The combination of a prolonged period of low interest rates, the likelihood of lower real returns on risk assets and rising regulatory pressures present wealth managers with substantial challenges in 2015.
Deploying capital to generate real and meaningful returns will require firms to both assess existing portfolios carefully and seek out opportunities for enhanced performance and diversification.
The recent period of strong performance (and subdued volatility) for risk assets is unlikely to be repeated in coming years and advisers will need to avoid extrapolation of recent history in discussions with clients.
Rather, advisers will need to focus attention on the benefits to client portfolios from further diversification via non-traditional strategies. Areas to consider include:
Alternative investment strategies
Liquid alternatives, unconstrained strategies and absolute return vehicles represent attractive and increasingly accessible options to all investors. Equally, where underlying clients can sacrifice near-term access to capital, managers should consider exploring private market vehicles to take advantage of the illiquidity premium available.
Socially-aware investing
Wealth manager firms can stand out from the crowd by integrating socially-aware investing into portfolio design. Many larger institutional investors have for some time captured environmental, social and governance factors into investment selection processes. A growing demand is anticipated from wealthy individuals for advisers to give more thought to these factors.
Improving client communication strategies
Disruptive technology and associated new business models continue to encroach on industry incumbents and it is anticipated that this dynamic will persist. Many seemingly established players will need to up their game in the areas of cloud computing, client service applications, social media and mobile transaction capabilities to satisfy client expectations and to compete effectively in the future. With appropriate investment, wealth managers can enhance and deepen client relationships.
Review of internal resources
Depending on their stage of evolution, managers might need to review the core skills that provide them with a competitive advantage and evaluate which functions are best sourced internally as opposed to through an external partner, consultant or other vendor.
Improve risk management
Investors are placing a growing emphasis on due diligence. Currently, wealth managers spend most of their time on product analysis, however, they should apply equal effort to understanding operational risk at the firm level. This will be relevant where third-party firms are providing more complex or esoteric products – the right level of attention will serve to mitigate against potentially damaging operational failure or even fraud.
Avoid over-reliance on backward looking measures
Wealth managers should also be careful not to have an over-reliance on industry models that emphasise measures of historic volatility in product risk assessment. Greater emphasis needs to be placed on forward-looking risk factors and qualitative due diligence to understand potential outcomes more fully.
Ensure governance procedures follow best practice
Many firms have yet to enhance their governance environment to industry best practice standards. There is therefore a need to contract in or develop the resources, data and processes that are necessary for a robust governance process in order to meet the complex needs of clients and regulators.
