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Tie advice fees to investment risk: Mercer

Tie advice fees to investment risk: Mercer

Fees for wealth management advice should mirror the risk and potential for ‘alpha’ investment return in portfolios to best accord with client interests, according to consultancy Mercer.

Fees always matter, according to the firm, with some clients preferring the certainty of lower investment expenses coupled with greater use of index-oriented products, while others are more comfortable with active fees and the potential for alpha from active management.

“It is important to help clients to distinguish between alpha and beta and to reserve higher fees for strategies with the potential for higher alpha,” Cara Williams, a senior partner and global head of Mercer Investments’ wealth management business, said.

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Publishing a list of 10 priorities for wealth management firms in 2015 Mercer, said generally wealth managers must employ strategies and improve communications to stand out in an increasingly competitive environment.

Ms Williams said that firms must employ strategies to improve investment results in a low-return environment, reduce risk and contain costs.

The consultancy put adoption and mastery of new technologies high on the to-do list, stating that the pace of change is only going to accelerate with increased use of cloud computing, applications, social media and mobile.

According to Mercer, communication and direct access to portfolio information is another issue “frequently cited by clients as their main frustration”.

However, wealth managers can “significantly enhance” client satisfaction and better manage fixed costs with the adoption of smart technology but this will require investment to stay ahead of the competition.

Along with rapidly changing markets, the regulatory environment and competitive pressures, technology was also cited as something that is breaking down the traditional wealth adviser business model.

Mercer suggested a review of the core skills that provide a competitive advantage, evaluating which resources are best sourced internally versus through an external partner.

“Wealth managers that are able to effectively assess the evolving requirements, how best to allocate resources and focus on serving their clients will succeed,” it added.

The consultancy also warned that advisers should assume returns in both equities and fixed income in 2015 will be below recent levels, so they ought to look beyond the traditional and consider less constrained funds or those with longer term perspectives.

It also noted that alternative investments are no longer exclusively available to the wealthiest investors or most sophisticated institutions, so should be integrated into clients’ investment strategy to reduce risk, enhance returns, or otherwise improve the likelihood of realising investment objectives.

peter.walker@ft.com