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Survey reports tell the storyElke Pienaar
When reading the World Wealth Reports by Merrill Lynch, JP Morgan and PricewaterhouseCoopers (PwC) recently, I noticed that quality client service was by far the most important driver of client retention. Of clients surveyed, 88% said the service quality is “very important” and therefore one of the main reasons for staying with a particular wealth manager.
This principle applies to all kinds of businesses. Successful businesses, known for good service, all have one thing in common: they all understand that they are in a business of people relationships.
It has nothing to do with the product or service you are selling/offering – it is all about the relationship with your clients. It is no different in the wealth management industry as we, too, are in a business of people relationships.
Quality client relationship together with fund/portfolio performance and quality investment advice ultimately will determine the success of your business.
Quality client service does not only affect your existing business but also potential business. New referrals come from existing clients who experience quality service and excellent client relationships.
Historically, advisers received a great deal of new business from word-of-mouth referrals (up to 53% of new clients). Even though 53% sounds like much, this is an area that creates huge opportunity for new business because clients will always be on the lookout to protect their assets and to build a trusted relationship.
The financial crisis of 2008 put much pressure on client-centric businesses, and bruised the confidence of wealth managers and advisers across the world.
PwC’s wealth management survey shows that the gap between the adviser’s perception of quality service and the perception of the client has widened.
In fact, it showed that most advisers believe they reached the “trusted adviser” status; and only 20% of the advisers admitted that they do not fully understand their clients’ expectations and investment objectives.
This gap will put pressure on the relationship, as the objectives and goals of both you and your clients are not aligned.
The survey found that this gap can be improved, and suggests that wealth managers start segmenting their clients.
Segmentation is to divide all your clients into groups determined by various factors.
In this case, segments will be determined by assets under management.
However, it is becoming more popular to include also some elements of behavioural finance such as risk aversion and investment style.
Behavioural finance is a relatively new field that encompasses ‘soft’ factors such as emotions around economic and investment decisions.
By doing such a comprehensive study of your clients, before segmenting the groups, you gain a much better idea of their behaviours and values. This, in turn, will give an indication of revenue potential and service level expected.
By specifying the level of service, you will find that you will not waste extra resources on clients with low revenue potential – thus proving to be a more cost-efficient way of improving service.
Two differentiating factors of clients are their attitude to risk and their income levels.
Generally, clients with an increased appetite for risk and an expectation of higher returns could suggest higher revenue potential.
However, it is the client who is nervous and risk averse who may require a higher level of service and hand-holding.
Clients who still are accumulating assets probably will require a higher level of service than those investors who have reached their investment goals already.
The Merrill Lynch Wealth Management survey identified a few other areas for improvement when it comes to client service and client retention:
• In today’s modern age, it is important for a company to offer its client online access and capabilities. Merrill Lynch’s study shows that 66% of clients deemed it important, but only 32% advisers marked it as such – just one example of how the gap is widening between perceptions of the adviser and those of the client.
• Companies need to develop more robust and transparent risk management capabilities. Diligent risk assessments will assist advisers in making suitable investment allocations. The three elements characterised by risk management assessment are behavioural finance, scenario analysis, and deeper diversification (not simply along asset classes but within asset classes).
• Fee structures – Across the industry, it is encouraged for financial advisory firms to move away from sales-led commission to customer-agreed remuneration. By far, the most popular choice for investors (according to the JP Morgan Wealth Management report) is performance-based fees.
• Quality of statements and reporting – Accuracy and transparency are important.
A critical shift toward a more holistic client service, is the shift toward ever increasing transparency. Clients are demanding more transparency with regard to how their advisers keep them appraised about their wealth, their holdings, and how these are being transacted, processed and managed.
“We see transparency as the new currency that clients will use to judge whether wealth managers are delivering true value as trusted advisers”, says PwC.
Transparency does not only refer to fees, but comprehensive reporting such as risk (credit, operational), forecasting, performance and greater information of the market overall.
The more complicated a client’s wealth profile, the more time should be spent on proper, transparent reporting. This principle of transparency should be applied also across your segments as discussed earlier.
There is no such thing as ‘once size fits all’, as each client will have different expectations and objectives – and the same applies to feedback and reporting. One would have to make a business decision as to which segment receives which level of feedback and reporting.
A commitment to improve transparency and levels of service, unfortunately, does not occur overnight. It will take time to get to know and understand your clients from an investment objective, risk and behavioural point of view.
By differentiating between the needs of your clients and segmenting them, you will better understand which levels of service they require.
It is a process that takes time and monetary investment, but proves to be successful in the quest to meet clients’ expectations.
