The year ahead has the potential to be a defining one for the wealth management industry, following a difficult 12 months that have seen client confidence rocked by a number of high-profile issues.
Whether it’s the suitability of investment products, exorbitant and opaque fees, or the need to build a better and more inclusive dialogue with clients, some of the sector’s more outdated practices have been put firmly under the spotlight.
So looking ahead to the next 12 months, what can be done differently to help drive positive and necessary industry change?
Lower and more transparent charges
It is no secret that the traditional wealth management industry has high costs, often accompanied by a lack of transparency.
Despite the introduction of the Markets in Financial Instruments Directive (Mifid) II in January 2018, the Financial Conduct Authority (FCA) has found that “firms knew about their obligations for disclosing costs and charges, but interpreted the rules in a variety of ways”. Now two years on from the introduction of Mifid II, clients continually show us third-party reports which have complied with the letter of the law, but not the spirit.
Obscure fees mean that many investors are in the dark when it comes to understanding exactly what they’re paying for and how much they’re being charged. Even more worrying is the lack of understanding around the corrosive effect that these costs have on their investments.
Fees are one of the biggest factors in determining the long-term net returns of an investment portfolio, yet it’s close to impossible for investors to calculate their impact without a clear breakdown.
Why is this still the case? Consumers have become accustomed to comparing the cost of their insurance or energy bills, which has increased competition, helped empower users to make more informed decisions, and encouraged sensible switching behaviours.
While the wealth management industry cannot be directly compared to a utility, there is nothing to stop wealth managers from making it simpler for clients to understand the all-in costs that they are being charged and the impact of these on their wealth.
Tightening up regulatory oversight
Confronting the issues which led to the most recent scandals involving the asset management firm GAM and fund manager Neil Woodford will be key to setting the right tone for 2020.
An industry which hides behind its own failings is unlikely to breed trust among investors who are already struggling with the uncertainties of more challenging market conditions.
But on their own, greater transparency and lower charges are not enough; this shift must also be accompanied by a more effective regulatory and supervisory regime that eradicates conflicts of interest and avoids the creation of another Woodford or GAM-style scenario, that have once again left investors exposed and out of pocket.
Part of this falls to the FCA. Fund labelling must improve, with managers being held to the original premise of their funds, ensuring too that the lines between liquid and illiquid securities cannot be manipulated or blurred.
The marketing of funds, both direct and via platforms or third parties, must also be more closely monitored, with clear consequences for when behaviours are influenced by commercial incentives that can so easily result in consumers being misdirected.
Cater to the whole potential client base
While there is much to do from a cost and regulatory perspective, there is a third imperative for the wealth management industry: correct the service to cater better for women.
Female millionaires are set to overtake their male counterparts this year. Yet despite a clear and steady demographic shift, the industry has been slow to consider the potential inadequacies of their services for a different audience.
Having predominantly catered to a historically male audience, wealth managers and their services have evolved over the years in a way which is often unappealing to women.
With women set to make up a growing share of the industry’s client base, wealth managers will need to evolve and develop their propositions to appeal to female investors. To do this successfully will require a cultural overhaul and an approach that understands women as individual investors, while recognising how their financial journeys and needs can differ to those of their male counterparts.
Last year was a testing time for wealth management clients, and future investment returns are likely to be muted. So 2020 presents an opportunity for the industry to deliver on what it is meant to do: provide value to clients by managing their wealth in a way which is inclusive, transparent, and most likely to provide net returns that are consistent with their individual financial goals.