Wealth Management Industry – Way Forward

Challenges

Up until 2007 the global personal wealth was rising to record levels. This rising wealth provided the wealth management industry an unprecedented opportunity to serve the ever growing client base and thus the industry was witnessing very good growth rates.

But this steady rise of the Wealth Management Industry is facing massive challenges as the effects of the Global Economic Crisis which began in 2008 and is continuing till today.

The reason why the HNI and Ultra HNI were severely hit by this crisis are:

1. High exposure to Equities: The High and Ultra High-Net-worth Individuals have the highest percentage exposure to the Stock Market of their total wealth.

2. Drop in Property Prices: Traditionally property provided a hedge against stock market crashes but in this crisis the Property Markets also declined sharply along with the Stock Markets.

3. Occupation of the Wealthy: The wealthier individuals usually work more in the Banking and Real Estate Sectors and these sectors are really severely hit by the Global Financial Crisis.

So the HNI and Ultra HNI segments are facing a double whammy one their investments in stock and real estate have depreciated to record low levels and second their current income sources also came from the same sectors.

This has led to client level challenges for the wealth management industry one their existing AUM have declined and second their flow of young up-and-coming clients has slowed down due to remuneration declines and unemployment.

Opportunities

But it is not only Dark Clouds for the Wealth Management Industry there are rays of hope and optimism also. These are:

1. Only a small proportion to global wealth is being serviced by the Wealth Management Industry

2. Wealth Managers with proven skills and expertise are well positioned to capture clients from less skilled service providers.

3. The Global Crisis has made many individuals less confident about their own decision making regarding investment decisions.

4. Smaller Players in Wealth Management sphere are exiting the market and there is consolidation happening.

The Client Desires

The challenges and opportunities enumerated above makes it very important that the Wealth Management Organizations understand their target markets and the psychology of their clients.

They must understand the expectation and desires of their clients and benchmark their offerings accordingly.

Clients Investment Priorities and Concerns

• The main focus of wealth management among all client segments is to maximise capital growth; with a high interest in income generation too.

• Tax and stock market downturns are considered the biggest threats to wealth among older investors; the young view redundancy as their biggest wealth threat.

• Simple Tax-Saving Strategies – such as pensions and IRA’s – are preferred.

Wealth Management Services Used

• Independent financial advisers are more widely being used than firms that position themselves as wealth managers.

• Younger potential clients use a wealth management service as a one-stop shop.

• Poor service and poor communication are the key reasons for dissatisfaction with a wealth manager.

Selecting a Wealth Manager

• Personal or professional referral is the most important factor for both age groups when shortlisting a potential wealth manager.

• Prestige, brand and international presence also scored highly among under-35s.

• When making the final selection, quality of assigned advisers, performance track record and experience with similar clients were the most important factors.

Investment Preferences

• Potential clients in both age groups favour an advisory portfolio management approach where every investment transaction is first approved by the client. So discretionary mandates are declining and Clients are increasingly becoming more active in the investment decision making process.

• Clients are increasingly going for a customized portfolio creation than just investing in model portfolios.

• Overall, clients want to focus on core asset classes such as equities and bonds, with less interest in non-core instruments. Younger clients show marginally more interest in specialist areas such as emerging markets.

Remuneration

Performance-based fees are by far the most preferred method of paying for wealth management, with commission deducted from product charges coming a distant second.

The Way Forward

Given the contraction in global wealth and the changing expectations of the next generation of clients, there are certain attributes that wealth management firms must possess to ensure future client growth, profitability and revenue stability:

These are:

Strong technology focus: both to ensure back office support and provide clients with the high level of communication, information and online functionality that they now expect.

Transparency and simplicity: particularly in terms of investment products used and in showing investment results achieved for clients.

Empathetic client segmentation: clients need to be assessed and managed not simply by level of assets but by similarity of background, investment objective and even values and social interests as younger clients seek out Wealth Management Organizations that offer high level personalized services.

Diversification by type of Client and Remuneration: as wealth contracts and markets remain volatile, WMO need to assess carefully both the sources of their clients’ wealth and the basis of their own remuneration (Time-based? AUM-based? Performance Based? etc) to ensure stability of their own revenue.

Client-led not sales-led proposition: wealth managers need to show how they differ from other intermediaries. Primarily this requires a business structure that enables the Wealth Management Organizations to focus on quality of client advice, not volume of product sales.

American Academy of Financial Management is a Global Financial Certification Organization head quartered in USA with offices around the world. AAFM offers Chartered Wealth Manager Certification Program – Highest Global Designation in Wealth Management and Private Banking that allows Wealth Managers to distinguish them by the knowledge and skills they gain on pursuing the program.

The above article has borrowed views from the Wealth Management Report by JP Morgan

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