Financial Services

Challenges facing the wealth management community centre on informed consent

March 11, 2016

Global

March 11, 2016

Global
Paul Resnik

Co-founder

Paul Resnik is a co-founder of FinaMetrica, which provides best-practice psychometric risk tolerance testing tools and investment suitability methodologies to financial advisers in 23 countries. Paul has been in the financial services industry for more than 40 years. He has founded financial planning, asset management, life insurance, consulting, recruitment, conference, wrap and financial planning software businesses. He has a detailed understanding of the financial services industry supply chain and personal financial planning. 

The challenges to wealth-management firms in the four major markets of the US, UK, Australia and Europe are mounting, and varied.

From the evolution of digitally led algorithm "robo-advice" and the rise of the informed investor, to the sharpening focus on due diligence, change is being driven by the differing agendas of governments, regulators, consumers and market participants. These main themes are best viewed through the prism of the inexorable (but generally glacial) shift from product-centric to client-centric wealth management with the goal of investors' informed consent.

At the core of the themes shared by the major markets is the issue of suitability and due diligence. Robo-advice is a case in point. Robo-advice will accelerate - in both direct-to-consumer models- and also where technology is aligned with human interaction. It will increasingly be seen as wealth management's equivalent to banks' ATMs. Robos from banks and large fund houses are set to dominate. However, regulation, or its lack, will be the determining factor in robo-advice take-up in each jurisdiction. The most developed robo market is the US, where new propositions emerge regularly from both mainstream players and entrepreneurs. Yet even there, informed consent is not typically part of the suitability process. That should be a cause for concern.

Across the four markets there has so far been little emphasis on suitability for robos compared to mainstream advice. This means we can continue to expect unnecessary levels of investor dissatisfaction following major market corrections.

Suitability applies to other service suppliers too. A more collaborative approach between specialists in the industry enables them to provide "best-of-breed" back and front office systems to advisory firms. Unfortunately, short-cut due diligence processes prevail on systems integrity and provenance. It seems that due diligence, in many cases, amounts to little more than asking in the case of risk profiling, for example "is there is a risk profiling methodology in place?". It doesn’t question whether it works effectively. Having a consistent, quality suitability process across all channels remains a major challenge for the wealth-management community.

Heterogeneity prevails

Other themes vary significantly between the four major jurisdictions, undermining any suggestion that the wealth-management world is becoming more homogenous. Directions and momentum are markedly different in each market. For instance, vertically integrated businesses (providing complete service from investment product manufacture to in-house sales) remain the primary wealth-management model in the US, Australia and Europe. Banks and wire-houses dominate in the US, although they are losing ground to independent advisers, while banks in Australia have strengthened their control of all parts of the country’s wealth-management service chain since 2008.

In the UK, however, the banks and life offices that withdrew from the middle market following the 2008 crisis are now returning to wealth management (taking us back to the earlier theme of suitability and the risk of poor investor outcomes). Do they understand that informed consent can only be given by an informed investor? That means transparency of adviser and investment costs, clear explanations of conflicts of ownership and meaningful disclosure of risks, with particular emphasis on illustrating the investor's loss capacity. The effect of properly informed investors is evident in the growth of low-cost passive investing, even if it's just that they can readily see and compare the fees disclosed.

To be trusted, you need to behave in a trustworthy manner. With regulation bringing unintended consequences, and moving at a different pace in the main wealth-management markets, firms that simply react will be left behind. However, opportunities will open up for those firms that understand that regulation prevails, but only for those where suitability, and informed consent, is the cornerstone of everything they do.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.

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