Globally, it’s estimated that $39* trillion of individual's assets are being managed by wealth management intermediaries with generalist skills. Such significant growth, over a relatively short period, can bring challenges for the intermediary. We look at one way in which these challenges can be overcome.

Alongside this growth, competition is increasing, the regulatory burden getting heavier, an increasing array of product ideas all in the face of static or decreasing resources. Intermediaries are working with ever-limited resources whilst having to service these greater client numbers and assets under management. Such challenges must be met if the intermediary is to continue to be successful. Whilst generalist skills provide a good foundation one solution is to enlist external expertise to provide deeper resource in specific areas of the wealth management process. This can enable intermediaries to focus on where they can add the most value: understanding their clients’ needs and offering the best solutions to meet those needs.  

Indeed, with $39 trillion of individual's assets at stake*, perhaps now is the time to consider alternative ways to best serve clients whilst maintaining profitability.

Let’s look at some of the challenges encountered by wealth management intermediaries today.

Backwards or forwards?

A key challenge being experienced in the current marketplace is that of limited resources. It can sometimes be difficult for intermediaries facing this challenge to carry out in-depth research in the face of increasing array of product, and past performance screening may be relied on, leading to less than optimal manager selection.

As Nick Sykes, European Director of Consulting at Mercer recently suggested: “Just buying the big manager with the strong performance track record may not be the right answer.” Manager Selection must take the past into account, whilst also focussing on the potential for future performance. Management skills and market conditions tend to fluctuate; thus, past performance should be considered in light of market conditions, with the understanding that it may not be the best predictor of future success.

Effective manager selection must make a careful analysis of skill, considering manager process and assessing risk parameters in the context of today’s volatile global market. Only then can one conclude that a manager is likely—or not—to outperform on a long-term basis.

An external resource with a large team of experts dedicated to manager research can offer the required depth of insight, resulting in a forward-looking approach as opposed to being guided, narrowly, by past performance. This may provide a cost-effective way for intermediaries to undertake a deeper level of analysis.

Fad or future?

With constant product innovation it can also be difficult for the generalist to keep on top of the investment rationale for each of these. Clients may need to be steered away from faddish investments, with the advisor objectively and analytically exploring the suitability or vulnerability of investing in the latest trends. Understanding the risks of some of these innovations is also imperative to ensure the best fit for clients.

In 2009, for instance, Exchange Traded Funds (ETFs) began to emerge as a hot trend in investment vehicles. But did investors really appreciate what ETFs meant beyond the immediate benefits that had been claimed, such as cost-effectiveness, diversification and liquidity? How many investors were truly aware of the implications of the different ETF investment structures and the real risks involved? In fact, the merits and pitfalls of ETFs are matters of intense debate today; understanding their various risks is the key to selecting which of these vehicles to invest in.

Another example calling for careful analysis is “absolute return.” Whilst some see it as the future of asset management, others are more cautious. Yet many retail investors seem to be using this method of investing without fully understanding what it is and what it entails.

The absolute measure of gain or loss of the invested capital differs from traditional fund-management techniques that rely upon comparison against a benchmark. But there is a difference between an investment opportunity and a return objective. Investors may not fully appreciate that absolute return funds encompass a vast array of different investment strategies—some with merit, some without.

Intermediaries need an understanding that can go beyond the initial hype generated by such trends, in order to assess and compare the various approaches. Such comparative analysis can help intermediaries to shape their thinking on the types of products clients want to invest in and thus assist them in making the best-informed decisions. This can be a challenge when resources are stretched and new investment ideas bombard us daily.

Compliant or not?

And, of course, let’s not forget regulation against the backdrop of all these other demands. Today’s financial services world is ever-changing and increasingly competitive, requiring difficult business decisions to be made whilst the industry faces increasing regulation against a backdrop of roller-coaster markets.

In this volatile context, intermediaries must fashion a competitive edge by strongly differentiating their service offerings. They need to focus on assessing their clients’ circumstances and tailoring solutions to the individual and this can leave insufficient time to undertake in-depth research of new investment opportunities and detailed research on funds.

Meanwhile, the forces of regulation, such as the Retail Distribution Review (RDR) in the UK, are creating new challenges for intermediaries. It is anticipated that RDR will change the advisory landscape, requiring that competent investment processes be in place that demonstrate robust thought and due diligence. The prudent solution may be to outsource some of these processes in order to avoid any potential for breaches and fines, thus enabling intermediaries to concentrate on the all-important client relationship.

Summary

Such an increase in market volume is positive; however, as intermediaries compete for this wealth of new business opportunity, they must balance their resource capabilities against rising service expectations and regulatory demands. Working with an external service provider can be hugely beneficial and one key way that addresses the challenges faced by intermediaries

* The annual World Wealth Report 2010 published by Merrill Lynch Capgemini estimated that in 2009 the value of funds managed on behalf of 10 million high NWIs with over $1m of investable worldwide assets increased 19% to $39 trillion.