Yannick Mathieu on how wealth management firms are starting to look beyond their own backyard when it comes to researching your investments
ACROSS EUROPE, NEW legislation is placing greater responsibility on wealth managers when making recommendations to their clients. In the UK, this is being driven by Retail Distribution Review (RDR), with the entire wealth-management industry — from the large private banks to the smallest independent financial advisers (IFA) — having to adapt to new regulatory demands. These changes could have a profound impact.
One of the logical consequences of the regulatory changes is that many IFAs may see the benefit of being part of a larger organisation, leveraging pre-established shared services in a cost-effective way. This trend could be influential in reshaping the industry across Europe. A more interesting development that could arise from the new regulations is the advent of new business models that could inject a refreshing level of innovation to the service that managers provide their end-clients.
One of the aspects likely to be the subject of new approaches is research. As one UK private client investment manager said: ‘The reliance on both internal and external resources is a clear sign that the market has moved from an “in-house is best” world-view. This shift has come with the realisation that internal research teams are unable to cover the entire research waterfront necessary today.’
At Standard & Poor’s Equity Research, we recently commissioned a report from Scorpio Partnership that revealed that the traditional approach to investment research does not demonstrate enough value to end investors, despite the fact that research is considered key to the investment process and client outreach.
The UK market is characterised by a clear emphasis on in-house research, used by 75 per cent of wealth managers in combination with third-party (largely sell-side) research and information from macro and data suppliers. The remaining 25 per cent use in-house research alone.
Over one-third (39 per cent) of the UK wealth managers surveyed admitted to finding gaps in their current research coverage, raising question marks about the strengths of their existing investment research practices. The ability to deliver research to support the generation and validation of investment ideas across ever-increasing areas of investment focus was consistently identified as the most prominent weakness with the current research model.
WEALTH MANAGERS ARE increasingly recognising the disadvantages in the most current research model. Indeed, independence of thought was high on the agenda, the report said, ‘as well as the ability to tell an investment story as opposed to getting bogged down in facts’. Respondents highlighted the need for an external provider to deliver independent, high-quality and insightful research, set within a qualitative framework.
Undoubtedly, research has a key role in the internal mechanics of the investment process. Although respondents are unclear how best to move forward, the pressures on the industry are likely to lead the market to look to external providers to drive and support investment ideas.
The report also covered the wealth management industry in Germany and Switzerland. Interestingly, the German respondents expressed the greatest desire for change, where over 20 per cent of the 30 German wealth managers interviewed said that they had already moved to a model that operates fully on external, or outsourced, resources.
Meanwhile in the UK, respondents did not reveal a single example of a firm that relied solely on external research.
Unsurprisingly, as wealth managers moved towards more fund-based investments, the external research used was likely to have a fund bias, including hedge funds, which have fast become a key part of private client portfolios.
Only a very small minority of the wealth managers interviewed said that they had the skills and in-house capability to conduct the necessary extensive research and due diligence on hedge funds. Exchange Traded Funds (ETFs) have so far failed to be incorporated fully into private-client portfolios, again due to the lack of market knowledge surrounding them. The report reveals a strong desire for an independent research agency to fill this knowledge gap.
The UK wealth-management industry is evolving, particularly in light of impending regulation enforcing independence and transparency, such as the RDR. We are already seeing companies look outside of their own stables to achieve this, and we expect the new decade to see an increasing number of players in the UK adopt models that have already gained higher acceptance elsewhere in Europe. In particular, outsourcing a larger proportion of activities, including research, could help to address regulatory pressures and client needs in a cost-efficient way.