Trust is essential in any relationship. And perhaps there are few relationships more important than that between an individual and a wealth manager who is in charge of a family’s financial wellbeing.
At the height of the recession, a PwC study found that only 19 per cent of wealth managers believed their clients saw them as a “trusted adviser”. Meanwhile a report by KPMG in 2012 said there was “no doubt” clients had lost trust in the industry.
The 2008 Bernie Madoff fraud scandal and the global financial crisis, coupled with new regulations in the shape of the Retail Distribution Review, which has banned commission and forced advisers to levy an explicit investment fee, has seen an unparalleled shake-up of the wealth management sector over the past six years.
Companies have merged, been bought out, withdrawn from wealth management altogether or drastically overhauled their services and the size of their offices. More consolidation is expected during 2014.
What is clear in an otherwise unclear and still changing world is that to survive, wealth managers must win back clients’ trust and build a meaningful relationship.
As Michael Morley, chief executive of Coutts & Co, puts it: “Too many wealth managers in the pre-crash era built their businesses on the sales-distribution model and this often led to bad outcomes for clients. Trust has decreased and the only way to win it back is to build your business on understanding each client, giving them appropriate advice, and executing the consequences of that advice really well.”
A report from PwC last June found that all 200 private banks and wealth management firms surveyed agreed that trust would play a greater role in how clients judge their manager.
Wealth managers must win back clients’ trust and build a meaningful relationship
However, trust is hard to quantify and measure. Ben Stott, a director at Jersey-based Affinity Wealth, tries to explain the nub of it. “Trust in wealth managers is often confused with mere satisfaction over the results of the advice process, for example through healthy investment performance, and this can lead to complacency. However, real trust is something that is hard earned and should endure short-term market-related turbulence,” he says.
Mr Stott says it cannot be generated through marketing and branding, and “clients should not be told they can trust you – they need to draw that conclusion for themselves”.
Lee Goggin, co-founder of findawealthmanager.com, believes wealth managers are gaining trust by being more “available” and client focused.
While investment performance and fees are significant criteria for high-net-worth individuals (HNWIs) to select and evaluate wealth managers, Mr Goggin has found on his website that service, particularly professional and prompt communication, is increasingly cited by users.
“If the service levels, performance and fees stack up well versus the competitors, then the clincher is the relationship manager,” he says.
Many wealth managers give would-be clients a choice of several advisers to find the best fit. Understanding clients’ goals is key, as is professionalism. “Wealth managers should be looking to provide as good a service for their clients as medical practitioners or solicitors do in their respective professions,” Coutts’ Mr Morley argues.
Ian Porter, head of wealth management at Sanlam Private Investments Wealth Management (UK), adds: “There is greater interest in how aligned a firm’s ethics and conduct are with those of the client, as well as the client wanting to understand the value that a relationship will generate for them.”
Indeed, Sanlam is changing its investment proposition to become more client centric and relationship based, due to the shift in clients’ needs.
Innovation can also set wealth managers apart. For example, Coutts launched an index called Objects of Desire at the end of 2013, tracking the price of luxury items, such as classic watches and fine wine.
According to findawealthmanager.com, 20 per cent of clients are most interested in alternatives as an asset class, such as hedge funds, private equity, property or art.
Another example is the gradual embrace of social media. At the end of 2013, MyPrivateBanking Research found that Barclays Wealth and Investment Management was the best at using social media, attracting praise for its behavioural finance content and Twitter feeds from senior executives. Coutts was a close runner-up.
Clients are also increasingly looking for discretionary managers to take on the burden of running their portfolio. In the last three months of 2013, 75 per cent of findawealthmanager.com visitors were seeking a discretionary, rather than advisory, investment relationship, up from 50 per cent at the beginning of the year.
“After a year of still-choppy markets, HNWIs have become more willing to cede control and have a professional take on the burden of running their portfolio,” says Mr Goggin.
But for all the improvements and slow battle in winning back clients’ trust, there are still lingering concerns.
For example, businesses looking for market-dominating scale can lead to off-the-shelf solutions, rather than bespoke management. Meanwhile, rapid consolidation can be unsettling for clients. Sanlam’s Mr Porter says: “Businesses that have leveraged significantly and acquired rapidly without appropriate due diligence are the most at risk of failure.”
Over at Coutts, Mr Morley says the biggest lesson from the financial crash of 2008 is to fully understand the products and services that clients need and want. “As wealth managers, we have to provide clients with advice beyond product solutions, and challenge their asset allocation plans and risk tolerances. We also have to evaluate closely whether these meet the requirements of the current family and its future generations.”
Amid the lessons learnt and ongoing swirl of consolidation, Mr Porter warns that the industry must not forget about the importance of building trust with clients. “If a client cannot bring themselves to be totally candid with their adviser, then the relationship will falter as misunderstandings and miscommunication develop into errors, omissions and distrust,” he concludes.