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Focus on Performance as the Key to Wealth Management Differentiation

Stephen Harris

WealthBriefing

2 July 2007

Wealth management organisations around the world are intent on differentiating themselves from their competitors. Times are good at the moment for those who look after the wealth of the world’s rich but no-one’s under any illusion that the current boom will last for ever. Those at the very top of these organisations are asking the question “what is it about our organisation that will make it stand out from the crowd when competition for high net worth customers becomes fiercer?” Talking and listening to wealth managers over the last few years I get the sense that most believe they already have a differentiated service. Many talk about their global reach echoing the increasingly international nature of wealthy families. The same organisations often mention the added value that their investment banking capabilities can bring to clients who have businesses that need these services. Often the large wealth management organisations also highlight their capabilities in wealth structuring. It’s often said that the wealth management industry is highly fragmented. This is certainly true but within industry groupings, based upon size and outlook, different organisations look remarkably similar to industry analysts. So think how similar they look to clients. And every wealth manager talks about focusing on client needs, knowing their customers and finding out exactly what it is that the client requires from a wealth manager. In many cases it’s this that they say sets them apart from their competitors. But I worry that this may be somewhat to miss the point. To differentiate from competitors, to retain existing and gain new clients, wealth managers should concentrate on their core competence – investment performance – and should tell the market “this is what we do” and not ask “what would you like us to do?” Too much emphasis is placed upon being a partnership. Clients want to be guided, they need to be told what their options are and what the likely causes of their investment decisions will be. Too few wealth managers seem to bring performance to the top of the agenda when they describe what they do. Perhaps they think that it’s a given. But is it a given to the client who is being told “we understand your business, your aspirations, your family, how you may want to structure your tax affairs” and who wants a wealth manager purely to smooth out their investments through good times and bad? What happened to: “We’re here to offer you solid, predictable, low volatility returns, year in, year out as a way to diversify from your business or other risks you take in your life”? This should be at the heart of any wealth management offering. Anything else is either a given and doesn’t need to be mentioned, a service that can equally well be performed by another professional or a business risk that the client themselves is best qualified to pursue. But putting performance first doesn’t mean product pushing for its own sake. Knowing your clients’ appetite for risk and allocating assets accordingly is important. Explaining what risk really means and how damaging volatility can be to anything but the most aggressive portfolio is even more important. I can’t imagine a client whose attitude towards risk would not be chastened by being reminded that a 50 per cent fall requires a 100 per cent increase to return to its starting point. Wealth management should be a hedge out of high risk taking and if it is dressed up in any other way, wealth managers are competing with the returns that their business-owning clients - a segment that must now be the most important, globally - can make for themselves. It is the promise of diversification out of these risks that the wealth manager has to offer and it is this service which should be unashamedly at the heart of any offering they make and should feature strongly in any marketing campaign. “We understand you, we know you,” is not a good enough message. “We know what it is we’re offering and in the long term it will be hugely beneficial for you and your family,” is the message that wealth managers might think about making core to their marketing efforts. I agree that this is to over simplify what is arguably quite a complex matter. Knowing your client is, of course, vitally important and the key to any client/advisor relationship. The ability to attract and employ client facing staff with great relationship skills is, and will continue to be, a key differentiator. And in some circumstances, perhaps in the immediate aftermath of a business sale, or if a client is too rich to worry about performance (yes – I’ve heard that one too!) then wealth management means something completely different. Wealth structurers argue, with good reason, that if you get the tax wrong you might be 40 per cent down before you even start to think about investment returns. But this, along with all the other great services and benefits that clients are offered, and are pleased to take advantage of, will fall into the “so what?” category unless the core wealth management imperative of consistent, low-volatility, risk adjusted returns that give clients diversification or certainty of income are placed in the number one spot. Some wealth managers will recognise and act upon this as their key differentiator rather than falling back upon a focus on clients that is neither unique nor sufficient to win when the tide begins to ebb in wealth management.