Wealth management: the Good, the Bad, and the Ugly

Do you still need a wealth manager? With news about mis-selling and its negative financial consequences for investors, the industry's creativity to dip into new fees territory, and the rise of digital challengers providing an enhanced customer experience and competitive pricing models, the question may strike a chord with you. Still, the alternative of working with different service providers and coordinating fragmented relationships is not straightforward. This article highlights some of the current wealth management offering's pain points and outlines options to relieve them.?

Conflicts of interest

The typical scenario: whenever a wealth manager sells its own financial instruments or financial instruments issued by entities of the same group or actively promotes products from within its range, there is a heightened risk that the wealth manager might indeed act following its own interests, rather than in your best interests. In other words, there is a substantial risk of a significant conflict of interests. The good news is that regulation requires them to act in your best interest, disclose potential conflicts of interest, and ensure your fair treatment if they cannot be avoided.

However, there is a chance that they try to solve this with small print in terms and conditions. So, what can you do? Ask if any potential conflict of interest is associated with the products they recommend buying. In particular, if it's an in-house product, ask for alternatives that are equivalent but more favorable from a cost and complexity perspective. While this information is required by regulation, you should always ask. And if they recommend switching an investment again, you should be provided with the assessment that the expected benefits of switching are more significant than the costs.

Open architecture and best in class

In an open architecture, a wealth manager acts as a one-stop-shop offering both in-house and third-party products. With a best-in-class approach, you should be provided the best performing products in the market irrespective of whether they are in-house or from a third party. Sounds great, but are you getting the best, or will they favor their in-house products?

Regulators oblige wealth management firms to implement policies and procedures to ensure that they are acting in your best interest. However, it's up to you to ask for more specific information on how they deal with conflicts of interest, details on internal guidelines, and to which extent they perform self-placements of their products. Product due diligence comes at a cost, and that's why you want to know in detail what you are paying.

The investment process

If you receive investment advice, your wealth manager must recommend suitable investments. This obligation includes the requirement to avoid any conflicts of interest that may adversely affect the suitability assessment.

An important detail to consider here: the concentration risk. It's part of the suitability assessment to ensure you don't run a concentration and credit risk by investing in too many products from the same manufacturer. These risks are managed by diversification, and you don't want to have all your eggs in the same basket. You shouldn't purchase all your investment products from the same manufacturer, no matter how good they are.

Again, the regulator calls for risk identification, control, and mitigation. However, it is still up to you to ask for details and concentration thresholds for third-party and in-house products.

Portfolio management

The above also applies if you delegate the investment process entirely to your wealth manager. This may provide peace of mind since you don't have to bother about investment decisions anymore, but you should look at things closer. If you're paying portfolio management fees and are holding a fund of funds from that same manager in your portfolio, you pay fees at three levels, and there should be good reasons for doing this. The treatment of in-house and otherwise affiliated products is what you need to understand in detail to make sure you are invested in the best products and diversify adequately.

The alternatives

Although global wealth is constantly growing, wealth management faces challenges since wealth owners are well informed, experiencing high tech and high touch in other industries, and expect pricing aligned with value. Unfulfilled trust and transparency expectations encourage them to seek out solutions that better align with their individual needs.

Family offices

Family offices are ideal for preventing and managing conflicts of interest, integrate the best service providers, negotiate preferential conditions, and oversee the entire service value chain. Wealth managers already offer dedicated interfaces for family offices and access to institutional-grade capabilities to enable high-quality solutions, control, and transparency.

Independent advice and portfolio management

Independent investment management services are another option. For instance, Switzerland is home to more than 2000 external asset managers with over CHF 500 billion assets under management. Most focus on investment management and advice while custody of assets remains with your bank. They are independent of custody banks and thus a viable alternative to the traditional wealth management offering. And with recent Swiss regulations, they are obliged to increased transparency, governance, and customer protection and are subject to enhanced regulatory supervision. Although custody is becoming a low-cost commodity, access to sophisticated products, lending, and exclusive services is still an excellent reason to work with an independent service provider and a wealth manager.

Wealth management platforms

Wealth management platforms and their standardized beauty contests are a more recent offering. In most cases, they are independent with no affiliation to wealth and investment managers. With an objective and evident service provider selection process, they achieve cost-efficiency, transparency and avoid conflicts of interest. They also offer regular performance and cost reporting and monitor investment strategies.

And if wealth management reinvents itself?

The Deloitte 2019, The Future of Wealth Management in Switzerland report confirms that wealth managers face challenging times and a high level of uncertainty. Consequently, they may have to transform into family office ecosystems with open architecture collaboration, wealth management marketplaces as a modular integrator of services, digital islands with superior digital client experience and cost-efficiency, or exclusive member-only investment clubs within this decade. These business models aim to bring the client experience to new levels of exceptional services and implement human-centered design applications.

That's an excellent outlook for wealth owners since their wealth managers will need to focus on client centricity relentlessly, enhance their overall digital experience to excellence, partner in the ecosystem for innovative solutions, and improve clarity on costs, services, and product quality. With that, transparency, value creation, personalization, and effectiveness could become the properties of a new wealth management era.