Wealth management industry figures agree that the sector will look very different by the end of this decade and that it will hopefully be more transparent, while much of the growth will be in Asia and outside more established markets.

Wealth management industry figures agree that, whatever shape it does take, the sector will look very different by the end of this decade and that it will hopefully be more transparent, while much of the growth will be in Asia and outside more established markets. And they also caution about the limits of the internet – the days of old fashioned human contact are not done yet.

At a Breakfast Briefing event this week in London, organised by ClearView Financial Media – publisher of this and other websites – and supported by the World Gold Council, panellists addressed the theme: 2020 Vision: Developing A Future-Proof Wealth Management Proposition. The speakers were Philip Cutts, chief executive and head of Credit Suisse’s UK private banking operation; Max Thowless-Reeves, partner and co-founder of Sorbus Partners; Marcus Grubb, managing director, investment at the World Gold Council; James Edsberg, senior partner at Gulland Padfield, Stuart Rutledge, head of global trust at RBC Wealth Management, and Denis Panel, CIO at BNP Paribas THEAM.

Panellists examined both the outlook for business models and the investment picture for the next few years. 

Many of the predictions about what will happen need to be understood in the light of an expected continued period of ultra-low interest rates, as debt-laden governments used such methods to dig themselves out of their fiscal holes, said the WGC’s Grubb.

“It is a time when thinking has to change and less conventional approaches are merited. I am in the camp where I believe there are five or 10 years of this [low growth, low interest rates] to go. To quote a wag from Luxembourg, `We’re all Keynesians now, aren’t we?’”

“Larger asset managers and private banks will struggle to have the kind of growth they enjoyed in the past,” he said, predicting that more boutique-style businesses will develop. 

Two-speed

Asia and other fast-growing developed markets will continue to attract investments from wealth management firms seeking to tap rising wealth there, particularly as North America and western Europe are unlikely to produce much new wealth over the next few years, said Credit Suisse’s Cutts.

“How can you succeed in five years’ time? Where is growth going to come from in this industry? In the more developed markets in Western Europe and North America, there has been little wealth creation in recent years. We haven’t, in Western Europe, seen much in the way of wealth growth for four or five years and there is not much expectation of that in the next short while,” Cutts said.

In emerging market economies, however, the picture is very different, he said. “Because of this, you need to be building and investing in franchises in those markets,” he continued.

Cutts also expects consolidation, although recently this has been difficult for firms to achieve as many are capital-constrained, but there have been developments, such as in the recently announced Cheviot/Quilter deal. (This refers to the marriage of Cheviot Asset Management and Quilter, creating a UK-based business with some £12.0 billion (around $19 billion) of assets.)

“As the capital constraints of banks continue to be problematic, you are going to see some firms restructuring a bit,” Cutts said, giving the example of Bank of America selling its non-US wealth unit to Julius Baer. “I think you will see more and more of that.”

“The ability to run business globally is increasingly difficult, expensive and complex. Regulators are giving more and more attention to private banks,” he said. “For cross-border business, firms will have to pay more attention to meeting the letter of the law in doing business in both countries. That will be difficult and expensive for some firms to  do,” he said, suggesting that business below a certain scale will not be profitable. “Cross-border work will reduce, firms will retrench back to their home markets.”

Finally, he said that product offerings will be simpler in reaction to problems with a variety of structured and complex products sold over recent years.

Cost disease

Thowless-Reeves of Sorbus said the advisory role of wealth management will increasingly have to be more clearly split from other financial roles to handle the conflicts of interest involved.

Conflicts of interest in firms between the manufacturing and distribution side of private banks are “increasingly untenable,” he said. “The incentive structure will be less conducive for the advice side staying within banks. The advice function in a private bank will be taken out by boutiques,” he said, noting the large number of family offices being set up in recent times. “If the years up to 2000 were characterised by consolidation and amalgamation of services within a unified bank structure, then the trend since then is one of fragmentation and disaggregation, with UHNW clients being better served away from the conflicts in private banks.”

He spoke of the phenomenon described as the “cost disease” (taking the idea from William J Baumol, of NYU Stern’s Berkley Center for Entrepreneurship and Innovation), describing how some forms of business benefit from rapid productivity gains, while other sectors, such as healthcare, don’t. Elements of wealth management are resistant to automation and standardisation and this is going to increasingly shape and segment the future wealth management firm.

Thowless-Reeves said he expects to see more standardisation of product/service offerings to clients below a certain investable asset level. “For a mass affluent client, if they want an advisor, it will be more expensive. Some types of firm will also develop a larger online presence as part of this process, he said.

