Sharpening value and standing out

In a post-RDR world, wealth managers must define their role and actively market what they do best to the right client. '¨What should they do to survive? Jennifer Palmer-Violet reports

Past results are not a guarantee of future performance. It's a well-known investment adage and one that befits the wealth management industry today. The old ways have proved successful, but the advent of the Retail Distribution Review (RDR) has triggered a wave '¨of significant change.

The new rules were brought in on 31 December 2012 to offer transparent charging for investors. This meant improving professional standards. Advisory firms must now disclose and separately charge clients for services, describe themselves as independent or restricted, and adhere to a code of ethics. So how is the wealth management industry dealing with the transition?

Ultimately, it will raise its game, believes Colin Lawson, founder and managing partner of Equilibrium Asset Management. "It will become more honest about fees and continually strive to add value," he says. "RDR is a positive force for change for wealth managers."

Roger Brosch, CEO at national advisory firm Foster Denovo, agrees. "For those businesses who have embraced it, in three to five years, we'll be looking at some very exciting business models that are delivering value and are valuable."

It's been a rare opportunity for firms to refine or rewrite their proposition, recognise their strengths and demonstrate value. "However," continues Lawson, "what is becoming clear is that some firms will not be up to the challenge and will face death by 'a thousand cuts'."

RDR's full impact is still up for debate. But industry leaders have expressed their thoughts and concerns in a quantitative survey, Through the looking glass: an executive perspective of UK wealth management in a Retail Distribution Review (RDR) world, commissioned by Pershing. Respondents from investment, wealth management and financial advice companies voiced a growing sense of enterprise and optimism overall. However, they noted that clients are not just querying the merits of the wealth model but actively choosing either to look elsewhere or act independently.

Bottom line

Top of the agenda is the bottom line: what, or rather who, is going to generate revenue? And be profitable with it. Managing existing relationships was 'critically important', said 46 per cent of those surveyed, but winning clients was not far behind (39 per cent). Most respondents (77 per cent) said clearly defining their service and distinguishing it from others was a priority for new business.

Segmenting clients and understanding their needs was another priority (deemed 'most important' or 'important' for future business by 83 per cent), and findings suggest this will be focused more on life stages than wealth status. What's noticeable is that a change is under way linking segmentation, productivity and profitability - motivated by new regulations since 2008 as well as RDR. Brosch has noted this shift.

"The advisory community historically has looked after a lot of clients and pretty much charged the same price for everybody," he says. "Clearly, some clients take a huge amount of time, some clients don't necessarily have the capacity and I think the cross-subsidisation that's gone on over the years - where one client who's very wealthy and gets a level of service that subsidises another client who doesn't have as much and who you don't do as much for - is now changing rapidly.

"People are identifying clients that are really profitable, they're delivering a lot more to those clients and other clients are either becoming transactional or are no [longer] clients at all."

Carving out a niche market is key to being profitable within this regulatory environment, adds Lawson. "'Niche' could be as simple as 'business owners with £2m+, age 40 to 55'. However, every firm needs to decide what their ideal client looks like."

But Edward Allen, portfolio manager and partner at Thurleigh Investment Managers, finds this view surprising. "Client circumstances change over time, and a client could easily move from segment A to segment B," he says. "It is important that the service proposition can rapidly adapt to changing client circumstances and needs, particularly for firms with a high service offering."

Key findings of the Pershing report 69% believe fee transparency makes good client management much easier 65% believe that client-facing staff must be supported rather than replaced by technology 59% say business needs are best met by working with external technology specialists 66% say wealth management needs to be competitive with other parts of the financial services industry 58% think service differentiates a wealth manager 65% believe good people outweigh good systems and technology in wealth management Source: Pershing, a BNY Mellon company (342 respondents answered the survey) Download the full results

Tipping point

Sharpening their value proposition is pushing firms towards a tipping point of what they do best, which is "essential to drive efficiency for both wealth manager and client", says Simon Bonnett, head of wealth management at Fiducia Wealth Management. But how confident are they?

The survey highlights a lack of assurance. Only 17 per cent of respondents rated their business' knowledge and skills as its greatest asset. And, notably, two-thirds believe wealth management needs to be competitive with other parts of the financial services industry and do not view it as a premium service. Maybe it's time to move the goalposts.

"Wealth management is about the management of your overall wealth and achieving your overall financial goals in life," says Brosch. "Financial coaching and financial planning in the longer term using cash-flow modelling is where clients will really value you. You'll be able to do long-term strategy then a single product sale is definitely where the market needs to be. Some are progressing with that successfully."

After all, clients' understanding is improving as the expectation of what firms must do for their fees increases, believes Jane Armstrong, chartered financial planner and consultant at Almary Green Investments. "Clients [know] advice is not free and that they need to pay for it in some way but also that, having paid, they are entitled to an agreed level of service," she says. "Any firms whose model has been to generate ongoing commissions without providing ongoing advice/service will need to change their business model."

