Expert: Michael Gruener, Co-Head of the Blackrock iShares EMEA Sales Team
In order to successfully visualise how a wealth management business is likely to look in five years’ time, it is imperative for business leaders and firms as a whole to re-engage and reconnect with their clients, while tackling development in areas including clarity of fee communication and technological innovation.
Regulators pushing for higher fiduciary standards have effectively imposed fee-based models within the wealth management industry.
Fee-based models are growing globally; however the industry is struggling to provide a justification to clients for charging a fee.
The uneconomical nature of offering fee-based solutions to all clients has contributed to the ‘Barbell effect’ in investments – passive + active Alpha seeking.
Technology has reengineered distribution through the emergence of automated advisers. The wealth management industry needs to embrace the technology opportunity rather than ignore it.
The round table discussion focused across three subjects
Shifts in pricing structure resulting from REGULATION
Regulators have pushed for higher fiduciary standards for the global wealth management business, demanding that the industry improve fee transparency for clients as well as ensuring a strong alignment of interests between clients and providers. Such pressures have caused the growth of fee-based cost structures.
Providers are rapidly moving away from existing ‘fee-sharing’ models into providing customised solutions tailored to their individual client price points (fee-based). However, as one delegate acknowledged…
“The moment you charge a fee – you must justify a reason for the fee – it is no longer ‘transaction based’ which was universally understood by clients and providers.”
Early adopters of fee-based solutions were able to justify the introduction of fees by significantly expanding their product line and service capabilities. These firms achieved an expansion of their proposition by integrating in-house asset management capabilities with their wealth management business.
Institutions that did not have in-house capabilities looked to acquire or partner with third party providers to develop their own integrated asset-wealth management solutions.
“In-house asset management capabilities bring major issues. We are all operating in a low trust world and the introduction of third party providers has to be handled and communicated carefully. Their number is slowly diminishing as any potential increase in demand for third party providers is offset by pricing pressures.”
Not all delegates agreed with the merits of asset and wealth management integration. Business leaders cited the potential inability of in-house asset management capabilities to match the standards and reputation of external providers.
These delegates went onto identify that fee-based solutions could be justified by effectively communicating to clients the value-add of the services provided and client experience they receive. There is unanimous agreement that in the wealth management industry today there is a strong need to revisit the existing client interaction process, particularly in the UK. One delegate commented…
“One of the biggest drivers that engages and provides value for clients is keeping it simple. However, simplicity is one of the hardest things for our industry to achieve.”
Participants also recognised that the roles of wealth managers and financial advisers have evolved from “explaining or selling products” to being an empathic, engaged and client orientated professional focused on goals based investing and advice.
“The role of a Financial Adviser in the eyes of a client is to tell them about what they need in order to achieve their life goals. Our role is no longer necessarily limited to just explaining or selling products.”
“As long as all outcomes remain focused on putting client goals front and centre – many clients have shown a lack of interest in how to achieve those goals or the details in getting to the goals.”
Clients indicate that they want their wealth managers “to do a little bit more”. It was widely accepted within the room that the success of justifying fee-based cost structures depends on the ability of an institution to understand what that little bit more is and communicating it effectively. Clients are willing to pay as long as their financial adviser “gets them”.
Fee-based models driving the BARBELL EFFECT
The growth of fee-based models has had immediate knock-on effects within the global asset management market, most notable of which being the ‘barbell effect’. Michael Gruener, Co-Head of the iShares EMEA Sales Team, described the barbell to be the new ‘normal’ for asset distribution within the global market space.
“Assets are moving away from ‘Core Active’ (mutual funds) and towards ‘Speciality Active’ (outcome based investments with high alpha) and/or ‘Passives’ (ETFs/Index). This has been driven by the rapid growth of fee-based models, however it is uneconomical to offer fee-based to all clients.”
All delegates seemed in agreement that it is difficult to offer personal fee based advice to clients below certain thresholds (several cited USD1 million in investible assets). These clients are serviced through ‘managed solutions’ which are easily commoditised and predominantly passive.
Delegates were quick to identify that…
“The US has already had this in place for the past 15-20 years; it is only just emerging in Europe.”
Although there is a shrinking in asset base for Core Active investments (down USD390 billion NNB between 2012 to 2015), there was wide consensus that innovation opportunities existed across the entire asset product spectrum.
Speciality Active, focused on outcome based/goals based investments is expected to show growth into high-conviction/unconstrained, multi-asset and multi-outcome orientated products. Core Active is set to see an innovation shift into further utilising factor investing and smart beta to remain relevant within the global market space.
Opportunities through AUTOMATED ADVISERS
“The reason why new firms such as Wealthfront have succeeded is because they have managed to keep the message and product simple. They have identified that the product they offer (not too dissimilar from what we offer) is bland and it should not take up that much time – however it can be as detailed as an individual wants or take as long as they want – this level of customisation was achieved through the use of technology.”
Automated advisers are perceived in the world of wealth to be tech companies that are not confined by legacy, enabling them to primarily focus on developing a dynamically evolving, simplistic and fully customizable client experience when it comes to an individual managing their own finances.
Conversely, traditional wealth managers and financial advisers use legacy, brand and reputation to enhance their value proposition – “a client should feel as if they are buying not just a product but an entire experience.”
“The beauty of firms such as Hargreaves Lansdown, Wealthfront, Betterment and so on, is that they do not have a legacy but provide and capture client experience. Right now, our industry is trying to balance legacy with that of client experience demands and expectations.”
Many participants were sceptical about whether direct to consumer, automated advisers would ever achieve sufficient distribution, but several delegates felt that they would be targets for takeover or partnerships with traditional wealth management firms, perhaps within the next 12-24 months.
“Many of these firms [automated advisers] will either fail, become partnered or be bought out by existing big name firms.”
Traditional institutions view automated advisers as a lucrative, high growth avenue into client pools who would typically be stranded within commoditised managed solutions. (Charles Schwab seeing USD5 billion in asset growth in the US within 2 months while Vanguard saw USD32 billion over 12 months.)
Automated advisers and the technology that they have developed is starting to be viewed as a powerful enabler within firms to empower financial advisers, allowing top producers to continue generating USD5 million to USD6 million in revenues while still being able to service a wide array of clients.
“Using technology to leverage the power of the Financial Adviser is the way to go.”
Automated advisers are seen in the present day as a method of creating new layers of interface with clients. Meanwhile, in the same timeframe, the role of the financial adviser is expected to evolve towards providing advice to facilitate clients to meet their goals and not the pushing of products and services.
It was widely accepted within the room that the main challenges for the wealth management industry over the next few years do not lie primarily with the competition from automated advisers or with adaptation to regulator environments – it is rather improving the client experience as one delegate summarised –
“How do we deliver a bit of open entertainment [to our clients to reconnect them to our value add]?”
Delegates ultimately pondered several questions which stood out as crucial to answer before any business in wealth management can begin picturing what it might look like in five years’ time.
“How do we allow clients to interact with us?”
“How best do we show value for fee-based solutions?”
“How or in which way can we create an emotional attachment between clients and a product or service which in low return markets can look rather bland?”
“How best can we utilise the power of new technology and automated advisers to adopt, evolve and reconnect with clients using tools that we can either develop or acquire?”