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EDITORIAL ANALYSIS: Will Funds Woo HNW Clients In Tough Times?

Tom Burroughes, Group Editor , May 4, 2020

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The drop in markets this year and prospects for sluggish growth even after lockdowns end will create a new environment for fund managers who in the past have sold their wares across a range of client groups. In a tougher market, might they be tempted to go harder after the wealth sector, as that's where the money is?

Equities have fallen sharply this year – albeit off 2020 lows because of a heavy dose of central bank new money. COVID-19 has hit investors’ portfolios. A raft of bank results for the first quarter, ranging from JP Morgan through UBS to Coutts all tell broadly the same story: assets under management have fallen. 

In the exchange traded funds space, these and similar structures such as exchange traded products saw their assets under management drop by 11.1 per cent from $6.04 trillion at the end of February to $5.37 trillion at the end of March. (Source: ETFGI.) Reports from organisations such as funds network Calastone said investors yanked money out of their funds in March, far higher than in recent years.

There is a chill wind after a decade-long bull market. Retail and institutional investors rode the upward escalator, as did private clients, using cheap Beta-capturing exchange traded funds for much of the time. “Passive” was in, “active” was out – to an extent. In that world asset managers sold their wares across the market segments. As global GDP nosedives and retail/institutional savers focus on rebuilding ravaged savings, might the asset management firms’ distributors and marketers concentrate more on those firms serving high net worth and ultra-HNW sector, because “that’s where the money is”?

So far, asset managers appear to be sitting on the fence, judging by how none responded to requests for comments from this news service about what they are going to do. (This firm discusses the topic at its Wealth Talk video spot here.)

We did get responses from Cerulli Associates, the Boston-based research and analytics firm. It thinks it is unlikely - yet - for asset managers to change what sort of clients they chase.  

“Unless there’s a profound and permanent shift in wealth concentration as a result of the current crisis, the majority of asset managers are unlikely to shift their target client base. Institutional asset managers that may have been eyeing entering the retail wealth management space are likely to pause their entrance plans until the recovery,” Ed Louis, who is senior analyst in the wealth management practice of Cerulli, said. 

“Retail wealth management focused asset managers are going to remain focused on helping their advisor clients and broker/dealer partners navigate their way through the current downturn. How they do that could change, however,” Louis said.

Change could happen if the crisis causes more advisors to outsource investment decisions to home office research teams or other model providers, he said.

“That kind of shift would increase the importance of engaging with those centralised decision-makers to secure allocations in models. In 2019, across all channels, almost 40 per cent of advisors said they either partially or fully outsourced investment decisions to their home-office or third-party provider,” he said. 

Louis said firms’ use of technology is certainly going to change because of COVID-19. 

“Asset managers are being forced to accelerate their adoption of technology in order to work with and support their clients. Some firms were in the early phases of integrating video conferencing into their service models and the current crisis has created a situation where effectively leveraging these capabilities is no longer optional,” 

“This makes it incredibly important that asset management distribution professionals deliver impactful and quality content when they do have the chance to engage with clients. Advisors are constantly being bombarded with information and other important priorities competing for their attention. It’s a lot easier for an advisor to leave a webinar or decline an evite than it is to walk out of an in-person meeting. When done properly, however, video-based meetings can be both effective and efficient. Once the crisis is over, face-to-face meetings will resume, but video will remain an important part of how asset managers communicate with wealth management firms, whether it be in terms of working with individual advisors or home-office professional buyers,” Louis added. 

The rise of "passive" entities such as ETFs has already squeezed asset managers' margins, making parts of the sector a scale business. BlackRock and Vanguard, to take two leading US players, now oversee gigantic sums of money, squeezing as much as possible from their AuM. Consolidation to remove duplication and unprofitable business was a secular feature of this market - with its rising regulatory burdens - long before anyone had heard of coronavirus. And the losses this year will almost certainly turn up the consolidation ratchet further.

A hungrier, more cost-conscious asset management sector will therefore want to focus its sales efforts on types of client most likely to return their calls. Inevitably, then, those client groups seen to have some money left in the tank are likely to be targeted, at least for a while. At times like that clients' advisors will need to prove their worth both as gatekeepers and counsellors.

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