Mercer outlined the top ten ideas for wealth management firms to prioritize in 2017 so those firms can best serve their clients and remain competitive in a market challenged by increasing regulation.
“Regulatory changes and technological advances are shifting the wealth management landscape,” David Hyman, U.S. head of Mercer Investments’ Wealth Management business, said in a statement. “To stay competitive and to best serve clients, wealth management firms should embrace these changes as opportunities to revamp their offerings, their strategies and their approach to their clients.”
In its new paper, titled 2017: Positioning Your Firm For Growth Moving Forward, Mercer suggests that wealth management advisory firms focus on the following areas for 2017:
1. “Are you ready for pending regulatory changes?”
The first thing Mercer suggests firms focus on in 2017 is preparing for regulatory changes.
In the U.S., wealth managers have until April 10 to comply with the Department of Labor’s fiduciary rule — if it goes according to the Obama administration’s plan. Meanwhile, in Europe, MIFID II legislation will place additional regulatory requirements on wealth managers.
“Between regulations and pressure on fees, wealth management firms should take this chance to revamp and differentiate their businesses,” Mercer says. “Communicating a more robust model relative to the competition as their value proposition in order to retain and attract clients is recommended.”
2. “Are your revenue and compensation models aligned for client success?”
The trend from a transactional to a fee-based business has been accelerated by new regulations, particularly in the U.S, Mercer notes in its paper.
The traditional brokerage business is being supplanted by a more relationship-oriented and lower-initial-revenue fee-based business, according to the paper. As a result, firms have had to adapt their models to focus more on scale in order to maintain profitability.
“Technology and outsourcing solutions should be explored by wealth firms so advisors can focus on client service and new client acquisitions,” Mercer says. “On the compensation side, firms should not only consider how their programs attract, retain and incentivize sales talent, but also the unintended consequences of their programs.”
(Related: Bob Doll’s 10 Predictions for 2017)
3. “Is active management still worth it?”
According to the paper, large flows of capital continue to move from active to passive management, driven mostly by lower fees and recent underperformance by active managers. “Nearly eight years into a bull market and with interest rates at all-time lows, the prospects for return from beta (passive management) have diminished while the prospects for alpha (active management) appeared to have increased,” Mercer says.
Firms should consider active strategies that seek to protect downside risk and focus on idiosyncratic return streams within client portfolios, Mercer suggests.
4. “Are you leveraging technology to provide economies of scale and to cater to changing client communication preferences?”
“Fintech is the new normal for the wealth management industry,” Mercer says.
Many technology companies can provide back-end and front-end solutions, with many aiming to support efforts to comply with new regulations, and streamline process and decision documentation.
“The more wealth managers can successfully automate to free up their time for clients, the more scalable their businesses will become,” according to the paper.
Mercer notes, though, that vendor selection must be “undertaken prudently,” as it is a fiduciary decision.
5. “Are ‘robo-advisors’ a good fit for your operation?”
Wealth managers should not consider robo-advice as competition but instead should embrace it as part of the firm’s long-term strategy, Mercer suggests.
“Robo-advisor options are typically ideal for less complex client segments and less tapped asset pools such as millennials who are just beginning to invest and are amenable to using online financial services,” Mercer says.
Robo-advice can be viewed as an easier, low-cost way to build wealth for these client segments, which could be parlayed into more hands-on approaches over time, according to Mercer.
6. “Would partnering with other providers better serve your needs?”
Mercer highly suggests partnering with other providers in 2017, especially in this new environment of regulation and technological advances.
Wealth management firms should hone in on their genuine competitive advantage, focus on core strengths and develop the optimal blend of internal resources and outsourced or delegated research and investment solutions.
Tougher regulatory requirements may necessitate greater governance and documentation around investment decision processes, which may require too large of an investment or too long of a timeline to develop in-house.
7. “When investing in a low-return environment, are alternatives part of your strategy?”
“High valuations in the equity market and with low yields in fixed income markets will make it more difficult for portfolios to reach their return objectives,” Mercer says.
Alternatives are likely to increasingly play a key role in portfolios as investors take on additional or differentiated risk in order to capture the type of returns generated in the past, according to Mercer.
“As alternatives tend to carry some combination of illiquidity and alpha risk, advisors will need to reflect that to clients and ensure they receive adequate analysis and understanding,” the paper suggests.
8. “Are you incorporating ESG into your investment advice?”
The DOL provided guidance in 2015 that explicitly allows fiduciaries to consider environmental, social and governance issues when making their investment decisions.
“We believe that this fits well within the shift in the industry to a more goals-based wealth management process that can incorporate both financial and non-financial goals in an investment program. ESG-conscious portfolios can also be a source of differentiation for wealth management providers,” Mercer says.
9. “Are you discussing goals-based advice with your clients?”
Mercer also suggests establishing tailored client solutions.
“The one-size-fits-all approach to wealth management has been diminished as objective or outcome-based advice and solutions, tailored to different demographic and risk-profiled client segments, becomes more prevalent,” Mercer says.
With the expectation that more providers will include post-retirement portfolios that focus on income generation, the most successful solutions will be designed to achieve clearly identifiable objectives related to an individual’s capacity to enjoy an adequate and sustainable income in retirement.
10. “Are you taking advantage of discretionary portfolio solutions?”
The amount of assets held in discretionary accounts continues to increase each year, according to Mercer.
In addition, more wealth managers are offering discretionary portfolio solutions for their clients.
According to Mercer, these assets have historically stuck over the long term, thus providing a steadier stream of recurring revenue.
“Yet, not all clients are comfortable relinquishing full control of investment decisions and allocations,” Mercer says. “This is giving rise to the quasi-discretionary model, also known as active advisory.”
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