A combination of forces are driving wealth managers towards putting more stress on their work as advisors and reducing reliance on product sales.

The UK wealth management industry is undergoing a sea-change as a combination of forces make firms put greater stress on advisory services as a revenue earner.

Regulatory forces such as the Retail Distribution Review in the UK – an attempt by the regulatory authorities to raise the quality of financial services - are driving firms towards an advice centric approach. Globally, firms are also being influenced by a need to diversify sources of revenue and to rebuild relationships with clients still licking their wounds.

According to consultancy firm PricewaterhouseCoopers, some 60 per cent of wealth management chief executives expect to move to an advice-led model with full open architecture within the next two years, compared with the 53 per cent that use this approach today.

For many in the industry, however, the surprising thing is that the adoption of an advice-based approach has taken so long to emerge and that in two years’ time, advice will still not be central to the offering of 40 per cent of firms:

“You can’t offer a true wealth management service without advice. Pre-populating buckets with investments and products before you understand a client’s long-term objectives is like putting the cart before the horse,” Barclays Wealth’s head of financial planning, Philip Smith told WealthBriefing recently. “Something like a client’s CGT liability may have more bearing on their finances than any investment decision.”

What is prompting an increased focus on advice varies on a business by business basis. “There is no one driving factor but capital market depreciation, a need to regain client trust and regulatory factors have created a perfect storm which is driving firms towards an advice led model,” said Brandon Sharrett, managing director of wealth management solutions company SEI.

Earning back trust

Crucially, a successful advisory relationship can help strengthen the relationship between client and firm and assist client retention. In its 2009 Private Banking Survey, PwC said that open architecture combined with quality independent advice increasingly seems to be the value adding proposition for both client and wealth manager.

“Clients are not looking for complex products, promising high yield, but rather trusted and independent advice that can address their needs both in the short term and longer term,” the report said.

“Financial planning is the glue that holds client relationships together,” said Barclays’ Mr Smith. Following the recent hire of an eight additional financial planners, Barclays Wealth Financial Planning now has 42 individuals authorised to give financial planning advice.

“We make sure that for every eight private bankers there is one financial planner,” said Mr Smith. Financial planners sit with private bankers across the organisation and meet with all new clients. “We can then get everything right from day one,” he said.

More predictable revenues

In addition to cementing relationships, increasingly firms are looking to an advice-led model as an additional revenue stream. This is particularly important when other sources of income have diminished as clients have turned away from more lucrative “risk assets”. A move from a transaction-driven business model to an advice-driven one, brings with it a shift from commission-based revenues to fees, providing the added advantage of greater financial certainty.

“Wealth managers will increasingly look to introduce new revenue models that are more predictable over the long term by replacing commissions with service charges and fees,” said PwC. The firm also said that as open architecture means that similar products can be made available to many institutions, there is increased downward pressure on fees. Firms are therefore under pressure to differentiate their offerings and tailor them to different segments such as entrepreneurs, professionals and specific ethnic groups.

Barclays Wealth’s Mr Smith said many firms are turning to the provision of regulated advice as it generates revenues when revenues from other sources dwindles as clients use safe, low-margin products. “If people are conservative and want to be in cash, but their goal is retirement in 20 years time, financial planning can help them to understand that over time their wealth will be eroded and the one per cent they achieve on cash will not help. We can help them get comfortable with what’s right for them and avoid what’s not appropriate,” he said.

Increasingly firms are charging for advice rather than providing it as a ‘value-add’, something which Mr Sharrett of SEI sees as inevitable. “The movement away from commission means that firms will have to start to charge for advice,” he said.

Wealth management consultancy firm Scorpio Partnership has determined a desire by HNW clients for financial planning and believes that there is a critical need for advice at a strategic level. “Clients are perfectly prepared to pay if it’s delivered in the right way by an independent institution,” said Scorpio’s Graham Harvey.

Due to the work involved in a full financial review, Barclays Wealth charges clients based on a structuring fee or commission based on product recommended. However, if a client has a large discretionary portfolio, financial planning may be provided as a “value add” to their private banking service.

Whilst private banks for the most part are already on a fee charging model and are therefore not so reliant on trail commission as the IFA market, Mr Harvey believes that in implementing an advice based model there has to be a delineation of how firms are paid and a transparency around which side of the table the financial planner sits - the client or product distribution side. The UK’s Retail Distribution Review will provide further clarity in this regard.

“Currently it is unclear as to whether you are paying for the product or paying for advice. The RDR will ensure that investors are overwhelmingly paying for, and receiving, advice,” said Phil Cutts, head of advisory, RBC Wealth Management.

Delivery is key

So why in spite of the potential benefits have more firms not set their sights on an advice centric model? One of the key issues is implementation. “One of the problems with delivering advice is how to do so systematically across the business and how integrate it into the firm’s platform,” said Scorpio’s Mr Harvey

SEI and Scorpio Partnership have defined a category of wealth management firm they term an “Independent Wealth Advisor”, which is distinct in the way it strives to gain ‘trusted adviser’ status by delivering independent, fee-based advice.

Any institution from an IFA to a private bank can make the transition towards Independent Wealth Advisor status by meeting a number of key criteria. These include employing a centralised, models-based investment management approach, delivering a consistent client experience and adopting a transparent fee process, which should ultimately enhance the capital value of the firm.

SEI’s Mr Sharrett views technology as essential in supporting an advice led approach as it can drive efficiency in relationship management. “An advice led model is more time consuming and so firms need to achieve efficiencies in their client process so that advisers can spend less time on administration and reporting. Technology has got to enable a differentiated client experience,” he said.

Mr Sharrett also believes that client management and wealth management must be integrated into a single platform in order to ensure a robust and consistent client experience.

A scaleable wealth process is also crucial to success “The investment approach should be centralised and determined by an investment committee. The key is to treat clients with similar needs in a similar way and so drive efficiency, scale and profit. Advisers can then have a defined role spending less time managing investments, and more time focusing on client relationships on building trust and deepening relationships with clients.” To achieve this SEI sees that advisers need strong soft skills and higher professional qualifications.

Regulation

When the RDR comes into effect in 2012, it is designed to make wealth management more transparent as firms no longer have an incentive to push products based on commissions.

“At present, there is always a chance that an equity based product with a 30 bps [basis points] margin may be recommended over a money market fund with a margin of 10 bps,” explained RBC’s Mr Cutts. “As trail commission is outlawed by the RDR, it will make more sense for firms to offer a broad range of products – including term deposits, structured notes and ETFs - driven by the solution rather than by commission, which is extremely positive.”

Barclays’ Mr Smith believes that the RDR will encourage professionalism in the industry. Barclays Wealth already has a minimum education requirement for its financial planners which exceeds that set out by the RDR and its aim is that all of its financial planners achieve Chartered Financial Planning status by 2011, well in advance of the regulatory deadline.

A fee-based model advisory model will undoubtedly benefit clients by ensuring that firms have no other agenda than to grow their wealth. The advantages for firms are less clear cut, but PwC cites one large US based institution that found that where CRMs made financial planning the cornerstone of client relationships, they generated more revenue with lower rates of attrition.

So, despite the challenges, providing clients with a more comprehensive advisory relationship can increase profits as firms gain a better understanding of client needs and succeed in increasing share of wallet as a result. From the industry point of view, what is there not to like?