The New Rules of Engagement for Wealth Managers

As non-traditional wealth management providers such as discount brokers, insurance companies, and independent advisors challenge private banks, trusts, and family offices for wealthy investors, it may seem that the difference between the role of a wealth manager and an investment advisor is rapidly blurring. But actually, the difference is coming into sharper focus than ever.

According to a recent Dow Jones survey by CEG Research, 42% of advisors call themselves "wealth managers," but only 6.6% actually meet that standard. This huge gap may be responsible for an alarming trend: With today’s volatile markets, wealthy investors are so frustrated that almost two thirds of them are "likely to ditch their current advisor," say Russ Prince, as quoted in a recent Forbes article.
And the stakes are high. True wealth managers control twice the assets and generate three times the net income compared to investment advisors. And given the current turmoil in the financial services sector, it’s the wealth management units that have remained the vital profit centers at many banks and brokerage firms.

Beyond investments, beyond performance: New benchmarks emerge

Even just a few years ago, it was exceedingly difficult and time-consuming for clients to research new investment opportunities on their own. Regardless of the quality of the advice, advisors were needed simply to gain access to sophisticated products and solutions.

That’s all changed. Today’s clients have plenty of convenient tools at their disposal to create and manage their own portfolios if they so choose, even for exotic investment vehicles. What’s missing from the equation today – and what’s rapidly emerging as a key point of difference – is the high-level strategic thinking and advice that transcends portfolio and investment management.

Three "must-have" attributes clients expect

Based on recent studies, including NorthStar’s 2008 wealth management trends survey, a new set of best practices have emerged as benchmarks for wealth managers who want to provide affluent clients the service and solutions they not only appreciate, but now expect as an absolute minimum.

• Provide holistic advice
  
  While expertise in delivering investment solutions is still critically important, it’s no longer a key differentiator for retaining business. Wealth managers are certainly expected to offer flawless execution and tactical planning, but they also provide strategic high-level advice on a client’s entire financial picture.
  
  This requires offering a far more holistic approach that transcends investment portfolio management to encompass taxation, estate planning, philanthropy, and intra-generational transfer. Trusted wealth managers must solve a broad range of issues for their affluent clients. What are the tax implications of reducing certain holdings? What’s the best way to structure an endowment? Is this the right time to purchase real estate in Europe?
  
  More than ever, high net worth clients are turning to their wealth managers for answers. And those answers need to be delivered quickly – in a matter of hours, not days.
  
  
• Offer more proactive and independent service
  
  While clients appreciate quick and responsive service, they actually prefer that wealth managers take more initiative for long-term planning. That means anticipating and addressing their needs before they even ask the questions.
  
  For example, more wealth managers are under pressure to provide far more customized reports on progress toward meeting goals. Clients are now demanding that reports be more relevant, provide clearer guidance, and offer more targeted information on performance in view of objectives and current economic conditions.
  
  What’s more, successful wealth managers say that clients are demanding a more independent approach for recommending solutions. While a firm’s reputation and asset base may remain influential, more clients reject being steered to specific products merely because they’re proprietary to your firm.
  
  
• Provide access to best-in-class expertise
  
  In the past, wealth managers have been very protective of their client relationships, reluctant to introduce clients to outside experts who can add more depth in specialized services.
  
  That’s understandable, but clients don’t see it that way. For example, a client may need a customized loan to purchase a corporate jet, an intricate contract for exchanging foreign real estate, or a vehicle for establishing a foundation to fund a new museum. Because one wealth manager cannot possibly provide deep expertise in all of these areas, it’s essential to offer access to an entire team of specialists so that clients can take advantage of experience that’s both broad and deep.
  
  As one wealth manager described it, clients need a "family CFO," a talented advisor, but one who is empowered to lead entire teams to meet virtually any financial need.
  

Looking inside your organization: The three Ps for serving the affluent

In an environment where clients are far more demanding, actively considering alternatives, and realizing that many wealth managers simply aren’t up to the challenge, what should firms be doing to differentiate their services and build higher level relationships?

According to the March issue of the CFA Institute Conference Proceedings, Scott D. Welch presented what Allan Starkie calls the "three Ps" – platform, process, and people.

• Platform
  
  Investment management applications no longer serve as a benchmark for "best-in-class" technology. Wealth management platforms provide more of the complex and sophisticated capabilities the wealthy investor requires such as highly customized portfolio construction, integrated planning, and consolidated reporting.
  
  As the CFA Institute’s conference proceedings point out, "The independent and boutique advisory firms have known for years that customization and open-architecture manager selection are what the ultra-affluent want, and brokerage firms and banks are rapidly jumping on that bandwagon."
  
  
• Process
  
  While many wealth management firms still apply the traditional salesperson/ portfolio manager approach to serve clients, that model will not be sustainable in the long term.
  
  More wealth management firms are undergoing process change to create a model based on a relationship manager/support team approach. The relationship manager maintains a high level of direct client contact and relies upon an entire support team – both internal and external – for access to the specialized information and resources needed to deliver comprehensive and integrated wealth management solutions.
  
  
• People
  
  As financial services becomes more sophisticated and highly specialized, a dramatic increase in the "credentialization" of industry professionals will push talent who want to develop and maintain high-level client relationships into acquiring new skill sets. And industry professionals can expect clients to select advisory services based on letters after their names such as CFA, CPA, and CIMA.
  
  Because clients now demand more depth and knowledge, business development executives need to rely more on their expertise than on personality to win new business. In turn, relationship managers need to extend their skills beyond merely "taking orders" to provide a more strategic partnership with their clients.

In the end, while many firms will be taking steps to position themselves as "wealth managers," the real test will be which institutions actually meet higher client expectations. It’s clear that the most successful firms will be those which embrace the "must-have" attributes − holistic advice, proactive and independent service, and best-in-class service − as well as deliver the critical three "Ps": platforms, processes, and people.