"Firms need to package up the service offering," Brosch continues. "Many of them have been providing that service for a long time, but probably haven't really put it into a packaged propositioning, saying these are all the things I do for you and here is the price.

"What they've done is just go along charging either through the product or from a product sale in the past and maybe haven't been very good at expressing the value they've added. I think the industry is getting much, much better at that now."

Lawson agrees that to survive there must be more on offer with obvious tangible value. "If most firms were honest with themselves, and their clients," he says, "they would be forced to admit that their investment proposition could be replaced (at least in part) by well-informed clients managing their own money using passive funds and discount brokers at a quarter of the cost."

Commodity concern

But there's a clear shift that sees a rise in time-based advice fees while asset-based charging is being challenged against value. For some, a move towards commoditisation is a concern. "Time-based fees will amount to client dissatisfaction," says Lawson. "They discourage technology, innovation and expertise. Asset-based charging will, and should always, be challenged. In this new world, firms that cannot show clearly the value they add will see a constant stream of clients leaving."

Brosch believes there should be a place where clients can buy things as cheaply as possible or do it themselves. "But there needs to be an area in the market where there is a really strong value-added proposition made available to those who are time poor and asset rich who really want the trusted adviser relationship."

Portfolio size has for many advisers been the only determination of charges in the past, says Armstrong, but charging based on asset value will still form part of the picture because this has an impact on the risk advisers are exposed to. "However, I expect other aspects, like the complexity of a client's circumstances and time spent on the work will become increasingly important in determining the overall charges."

It all comes down to relationship status. "If you look at particularly the legal and accountancy professions where the hourly rates have become a dominant force, certainly for Middle England, I'm not sure there's a very successful service-driven culture that exists," Brosch continues. "I think it's very transactional: I'll do this for you and then I don't talk to you again until you ring me up. There's very little proactive ongoing service provision and to me I don't think it best serves the client's interest."

Strong relations

Indeed, the client relationship remains on the pivot of business. The vast majority of survey participants considered maintaining - and hopefully deepening - existing relationships to be at the heart of future survival. Brosch brings this back to the long-term planning. "The investment is almost just a vehicle to help you achieve your goals," he says. "The focus should be on the longer-term planning goals and coaching people to do the right things at the right time. Giving them confidence to take action.

"These are all things that are built very much around the strength and depth of relationship. And that depth of relationship is about an emotional connection between the client and their goals and aspirations, helping them really understand what's important to them."

While some respondents (39 per cent) believe success will be rooted in an emphasis on personal touch, others believe they will get ahead through improved systems. Technology has its part to play, but some advisers are concerned it will diminish their value. "Clients are time-poor and value relationships and strategy, they need to be questioned and evaluated," says Bonnett.

"Software is impersonal and produces what you put into it, which is often wrong answers to poorly worded questions."

Lawson thinks it's about balance. "Clients want information from technology and a relationship with their adviser," he says. "Any adviser who fears technology won't be an adviser in the future. Technology will allow the great advisers to look after more clients more efficiently." And Brosch agrees that while the relationship will always be at the core of the client's overall proposition, "technology will provide the right messages at the right time in the most convenience manner".

Tailored solution

There's no one-size-fits-all approach, though. Each firm has to recognise '¨and capitalise on its own strengths. Decision-makers must take an open and modern approach: technology, partnering and innovation will play their part.

Future processes need to be faster, more efficient and more accurate to win market share. And knowing your client is more important than ever.

There's a place for all who get it right. Brosch says there will be polarisation and consolidation, while Bonnett believes wealth managers will be pushed alongside other esteemed professionals. Armstrong thinks a number of advisers will quit.

"The loss of advice services from sources such as banks and building societies has created a gap in the market, which may be filled in part by opting to buy direct using online offerings from the providers," she says. "However, with a bewildering array of products on offer, it is likely that many more clients will turn to IFAs for advice."

The future wealth management leader is a knowledge manager, according to the survey. And intuitive and interactive customer relationship management (CRM) will level the playing field.

"Size means nothing anymore," says Lawson. "The key for all firms is finding, training and retaining the very best CRM. If you lose a great CRM the chances are clients and staff will follow."

Renewed focus on value is a positive sign, says Kevin Bonar “We undertook this research to determine how regulatory overhaul, culminating in RDR implementation, has affected wealth managers’ outlook and strategy. It’s clear from the research that the industry is very aware of the need to adapt its way of doing business, and firms are embracing new ideas, approaches and solutions to succeed.                                                              “While two­-thirds of advisers felt that wealth management was not a premium service, most still felt the personal relationship was the most valuable part of their offering. Firms are also focusing on improving client segmentation, and recognise the need for new technology and infrastructure to underpin their business. “RDR has prompted changes that were a long time coming for the industry – the renewed focus on value to clients illustrated by our study is a positive sign for both advisers and their clients.” Kevin Bonar is CEO of Pershing

Jennifer Palmer-Violet is acting editor of Private Client Adviser