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Mercer Outlines Top Ten Investment Ideas for Wealth Management Advisory Firms for 2017

  • January 17, 2017
  • United States, New York


Mercer, a global consulting leader in advancing health, wealth and careers, and a wholly-owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), today 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” said Cara Williams, Global Head of Mercer Investments' Wealth Management business, Mercer. “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.” 

Mercer suggests that wealth management advisory firms focus on the following areas for 2017: 

  • Prepare for regulatory changes: Regulatory changes continue to be top of mind for wealth managers around the world. In the US, wealth managers have until April 10, 2017, to comply with the Department of Labor’s Fiduciary Rule, while MIFID II legislation will place additional regulatory requirements on wealth managers in Europe. Between regulations and pressure on fees, wealth management firms should take this chance to revamp and differentiate their businesses. Communicating a more robust model relative to the competition as their value proposition in order to retain and attract clients is recommended. 

  • Align revenue compensation models: On the revenue side, the trend from a transactional to a fee-based business has been accelerated by new regulations, particularly in the US. The traditional brokerage business, which has higher revenue per transaction, is being supplanted by a more relationship oriented and lower-initial-revenue fee-based business. 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. 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. 

  • Analyze active management: 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. Firms should consider active strategies that seek to protect downside risk and focus on idiosyncratic return streams within client portfolios. 

  • Leverage technology: Fintech is the new normal for the wealth management industry. Many technology companies can provide back-end and front-end solutions, with many aiming to support compliance efforts 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. Vendor selection must be undertaken prudently, as it is a fiduciary decision.  

  • Embrace robo options: Wealth managers should not consider robo advice as competition but instead should embrace it as part of the firm’s long term strategy. 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. 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. 

  • Partner with other providers: 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. 

  • Add alts: 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. Alternatives are likely to increasingly play a key role in portfolios as investors take on additional/differentiated risk in order to capture the type of returns generated in the past. 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. 

  • Incorporate ESG: In the US, 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. 

  • Establish 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.  With the expectation that more providers will include postretirement portfolios that focus on investor drawdown (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, at a reasonable cost. 

  • Consider discretionary solutions: The amount of assets held in discretionary accounts continues to increase each year. More wealth managers are offering discretionary portfolio solutions for their clients; 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. This is giving rise to the quasi-discretionary model, also known as active advisory. 

The 2017: Positioning Your Firm For Growth Moving Forward paper can be found here: www.mercer.com/our-thinking/top-priorities-for-wealth-management-firms.html 

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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 careers of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 43 countries and the firm operates in over 140 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 annual revenue of $13 billion and 60,000 colleagues worldwide, 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

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