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World Wealth Report – a summaryEach year, institutions such as Merrill Lynch, Capgemini, PricewaterhouseCoopers and JP Morgan release a World Wealth Report. These reports analyse the macro-economic factors that drive wealth creation and also look into key trends that affect high net worth individuals (HNWIs) worldwide. Elke Pienaar prepared a summary of these reports.
The various studies offer valuable insight to wealth managers globally, as a great deal is revealed about how existing and potential clients view the wealth management industry and what they want from it.
How the world’s wealth was affected by the financial crisis
At the end of 2008, the world’s population of HNWIs was down approximately 15% and their overall wealth dropped 19.5%.
The sharp decline resulted from this group’s partiality for more aggressive products, which tend to return greater-than-average returns in good times, but the opposite was true during 2008.
The most significant drops came from the three largest regions, namely North America, Europe and Asia-Pacific.
Going forward, the report suggests that HNWI wealth should grow as the global economy recovers. These individuals are expected to slowly shift again from cash-based investments to higher risk/higher return assets.
It is also expected that North America and Asia-Pacific will lead the growth in HNWI financial wealth, and it is predicted that Asia-Pacific will surpass North America by 2013.
How HNWIs sought refuge
As the financial crisis worsened, HNWIs became more cautious of complex products, alternative investments and equity. The total global inflow into money market exceeded $455 billion for the year. HNWIs were actually so risk averse that they were happy to invest in zero-yield United States Treasury bills.
The reports also suggest that HNWIs returned to real estate investments, as they preferred more tangible assets.
Another interesting finding was that HNWIs moved assets/investments to familiar and domestic territory. It is expected that HNWIs will remain relatively conservative in the short term before they return to equity and regain their appetite for risk.
Challenges faced by wealth management firms
It is clear that the financial crisis has shaken the trust that HNWIs placed in markets, regulators, financial institutions and portfolio management.
A survey showed that 46% of HNWIs lost trust in their adviser, and an equal percentage in their wealth management firm.
Seventy-eight percent said they lost trust in the entire financial system and the regulatory bodies. These individuals opted to move funds to safer and more liquid assets.
Many also diversified across various institutions in order to diversify risk. In this environment, advisers and wealth managers face many challenges and have to pay particular attention to client satisfaction, as they do not know what is making clients stay or leave.
Not only did HNWIs withdraw assets from institutions, they also moved funds to lower margin products such as cash, cash equivalent investments and fixed income.
All this put tremendous pressure on profit margins, which forced some firms to cut costs.
It is important to note, however, that despite the turmoil, the wealth management industry fared much better than other financial services in 2008.
Client retention – current trends and challenges
Advisers generally understand the top drivers of client retention, which are quality service, portfolio performance and investment advice.
These reports, however, identified a number of other drivers that can greatly influence clients’ decision to stay with a particular company.
In many cases, these drivers leave plenty of room for improvement:
• Online access and capabilities;
• Statement and reporting quality;
• Risk management and due diligence capabilities; and
• Fee structures.
Further to the drivers mentioned, the reports also identified some trends that could require a specific and proactive response from the various wealth management firms:
• Younger and middle-aged HNWIs are more likely to withdraw assets – As these new generations start accumulating wealth, it is important to determine what their needs and expectations are. Possibly look at innovative use of technology
to communicate.
• Clients whose wealth derives from businesses or income are more likely to withdraw assets – Wealth from new business 52%, and from income 18%. Due to this large exposure, proactive management is essential for clients who fall in this category.
• Advisers older than 41 are likely better to retain clients – This statistic shows that clients value experience greatly, particularly during a crisis.
• Sixty-nine percent of advisers who kept clients during 2008 worked on a team-based model – Studies show that the industry is starting to embrace this approach rather than the individual-advisory model.
• Brand and reputation matter more
than size.
Client retention – the way forward
Wealth managers will have to act to rebuild clients’ shaken confidence. An important factor that came up in the various reports is that wealth managers would have to make use of more comprehensive risk assessments.
Three key elements to a comprehensive risk assessment are:
• Behavioural finance – this is a relatively new field, but worth a look. It focuses on the ‘soft’ factors such as the emotion around making decisions.
• Scenario analysis – this is a good way to communicate to a client in a simple fashion what the likely impact would be in extreme scenarios.
• Deeper diversification – this is when diversification not only takes place across various asset classes, but also within each asset class.
If this holistic approach to risk management is followed, the adviser can determine ways of constructing the portfolio and how to approach the overall investment
advisory process.
The financial crisis has produced shifts in the wealth management industry, heightening the prospect that only some will emerge from this disruption as winners. Wealth managers across the world should redefine their success around key principles:
• Retaining existing clients – As mentioned earlier, most wealth managers understand the key drivers for client retention; the focus should therefore be shifted towards “differentiating drivers” such as statement and reporting quality, online access, risk management and due diligence capabilities, and fee structures.
• Shift portfolio allocation models towards value-creating assets – The risk appetites of HNWIs have changed, at least in the short term. It is therefore important to focus client asset allocation on assets with less downside risk. This will contribute to rebuilding client confidence.
• Acquiring new assets – In this environment, it could be challenging to get new clients. It could, however, be as simple as offering a potential client a product/service that addresses specifically the dissatisfaction with the existing relationship.
• Optimising operations – It remains important to align the client and adviser needs with new revenue realities.
Conclusion
In the current climate, it has become more important than ever to know and understand your clients’ needs. Sometimes it is as simple as providing transparent products and fees, and quality statements and communication to improve the relationship with your client.
These drivers, together with quality service, portfolio performance and quality investment advice, will ensure satisfactory client retention as well as potential to attract new clients.
Even though the environment has been challenging, it does provide the attentive wealth managers with some excellent opportunities.
Sources:
JP Morgan Asset Management. “The Wealth Management Report: Meeting the expectations of UK high net worth clients”.
Capgemini Consulting Technology Outsourcing & Merrill Lynch Wealth Management. “World Wealth Report 2009”.
In the current climate, it has become more important than ever to know and understand your clients’ needs
