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Wealth Mismanagement Survey

By Spear's

Bruce Weatherill on the ways in which recent events shamed the wealth-management sector — and the extent to which many of its practitioners were found wanting

The credit crunch and its effect on investment banks, retail banks, investment managers, hedge funds, indeed the whole financial services industry, with follow-on impact on the rest of the economy, has been in the press daily for the past year or so.

The sector that appears to have been forgotten is the clients of wealth managers, namely high-net-worth individuals, other than the fact that they are being targeted to pay higher taxes to help bail out government deficits.

There is no point in looking for sympathy from governments or the press, but wealthy individuals are now far less wealthy on the whole than they were eighteen months ago. This is despite the fact that they have been advised by the brightest and best client relationship managers (CRMs) in the world, as clients of private banks and wealth managers — at least, that was the theory.

During the bull markets of the past decade, despite a few small blips, wealthy individuals have benefited from an extraordinarily benign environment and their wealth has increased substantially. The wealth managers were also net beneficiaries of this explosion of wealth and impressed on the wealthy the need for personal service and expert advice to protect and grow their wealth.

The proposition was that expert wealth managers were needed to provide comprehensive advice to the wealthy and their families effectively from birth, through a long working life to old age and, post-death, to pass the wealth (largely intact) on to the next generation — and so on in perpetuity.

While things were going well for the wealthy this proposition, despite the high cost that came with such personal service and care, was generally accepted and worked to the mutual benefit of clients and wealth managers.

What was promised

The credit crunch has thrown up a number of very severe challenges to the wealth-management industry that question the very nature of their business models and their ability to deliver what they have held out to their clients. What were deemed to be ‘universal truths’ appear not to have been quite so universal nor so truthful.

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Talk about ‘Black Swans’, probability theory, and the ‘surprising correlation’ to equities of non-correlated assets are all used by wealth managers to explain why advice which was previously given was sound but in the end did not generally protect the wealthy from the impact of the credit crunch.

The press has been full of the effect of the credit crunch on financial institutions, how their profits are falling, how costs need to be cut, how reserves need to be bolstered and public trust must be regained. But what about the wealthy? What should they do? What should they expect from their wealth managers and how much should they pay for it?

The credit crunch has opened the eyes of the wealthy to what goes on in the financial markets and exposed some very gory and certainly not very savoury aspects of the wealth-management industry.

Far wider than the effects of the credit crunch and all associated issues, there has been what, at least at first glance, appears to have been a catastrophic loss of trust by the wealthy in their wealth managers — to a much greater extent than the latter are prepared to accept or own up to.

This is going to have a very significant effect on the wealth-management industry and will, in my view, change the dynamics fundamentally, although not necessarily in the short term.

In the eye of the storm, few high-net-worth individuals will change their advisers, but it is very clear that the credit crunch has caused many to readdress their financial affairs and as a consequence the value added by their advisers, including their wealth managers.

It would of course be wrong to tarnish all wealth managers with the same brush and there remain some excellent service providers who have protected the wealth of their clients and met expectations. But there are also plenty at the other end of the spectrum.

Most of the wealthy have their own horror stories, either their own experiences or those of close friends or family. At the very minimum the wealthy are baffled as to why they should be paying discretionary managers a 1 per cent fee for managing cash or fixed-interest holdings where the return is in the region of 4 per cent gross — and that is if they are ‘lucky’.

It is also hurting the wealthy to continue to pay fees and commissions on portfolios where the return has been as bad as, or even worse than, the losses experienced by the markets as a whole. Where is the value promised by their wealth manager, the personal service, proactive reporting and advice by the best minds worldwide when they are most needed?

What to me is most surprising is the fact that many wealth managers appear to be in a state of denial as to what their clients think and feel, or have deluded themselves into thinking that they have actually served their clients well during the credit crunch.

The result

How can this be so in an industry that purports to differentiate itself on excellent client service and in-depth ‘know your client’ questionnaires? The answer is in part, with a few notable exceptions, that many do not carry out even the most basic client-satisfaction surveys — something which is the bread and butter of the retail sector but sadly lacking in the wealth-management sector.

So, what is the contrast between delivery and expectation that has been highlighted by the credit crunch and appears to be causing the wealthy to question the propositions made by wealth managers?

And this is just the beginning of the analysis of the issues raised by clients and for which they demand a response. In conjunction with the Dow Jones Group (Wall Street Journal, Financial News, Factiva, Wealth Bulletin etc), I have been carrying out a unique 360° review of the state of the wealth-management industry during the credit crunch, taking into account the views of the wealthy, the views of providers of services to private clients such as lawyers, accountants and consultants, as well as the views of wealth managers, family offices, trust companies and private-client asset managers around the world.

The detailed findings and report can be obtained from me for those who want further detail. The research compares and contrasts the responses from the various participants, analyses the responses by region (EMEA, Asia Pac, Americas) and by different types of organisation (different types of wealth manager, family office, trust companies etc) and identifies which models are likely to be most successful in the future.

There are of course various actions that wealth managers can take and are taking to address these issues, and it there will be some clear winners and losers over the coming months. What is beyond doubt is that the wealth-management sector will change beyond recognition as it addresses these issues which, if not addressed, would challenge the very core of its existence.

This is excellent news for the wealthy because never have they been in more need of advice, more in need of support, more in need of good investment opportunities, more in need of financial and tax planning… indeed, more in need of the range of services offered by wealth managers.

The challenge has been laid down — who will react to the needs of the wealthy and reap the rewards which go with it as, hopefully, the first signs of ‘green shoots’ emerge?

Bruce Weatherill is an independent consultant to the wealth management industry, and was previously global leader of the Private Banking Practice of PricewaterhouseCoopers

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