-Capital and a former leading banker at Barclays.

“But on the other hand, the weight of more and more regulation and a dysfunctional banking sector will continue to hobble growth,” even though some developed economies are doing better than expected.

Independent players will continue to do well, but not necessarily en masse, believes London & Capital’s Mr Tait, with a bespoke rather than a factory approach to client
servicing increasingly a pre-requisite of success.

“In general terms, middle bracket, independently-owned firms will look to capitalise on the mismatch between the services offered by larger houses and smaller IFA firms,” he explains.

Most industry players agree that standards need to improve and wealth managers must sharpen their skills. In fact the main issue for banks to address is their ability to attract the best relationship managers ahead of the competition, believes Dina de Angelo, director at Pictet Wealth Management.

 “The banks that will survive will be the ones where the bankers themselves are highly versatile, experienced individuals, who understand structuring, taxation, regulation and investments,” she says, rather than the variable quality individuals frequenting the offices of many firms.

Where the structure of firms will play a crucial role is in the mass shift in the servicing efforts of many institutions from old families to newer, entrepreneurial wealth.

This trend is highlighted by Forbes, which points out that in its latest annual review of the world’s wealthiest people, 275 of the top 400 billionaires are now classified as ‘self-made’, rather than inheriting family wealth.

“Firms must structure their offering to better suit the needs of a younger wealth generator,” says Ms de Angelo, citing requirements for strong credit facilities in particular.

“In terms of investment work, entrepreneurial wealth is interesting because the time horizon of the client is like in the old days – much longer because they are young, want to continue working, have families to think about, have social responsibility to aspire to and are typically global in nature. Return expectation is the real issue.”

There is a distinct difference between the mentality of owners of entrepreneurial and inherited wealth, believes London & Capital’s Mr Tait. Although both groups tend too know exactly what they are looking for from wealth managers, their objectives can be quite diverse.

“Entrepreneurs, used to managing their own money in their business life, like to remain close and hands-on, relishing the idea of direct access to the investment managers handling their money,” even though the strategies they choose may end up being cautious and focused on capital
preservation.

Making money

Wealth generation trends show entrepreneurship significantly overtaking inheritance as the major source of wealth, according to Barclays, with the speed at which wealth is being accumulated also showing a marked increase.

In order to benefit from this major power shift, banks need to focus on entrepreneurs as both business owners and individuals. They must recognise the needs of these customers will change over the entrepreneurial lifecycle and develop a holistic wealth management approach that balances a client’s business and personal needs.

“While on the face of it, an entrepreneur may be more open to risk-taking in business, they can be much more risk averse when it comes to their personal wealth,” says Henry Fischel-Bock, Barclays’ head of wealth management for the UK and Europe.

A combination of approaches is needed to successfully service this entrepreneurial segment, according to Barclays, combining insights from behavioural science and psychology with modern theories of portfolio management.

“We can guide each client’s behaviour to create investment solutions that more closely match their unique objectives and preferences,” says Mr Fischel-Bock.

Working with such customers who have a major stake in big business allows universal banks to take advantage of their ‘one bank’ structures, integrating investment banking with the consumer side to share both contacts and revenues.

“Our strongest revenue and asset growth in recent years have been in Asia and the US,” reveals Mr Fischel-Bock.

“It is in markets like these, where we work very closely with our investment banking division, that we see real opportunities to grow revenue, and they tend to be in the ‘ultra’ bracket, where clients can best benefit from these synergies.”

Yet this branding push must be a genuine one rather than a surface wash and brush-up, warns Jim Prior, head of corporate positioning agency, The Partners.

“The real question is whether the effort is of the right nature and scale and whether it will yield results,” says Mr Prior.

“Those that are approaching brand improvement through a fundamental and wide-reaching review of strategy, led from the top and rigorously applied, will get it right. Those that see it more as a marketing and advertising exercise, with little impact beyond, may struggle more.” 

Wealth creation

Leading Western wealth managers must tilt their operations towards Eastern developing markets in order to maintain profitability, claims Singapore-based consultancy Wealth-X.

Asia has the highest expected increase in wealth over the next five years, according to the group’s World Ultra Wealth Report 2013, with an average growth rate of 8.5 per cent a year.

“In absolute terms, Asia’s wealth growth will be higher than North America’s,” says Mykolas Rambus, CEO of Wealth-X. “We are still in the early stages of a 150-year wealth creation cycle in Asia, as more and more citizens achieve middle class incomes and grow demand for virtually all goods and services, boosting wealth across the region.”

But these clients are also known for being demanding and expecting higher returns, as they are still accumulating wealth, in contrast to North America and Europe, which have more a wealth preservation focus, says Mr Rambus.

This makes for a more challenging operating environment for wealth managers. “Wealth management services will play a vital role to ease the transfer of wealth between generations, which we expect to grow dramatically in the coming years,” he says.

Consequently wealth managers must keep a much sharper eye on the ball, he believes. “They need to be keenly aware of the differences in cycle of wealth creation between clients of various regions.”

For most leading banks, how they handle the challenge presented by a massive shift in power and wealth from older to younger generation could prove the toughest test of all.

Market outlook

Equities will continue to perform in 2014, with better economic news, despite current concerns over ‘tapering’, believes Lorne Baring, founder of Geneva-based family wealth boutique B-Capital.  Bonds will remain in bear market territory as yields rise, he says. Safe haven currencies and gold will be under pressure as investors perceive there is less need for safety. Commodities will continue to fall as supply outstrips demand, which may also be weaker than expected in emerging markets.

“As the memory of the five-year crisis starts to dim, investors will feel more confident about taking risk,” adds Mr Baring. “Equities will find fashion again as the combination of improving earnings and attractive dividends lure investors out of cash. More and more cash will leave the sidelines as fundamentals re-assert over macro-level intervention by central banks.”

In this climate, mutual funds are likely to play an increasing part in portfolios, says Sanjay Joshi, head of fixed income at London & Capital. These will continue to fall into two camps of passive index trackers and active stock selection funds, sometimes deploying derivatives.

Thematic funds will offer extra diversification, he believes. “Within equities, more defensively oriented funds will focus on sectors such as global pharmaceuticals or financials in bonds,” says Mr Joshi. He also expects multi-asset funds that allow for both tactical and strategic asset allocation to provide longer-term income and capital growth opportunities.

London & Capital is not as negative as many competitors on emerging markets (EM), believing major EM countries will benefit from strengthening domestic demand in advanced economies.

While EM growth is unlikely to strengthen this year, bad news has already been priced in and EM underperformance is likely to be less pronounced than recently, leaving equities inexpensive, providing they are bought selectively, says Mr Joshi.

On the fixed income side these developing markets can provide significant income and long-term capital growth opportunities capturing the credit upgrade cycle.

“However it is important to differentiate between the stronger and weaker sovereigns and credits in 2014, a characteristic that this asset class will share with developed markets,” warns Mr Joshi.

RDR

Despite the increased costs of compliance, following the UK’s Retail Distribution Review (RDR), many leading banks are welcoming the new regulatory landscape.

The reason they like it is that it can put clear water between their efficient distribution machines and less organised, smaller competitors, lacking resources in technology. It also rewards the larger banks with strong training departments and big budgets to re-educate relationship managers.

“RDR has been excellent for the industry and helped firms focus on the right things that matter most to clients: high quality service delivered through transparent fees,” says Henry Fishchel-Bock, head of wealth management for the UK and Europe at Barclays.

“Being clear about the advice that clients really value, and relentlessly ensuring the advice we give justifies our fee, is key for us.”