Delegates at the recent WealthMatters conference in London heard experts talk of how UK regulations raise major question marks about certain wealth management business models.

With
the implementation of the UK’s
Retail Distribution Review reforms, there has been a notable shift to
execution-only and discretionary services, which are opposite ends of the
advisory spectrum. The new regulation, combined with a change in client
behaviour, has made asset managers and private banks take a closer look at
their strategy and how this meets current client needs.

To
discuss these issues, delegates gathered recently for the WealthMatters conference
in London, an
event at which 250 people attended. The conference was organised by ClearView
Financial Media, the publisher of this website. Sponsors for the conference
were Equipos, brt, Ossiam, Advanced 365, SPDR, MSCI, Vermillion, Finantix, KA
Watson, Wealthmonitor; with support from APCIMS (now renamed as the Wealth
Management Association) and ETF Strategy.

(To view other reports from the conference, click here, and here, and here,) 

The
strategy Q&A panel discussed current strategic challenges, in particular,
which business models are best suited for the industry after the RDR’s arrival.

Full-service models

Tim
May, chief executive officer at the recently-renamed Association of Private
Client Investment Managers and Stockbrokers, considered the benefits of
full-service business models, versus simpler service models, such as boutique
firms.

“There
is no direct regulatory barrier to prevent a firm from offering all services,
if they choose to do that and if it suits their client base,” said May.

“I
think the biggest challenge to all our firms is the whole advice area, for a
number of reasons. The RDR has prompted it in this country and the cost of
providing advice done explicitly in accordance with EU and UK rules is not
cheap. Some are struggling to find that sweet spot for providing advice,
because it has to be highly automated if you go down to that lower end of size
of client,” he said.

The
head of Credit Suisse’s private bank in the UK, Phil Cutts, said the key issue
that the industry is facing is that “no two clients are the same”.

“Some
ultra high net worth clients are semi-institutional and often have their own
family office or have a full institutional service, but unlike traditional
firms, they want a more holistic wealth management experience. A full service
firm can do that,” he said.

To
this end, global consultancy firm EY has seen increasing feedback that wealth
management clients are looking for a single advisor, yet they tend to use a
number of organisations, when research is done on how the clients actually
manage themselves, said director Simon New.

“I
think that you can offer full service, provided that you offer a standardised
proposition. That standard is not going to appeal to everybody, however, where
we see firm’s break themselves financially is when they deviate into bespoke,
custom-made products; services which financially just aren’t viable. If you can
get people [advisors] to stick with a standard, you can get a value proposition
down into the low hundreds, but we see organisations trying to provide
non-standard products at the low-hundreds, and I just don’t see the economics
working,” New said.

Agreeing
with New, co-founder of Lord North Street Private Investment Office, William
Drake, said it was mysterious how firms can deliver advisory services to
smaller clients.

“The
clients we have are very rich, but they are no more populous than others, and
the time it takes for us to figure out what they want, is a while. We have a
fairly strict minimum of £25 million because we simply can not give that
service and make any money on smaller clients,” he explained.

And
there does seem to be widespread concern for the one-stop shop, as Andrew
Fisher, chief executive of Towry, put it.

“There
is a big danger in the one-stop shop, that a client won’t get value for money,
or worse, from the institutional view, where the client arbitrages the firm,”
he said, agreeing with the Wealth Management Association’s Tim May. 

“My
issue is, that if you have a person who is purporting to understand all asset
classes at all times and at the same time also is managing a relationship, then
that person is either a genius or a charlatan, and I fear that there are not
that many geniuses in our industry,” argued May when considering the
possibility of one single advisor providing full service to as many as 250
clients.  

Core concern

And
herein lies a core concern for the industry, as the RDR has increased
transparency on advisory fees, clients have made a distinct shift towards
execution-only services or discretionary products, leaving some client groups
without financial advice.