“One anomaly which should be addressed is that many investment management firms in effect outsource their strategic asset allocation to industry benchmarks. As this is by far the single largest determinant of returns (in excess of 90 per cent) it is hard to understand why many, possibly a majority, spend their research budgets on tactical asset allocation (minor variations to the strategic asset allocation) and stock selection,” he said.

In describing details of how some business models operate and could run in future, Thowless-Reeves said online functions have their limits. “The difficulty, though, with the online model is that there is a presumption that you know the questions to ask and the client is capable of reducing their entire wealth objectives down to tick-box solutions. For the mass affluent market this will inevitably have to be the approach and clients will increasingly use the internet to become self-advised or self-directed,” he said.

One area of growth has been in the single and multi-family office space, he continued. On multi-family offices, he said some have started with a SFO structure and then other families were “bolted on”. “When you add 10, 20 or 30 families, is it really a family office? Are all the joining families really treated equally when the first family owns and controls the multi-family office?” said Thowless-Reeves.  

“We [at Sorbus] do not believe UHNW wealth management is  scalable beyond very small numbers. After too much growth in clients the service inevitably degrades and starts to resemble the same sort of structure clients fled from initially.”

Faster cycles

Recent events suggest firms will no longer be able to wave around a great investment track record as their chief client recruitment and retention tool, argued RBC’s Rutledge.

“What we see is that business models need to be adapted so that client satisfaction and service quality is separated from investment returns,” he said, stressing that there must be far more to wealth management than simply trying to beat a market index.

Part of the issue is that the pace of the economic cycle is now much faster than, say, a decade ago.  

“Business cycles in recent years have fundamentally shifted. We used to have cycles running for about 15 years or so….we have seen them shrink to just two to four or five years,” he said.

On the use of technology and its growth, Rutledge was not dismissive but he raised a note of caution: “Online models [of wealth management] have their place. If you can get the client segment right, it works...there is a certain segment of client that wants to look at the online model. It is for a niche…We are in the business of providing one-on-one advice, with our relationship managers supported by teams of specialists,” he said.  

Regrets – I have had a few

Edsberg told the event about how his firm had managed to find out what wealth managers wished they had done differently from what had transpired in the run-up to the crisis year of 2008, and what that said about the future.

“Many executives told us that the dangerous thing about the boom was how easy it had been to hide poor decisions and to postpone difficult choices about where to invest in their business's people, offering and technology,” said James. "Firms conceded that there was too much 'trial and error', too many products launched on the basis of scanty analysis.  Above, all they felt that they had failed to prepare their business model for a low inflation environment,” he said.

"The case for following a client-centric strategy is overwhelming,” Edsberg said. The evidence shows that higher rate of turnover among client relationships is more driven by dissatisfaction over poor client service experience than due to investment performance.  The way to approach this is not to leave all the responsibility to relationship managers and client-facing teams, and marketing - capable though they are but to consider how the whole business contributes, or needs to contributes to delivering a 'world class client experience'.  That means assessing all aspects of the business for their client focus, including governance, operations and policies, systems,  culture, reward and communications.

“The nature of client interaction is becoming far more complex, particularly at the top end. Clients are becoming far more savvy and more empowered,” he said.

Firms are increasingly using the service experience as a differentiator as it is harder to stand apart on investment performance. “The difficult part for a bank is to know and define what the client experience should be,” he said.

Consider the options

Beyond the predictions of what the business of wealth management will look like, some of the panellists looked at specific investment ideas and techniques. BNP’s Panel talked about his firm’s work in the area of using option strategies, for example, to deliver the kind of returns investors might be expected to look for.

“Should you have a very defensive strategy in equities at the moment? I don’t think so,” he told delegates. It is necessary for investors, Panel said, to have an “asymmetric” approach.

“We have launched, for example, a strategy based on a long position in the stock market and with a systematic daily sale of call options in the same underlying [equities],” Panel said, describing how this approach benefited from the high income that can be earned by the sale of options when their prices are high in times of high volatility.  He spoke of how options-based strategies, calibrated to conditions when markets were both volatile and more calm, could deliver wealth protection – with some upside – for clients concerned about risks to their capital.

“We have launched a fund which is managed by constructing a portfolio investing in low volatility stocks. The strategy exploits the ‘low volatility anomaly’, which is an anomaly in the returns of equities observed over times and across markets globally, where lower risk (lower beta) stocks outperform higher risk stocks. By investing in low beta stocks the fund seeks to capture higher returns with substantially lower risk than the capitalisation-weighted indices,” he said.