Do wealth managers need to, and can they reinvent themselves?
Do wealth owners still need a wealth manager? Given the news of misconduct and negative consequences for investors, the industry’s creativity to move into new fee areas, and the rise of digital challengers that offer a distinctive client experience and more competitive pricing models, this question certainly arises. Still, the alternative of working with multiple vendors and coordinating segmented relationships is not easy to implement. This article highlights some of the pain points of the current wealth management offering and ways to address them.
Wealth management covers a broad range of financial services and is, in a sense, the big brother of asset management, which is often also referred to as investment management or asset management, since wealth managers typically offer this service as well. Traditional wealth managers take a technical approach to increase and preserve the value of financial assets by making active investment decisions on behalf of their clients.
Wealth managers take a holistic view of their clients’ assets for comprehensive wealth planning. This approach is also regularly described as private banking or private wealth management and, compared with traditional asset management, takes into account other dimensions, such as wealth planning and estate planning, to ensure the protection of assets and their preservation over generations. Wealth management and asset management can also overlap in investment advice, which is a narrow sense that includes recommendations to buy, hold or sell financial instruments.
In practice, one finds a wide range of definitions and terms for sometimes the same service, so the author does not claim interpretive authority. However, in the following, the terms wealth management, asset management, and investment advice will be based on the above definitions.
Conflicts of interest
A typical scenario is that when a wealth manager sells and actively promotes its financial instruments or products issued by companies in the same group, there is an increased risk that it is acting in its interest and not in the best interest of the client. In other words, there is a potential conflict of interest. The good news is that regulators require wealth managers to act in the best interests of their clients, disclose potential conflicts of interest, and ensure fair treatment if a conflict of interest cannot be avoided.
However, there is a risk that wealth managers try to comply with regulatory requirements merely in the fine print of their terms and conditions. What can be done in such cases? One asks whether a possible conflict of interest is associated with the products whose purchase is recommended. Especially if it is an in-house product, one should be given alternatives that are equivalent but more advantageous in terms of cost and complexity. Although this information is required by law, it is always important to ask. And if it is recommended that an existing position be replaced with a new product, one should also immediately ask for confirmation that the expected benefits of switching outweigh the costs involved.
Open architecture and best-in-class
In an open architecture, a wealth manager acts as a so-called one-stop store, offering a wide range of both in-house and third-party products. Combined with a best-in-class approach, the client should receive a wide range of objectively market-leading products, regardless of whether they are in-house or third-party products. Sounds good, but do you get the best, or are proprietary products preferred?
The regulation requires wealth managers, detached from the sales approach, to put policies and processes in place to ensure they are acting in the best interests of their clients. However, it is once again up to the client to seek more detailed information on how to manage conflicts of interest. Clients should certainly ask for the details on internal policies to know the extent to which proprietary products are placed and under what terms. Due diligence on products comes at a price, so know exactly what you are paying for.
The investment advice
If one receives investment advice, the wealth manager must generally recommend suitable investments. This obligation also includes avoiding conflicts of interest that could negatively impact the assessment of the suitability of the investments for the client.
Concentration risk is an important detail to consider in this regard. It is part of the suitability assessment to ensure that clients do not take concentration and credit risk by investing in too many products from the same provider. These risks are managed through diversification, and one should not put all eggs in one basket. Therefore, it is not advisable to buy all investment products from one product provider, no matter how good they are.
Again, the relevant regulation requires disclosure, control, and management of risks and conflicts of interest. However, it remains up to the customer to find out details and concentration thresholds for third-party and proprietary products.
The asset management
The above also applies if the investment process is completely delegated to the wealth manager under an asset management mandate. This circumstance may seem reassuring, as one no longer has to worry about investment decisions. Nevertheless, things need to be looked at more closely. For example, if one pays asset management fees and holds a fund of funds from the same wealth manager in the portfolio, which in turn invests in in-house funds, costs accrue at multiple levels in favor of the same service provider, and there should be good reasons for this. The treatment of in-house and linked products needs to be understood in detail not only for the sake of cost but also to ensure that one is invested in the best products and achieves appropriate diversification.
