Many wealth managers start off a new year by reviewing priorities related to the advice they provide their clients, as well as factors likely to affect their business.
Mercer Investments has weighed in by offering 10 priorities for wealth management firms in 2014, five related to the structure and risk of a firm’s own wealth management business and five related to serving retail and high-net-worth clients.
“Recent years have been a period of incredible change for wealth management firms,” Cara Williams, global head of Mercer Investments’ wealth management business, said in a statement.
“The financial crisis severely tested the business model for many firms, placing alignment with client’s needs and interests under scrutiny as well exposing the depth and responsiveness of the resources devoted to the business.”
Williams said these challenges came as a growing proportion of baby boomers moved into retirement, taking personal control of their accumulated wealth, and firms adjusted to the continued disintermediation of the financial services business.
The U.S. market’s remarkable rebound in 2013 has raised client expectations, she said. “Now is the time to mobilize the best information resources as background to asking the ‘what if’ questions about market conditions in 2014 and beyond.”
Following are Mercer’s priorities for wealth management firms and for serving clients.
Five Priorities for Ensuring Firm’s Success
1. Make sound investments in the firm’s future competitiveness
Rapidly changing markets, technology, the regulatory environment and competitive pressures have shattered the economics of the traditional wealth management business. To remain viable and best serve clients, wealth managers need to review the changing skills and resources that provide a competitive advantage, and decide whether additional new resources are best developed internally or acquired through a partner, consultant or other vendor.
2. Ensure that your firm has a robust governance model responsive to changing requirements
Failure of governance can be costly and even bring down a firm. Yet many firms are constrained by limited resources, or they have decision making that is unresponsive to the changing investment environment or calcified operating models. Evaluate the governance environment, and consider whether the firm’s protocols and procedures effectively meet the needs of the firm and its clients. If not, you will need to contract or develop the resources, data and processes necessary for a robust and fluid governance process in today’s investment climate.
3. Don’t shortchange due diligence regarding operational risk
When an investment manager suffers a profound operational failure or engages in fraud, the loss to the firm can be profound. Yet few wealth management firms invest the same care in operational due diligence as investment due diligence. Resolve to evaluate your process for operational due diligence, and take the steps necessary to protect the firm and its clients from operational failures.
4. Know your managers as well as their portfolio holdings
Wealth management firms expect investment managers to know their portfolio holdings extraordinarily well, yet few firms invest adequate resources in researching and knowing their investment managers. This can result in a mismatch between the managers selected to manage a portfolio and the clients who own that portfolio, possibly leading to disappointing results and increased business risk. Develop a manager research and oversight process—internally or with a partner—that allows you to know your managers as well as you know your clients.
5. Remember that fees always matter
Evaluate business models, services and enhancements that allow you to deliver exceptional service and products while continuing to reduce the cost to your clients.
Five Priorities for Serving Wealthy Clients
1. Review client portfolios and investment objectives
The investment environment of the past several years has been a stress test for many investors’ portfolios and savings. Review how each client has weathered the cycle, and whether they currently have a sound strategy to meet their investment objectives.
2. Position fixed income portfolios for growth
The period from 1982 to 2012 was the heyday for owners of a significant fixed income portfolio, as interest rates declined from nearly 20% to low single digits. That decline is over. Review bond portfolio risk with your clients, and position their fixed income portfolios for growth in a flat or rising rate environment.
3. Assess how tax changes may affect the client’s after-tax results
Taxes are increasing. Review each client’s savings and investment strategy, and help them position for the best after-tax results.
4. Evaluate the place of alternative investment strategies in portfolios
Alternative investments are no longer available only to the wealthiest investors or most sophisticated institutions. Evaluate how alternatives can be integrated into clients’ investment strategy to reduce risk, enhance returns or otherwise improve the likelihood of realizing investment objectives.
5. Support socially aware investing strategies for clients
As record levels of private wealth pass to a new generation, many investors are looking for the opportunity to “do good while doing well.” That requires investment strategies that integrate environmental, social and governance considerations into management. Be well prepared to integrate ESG strategies into client investment solutions.
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