2016 top ten priorities for wealth management firms

2016 top ten priorities for wealth management firms

Mercer outlines 2016 top ten priorities for wealth management firms

  • December 18, 2015
  • United States, New York

Low interest rates, increased regulation and an evolving investment market showcase challenges and opportunities


Mercer, a global consulting leader in advancing health, wealth and careers, and a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC) has identified the top ten priorities that wealth management firms may want to consider to best serve their clients in 2016, and to help them stand out in an increasingly competitive environment. 

“As the wealth management landscape evolves, we continue to see three core challenges,” said Cara Williams, Senior Partner/Global Head of Mercer Investments' Wealth Management business and Global Technology Solutions. “These challenges include firms’ attempt to enhance investment returns in a low return environment, a volatile investment market and efforts to contain costs with increasing regulatory pressures. Our top ten priorities aim to help wealth management firms to focus on the areas we believe will likely be most impacted in 2016.”

Mercer advises wealth management firms / clients to consider the following in 2016:

1.    Regulatory Dynamics

Regulatory change continues to dominate much of the agenda for wealth managers around the world. The financial penalties and reputational damage caused to those who have failed to meet acceptable standards act as the greatest incentive for others to ensure that they are playing by the rules. Newer regulatory requirements, such as MIFID II in Europe and the proposed “fiduciary rule” in the US, are being used by some as an opportunity to differentiate their businesses as more robust relative the competition. Equally, as investment products become more sophisticated and complex, the more successful wealth management firms will do more to ensure that advice-related documentation is more robust and that distribution-focused staff fully understands all the risks of the products they discuss with end clients.

2.    M&A activity

The movement to fee-based business models has had considerable impact on the wealth management industry. As the traditional brokerage business, which has higher revenue per transaction, is replaced with a more relationship-oriented and lower initial revenue fee-based business, firms appear to be adopting their models to focus more on scale to maintain profitability. The current market landscape is less focused on advisors setting up independent full service boutiques. Instead, it is more about partnering or collaborating with firms to deliver investment solutions, without the perceived conflicts of interest from a fully-integrated banking and asset management firm. This is a positive for established advisors who are seeking to monetize and transition their practice as acquirers are willing to pay higher multiples for recurring fee based revenue than they are for transaction based revenue.

3.    David versus Goliath: rise of independents and smaller firms

More private bankers are leaving established financial institutions to become independent asset managers, where they set up multi-family offices and continue to serve their high net worth clients. This growing trend creates additional business challenges for larger financial institutions as the dynamics between the private banks and Multi Family Offices (MFO) will alter the competitive landscape. Wealth management firms that build a framework that is flexible may find themselves in a more stable position to compete with smaller, more nimble outfits.

4.    Robo-advisors

Computerized investment, sometimes referred to as “robo-advice”, has gained significant traction in recent years. Rather than view it is a threat to existing business models, wealth managers are encouraged to incorporate this trend as part of their long-term business strategy. Advisors may choose to seek ways to incorporate a robo-advisor option for less complex client segments. As more millennial generation investors enter the marketplace, it is expected that they will actively seek out easier, low-cost, “do it yourself” ways to build their wealth. 

5.    Insourcing versus outsourcing

Tight margins, increasingly stringent regulatory regimes and a more complex, global investment landscape are key reasons more wealth managers are considering how their investment functions are resourced. Wealth managers may want to consider focusing on core strengths and develop the optimal blend of internal investment function resourcing and outsourced or delegated research and investment solutions.

6.    Allocation to alternatives 

In a low growth world, returns across asset classes are anticipated to be lower over the coming years. High valuations in the equity market combined with low yields in fixed income markets will make it more difficult for portfolios to reach return objectives. Alternatives are likely to play an increasing role in portfolios as investors need to take on additional and/or differentiated risk to capture the type of returns generated in the past. Advisors may want to note the types of risk they are taking on as alternatives tend to carry some combination of illiquidity, carry and “alpha” risk. As wealth managers allocate more client capital to alternatives (both liquid alternatives and illiquid private markets), greater analysis and understanding of client’s overall factor exposures is critical.

7.    Objectives-based advice

Objective, or “outcome based” advice and solutions, is tailored to different demographic and risk profiled client segments. This approach has become established and is poised to become the default solution in wealth management, challenging the traditional ‘one-size-fits-all’. Wealth management firms should hone in on designing solutions to achieve clearly identifiable objectives related to an individual’s capacity to enjoy an adequate and sustainable income in retirement, at reasonable cost.

8.    Rise of ETFs

With a global asset base of US$3trn and forecasts for that asset base to more than double by 2020, ETFs are a well-established force with an expected upward trajectory. Wealth managers may want to consider further developing ETF offerings to include newer customized fixed income strategies, non-market cap based products and actively managed ETFs in order to compete more effectively.

9.     Rising rate environment

Most wealth managers have factored in the risk of rising rates by applying gradual de-risking of client’s portfolios, though how much rates will rise over time and the cadence of rate raises is uncertain. Wealth managers may want to evaluate the directional impact on major currencies, which poses a significant threat to client’s portfolios. A key question for wealth managers will be to determine how much currency hedging should be applied and for how long.

10.  Trends in discretionary versus advisory models

The volume of assets managed in discretionary or managed accounts continues to accelerate each year, a trend largely due to changes in market environment and inter-generational wealth transfer. More wealth managers are offering discretionary portfolio solutions as a way to capture a bigger share of wallet, since those assets traditionally tend to be stickier. Some clients, however, are still not comfortable relinquishing full control of investment decisions and allocations. This is giving rise to quasi-discretionary model, also known as active advisory.

About Mercer                                                                  

Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in more than 40 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With 57,000 employees worldwide and annual revenue exceeding $13 billion, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer.