One of the trends that emerged following the financial crisis was a move by many high net worth individuals away from the discretionary investment model. From 2008 many clients decided to take direct ownership of their financial affairs, or even to withdraw from the markets altogether. A lack of trust in the financial system was undoubtedly the number one reason for this move and remains a key challenge for our industry at the start of 2014.
Happily, there are signs that things are moving in the right direction. The 2013 World Wealth Report, produced by RBC Wealth Management in partnership with Capgemini, indicated that trust in wealth managers is improving – around 61% of high net worth individuals polled said they had trust and confidence in their wealth managers and firms, an increase of roughly four and three percentage points, respectively, compared with the previous year.
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From a position where the industry had been rocked to its core, these findings are promising. Moreover, this increased level of trust has been evidenced by a return to discretionary investment management in the last 12 months.
2013: a return to discretionary
In 2013 many of the clients who had chosen to take over day-to-day control of their allocation in the wake of the crisis once again began to mandate discretionary specialists. While there were a number of factors at play, it was interesting to see a growing recognition of the value that investment specialists can add when it comes to wealth preservation or growth. I would predict this trend to continue into 2014.
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By GlobalDataAbove all though, trust remains crucial regardless of whether high net worth individuals chose to maintain control of portfolio decisions or entrust this to an investment professional. And to earn this trust requires the emphasis of the client-advisor relationship to be on needs of the client – ensuring that every investment solution directly addresses their goals, and takes into account that these may change over time. This inevitably requires global insight into the economic context against which investment decisions will take place.
In addition to this loss of faith in the system, the fact that markets were so strongly driven by what central bankers and policy makers might say in a speech made it even more difficult for high net worth individuals to stay invested, opting instead for cash or near-cash assets. Against this backdrop, it is worth examining where the opportunities lie for those investors that want to capitalise on select opportunities, and how the wealth management industry is evolving to cater to an ever-growing and more sophisticated pool of wealthy individuals.
A closer look at investment in 2014
Few investors were prepared for the magnitude of the strong performance of equities markets or for the poor performance of the fixed income markets in 2013. However, a less policy-driven environment and the notable trend towards more ‘normal’ risks such as concerns about rates of GDP growth, rate of interest rate changes or inflation levels should provide investors with more confidence to gradually move out of cash in 2014.
The rise we have seen over the past few months in the equity markets is strongly linked to the rate of GDP growth in individual markets around the globe, and the US economy is leading the rest of the world back to sustained healthy growth. With consensus growth rates converging around 2.5%, any unexpected acceleration or deceleration has not been factored into the bond or the equity markets. Meanwhile, 2013 marked the return to growth in Europe. With better governance and with the European Central Bank committed to the role of lender of last resort, the chances of a Eurozone breakup receded markedly. However, given the continued burden of austerity and a banking sector still unwilling (and in some cases unable) to lend, any future growth is likely to be fragile, uneven, and vulnerable to shocks.
Further afield, the rate of decline in the emerging markets has been faster than the developed markets, but positive growth forecasts in the latter should boost demand for emerging market exports providing a tailwind for the emerging world in the coming year.
As these economic indicators continue to show positive signs, investors and their advisors are faced with the challenge of positioning portfolios in a way that will benefit from further improvement in conditions, while guarding against any unforeseen events.
Where next for the Wealth Management industry?
Wealth numbers are on the up across many regions – both in terms of total value of wealth (in excess of $46.2 trillion, according to the 2013 World Wealth Report) and the number of individuals in possession of this wealth (12 million). As a result, there is clearly an opportunity for talented advisors armed with a comprehensive set of wealth management tools to provide a valuable service to an ever growing pool of wealthy individuals.
There are unlikely to be major shifts in the industry in 2014, but private banks will continue to refine their business models. In the wake of regulation like RDR and a tighter regulatory environment, trying to be all things to all people is simply unrealistic. We will inevitably see more consolidation next year as businesses look to crystallise their proposition and define their target segment within the marketplace.
Technology clearly has a role to play in the way advisors interact with their clients, but private bankers ought to be wary that an over-reliance on the latest platforms should never be a substitute for face-to-face communication. Understanding client preferences and the most effective method of maintaining a dialogue remains crucial.
With so many wealth managers competing for this expanding pool of wealth, firms that can adhere to a well-considered strategy with the support of a strong team of bankers and specialists will continue to make good headway come the new year. Quite simply, private bankers and investment advisors that can step up and prove their worth in an increasingly noisy marketplace will have the greatest chance of success.
Back to the start
Just as any foray into the markets should be tempered by an in-depth understanding of their attitudes towards investment risk factors, every client relationship must be built around frank and continuous conversations about their long-term objectives. It is one thing to earn the trust of clients, and quite another to maintain that trust during economic uncertainty or market volatility. There in lies the challenge for wealth managers in 2014.
Philip Harris, head of Private Client Wealth Management, RBC Wealth Management