Although global assets are growing steadily, wealth managers face challenges as asset owners have become well-informed, have had good experiences with high-tech and high-touch industries outside of finance, and expect to price based on value delivered. Unmet expectations of trust and transparency are driving them to seek solutions better suited to their individual needs.
Family offices are, for the most part, excellently positioned to avoid and manage conflicts of interest, engage the best service providers, negotiate advantageous contract terms, and oversee the entire financial services value chain. Wealth managers offer proprietary interfaces for family offices and access to institutional capabilities to provide high-value solutions, control, and transparency. The other advantage of a family office is the structured search for the best providers for the different asset classes.
In the author’s view, the great added value lies in controlling: successful family offices record and analyze data in detail to obtain clear insights into costs, performance, and strategy conformity across all asset classes and managers. This is the family office’s key asset: comprehensive control and analysis of all investments and providers as the basis for informed decisions in managing overall assets.
Independent asset management
Independent asset management is another option. In Switzerland, for example, there are more than 2000 independent asset managers with over 500 billion Swiss francs in client assets under management. The majority focus on asset management and investment advice, while asset custody remains with a bank. They are independent of custodian banks, making them a real alternative to traditional wealth management.
With the recent Swiss industry regulation, they are also committed to increased transparency and governance as well as better client protection and are subject to increased supervision. Although custody is likely to become commoditized in the future, access to sophisticated products, customized financing, and exclusive services remains an excellent reason to work with an independent asset and wealth manager.
Independent of a bank, external wealth managers can develop creative and comprehensive investment ideas by identifying the best products tailored to clients’ risk profiles. In addition, wealth owners may be interested in consolidating wealth management without compromising the diversification of their portfolios and custodians. By having their investment strategy implemented by an independent asset manager, they can overlook all assets holistically.
Wealth Management Platforms
Wealth management platforms and their standardized beauty contests are a newer offering. In most cases, they are independent and have no connection to wealth managers and asset managers. With an objective selection of service providers, they achieve cost efficiency, transparency and avoid conflicts of interest. They also produce regular performance and cost reports and monitor investment strategies.
Since private clients generally seek a long-term relationship in the management of their assets, it can be worthwhile to bring in an independent provider for the selection process. Especially when working with several specialized niche providers, this selection approach can add value.
What if wealth managers are reinventing themselves?
The 2019 Deloitte study “The Future of Wealth Management in Switzerland” confirms that wealth managers have challenging times and a high degree of uncertainty. It applies not only to Switzerland but globally.
As a result, wealth managers are likely to transform themselves by necessity this decade into family office ecosystems with open architecture and collaboration, wealth management marketplaces as modular integrators of services, digital islands with superior client experience and cost efficiency, or exclusive investment clubs for members. These business models aim to elevate the customer experience to a new level of exceptional service and implement digital applications with customer-centric design.
These are excellent prospects for wealth owners, as wealth managers need to relentlessly focus on their customer-centricity, elevate their overall digital experience to a level of excellence, be a partner in the ecosystem for innovative solutions, and provide more clarity on the cost and quality of their offering. As a result, transparency, added value, personalization, and cost efficiency could become the hallmarks of a new era of wealth management.
Markus Schwingshackl is an attorney and founder of the boutique law firm Centro LAW (www.centrolaw.ch) in Zurich, assisting international wealth owners, entrepreneurs, their families navigate the complexities of family offices, wealth planning, estate planning, and wealth management.
Centro LAW Law Firm: www.centrolaw.ch
- The Single Family Office Investment Committee (Guest article – Markus Schwingshackl, Centro LAW)
- Vienna & Frankfurt – Cosmopolitanism, Family Office, Asset Management & Schnitzel (INTERVIEW – Martin Friedrich, Lansdowne Partner Austria GmbH)
- “Family Office Management vs. Private Wealth Management”, Asset Management, Trusted Advisor, Art, Mittelstand & Digitalization (Interview – Dr. Maximilian A. Werkmüller, LL.M., Professor of Finance and Family Office Management – Allensbach University)