The wealth manager’s checklist for this year

Deploying capital to generate real and meaningful returns will require firms to both assess existing portfolios carefully and seek out opportunities for enhanced performance and diversification.

The recent period of strong performance (and subdued volatility) for risk assets is unlikely to be repeated in coming years and advisers will need to avoid extrapolation of recent history in discussions with clients.

Rather, advisers will need to focus attention on the benefits to client portfolios from further diversification via non-traditional strategies. Areas to consider include:

Alternative investment strategies

Liquid alternatives, unconstrained strategies and absolute return vehicles represent attractive and increasingly accessible options to all investors. Equally, where underlying clients can sacrifice near-term access to capital, managers should consider exploring private market vehicles to take advantage of the illiquidity premium available.

Socially-aware investing

Wealth manager firms can stand out from the crowd by integrating socially-aware investing into portfolio design. Many larger institutional investors have for some time captured environmental, social and governance factors into investment selection processes. A growing demand is anticipated from wealthy individuals for advisers to give more thought to these factors.

Improving client communication strategies

Disruptive technology and associated new business models continue to encroach on industry incumbents and it is anticipated that this dynamic will persist. Many seemingly established players will need to up their game in the areas of cloud computing, client service applications, social media and mobile transaction capabilities to satisfy client expectations and to compete effectively in the future. With appropriate investment, wealth managers can enhance and deepen client relationships.

Review of internal resources

Depending on their stage of evolution, managers might need to review the core skills that provide them with a competitive advantage and evaluate which functions are best sourced internally as opposed to through an external partner, consultant or other vendor.

Improve risk management

Investors are placing a growing emphasis on due diligence. Currently, wealth managers spend most of their time on product analysis, however, they should apply equal effort to understanding operational risk at the firm level. This will be relevant where third-party firms are providing more complex or esoteric products – the right level of attention will serve to mitigate against potentially damaging operational failure or even fraud.

Avoid over-reliance on backward looking measures

Wealth managers should also be careful not to have an over-reliance on industry models that emphasise measures of historic volatility in product risk assessment. Greater emphasis needs to be placed on forward-looking risk factors and qualitative due diligence to understand potential outcomes more fully.

Ensure governance procedures follow best practice

Many firms have yet to enhance their governance environment to industry best practice standards. There is therefore a need to contract in or develop the resources, data and processes that are necessary for a robust governance process in order to meet the complex needs of clients and regulators.

Scrutinise fees

Finally, in a low-return world, fee containment will be of growing importance. Advisers and wealth managers will need to be increasingly sensitive to this with clients. It will become ever more important for wealth managers to distinguish carefully between alpha and beta and to ensure that they reserve higher management fees for only those strategies that genuinely have the potential to deliver higher alpha.

Cara Williams is senior partner and global head of Mercer Investments’ Wealth Management business and Global Technology Solutions

EXPERT VIEW

Fraser Donaldson, Insight Analyst (Investments) at Defaqto, highlights a key challenge for advisers when looking at discretionary services:

“A new paradigm. When I hear this phrase I treat it with scepticism. More often than not, I have been right to do so as things invariably revert back to well-established fundamental principles. However, I think in this instance, we are really beginning to witness a new way of thinking for many advisers.

“There is a huge challenge in changing the mindset of advisers to focus on what the client needs. Deliver this in as risk-averse way as possible and they will thank you.

“Ask yourself a question. Do you look at performance and instantly dismiss below-average performance over relatively short periods of time in favour of something that is top quartile, even consistently, over say five years. Should you? Ask yourself what the manager is trying to achieve and then see if that is aligned with the client?”