Wealth managers lost control of their advisers during the financial crisis and are now looking to tighten the reins, but will this lead to one-size-fits all portfolios?There is little argument that trust between private bankers and their clients broke down during the financial crisis of 2008. But what is sometimes overlooked is that one of the reasons for this was the erosion of a once-strong link between advisers and the teams at the fulcrum of wealth managers and retail banks, which make the asset allocations and draw up the list of approved products to populate these skeleton portfolios.
In fact, many firms have so lost control of what their advisers are actually putting in clients’ portfolios that they are either vastly undercharging or overcharging their investors, claims US software technology group Bonaire, which provides private banks with revenue management services and has 15 clients in Europe, each with more than $50bn (E35bn) under management.
Now there are regulatory drivers, such as the Markets in Financial Instruments Directive (Mifid) in Europe and the Retail Distribution Review (RDR) in the UK, forcing wealth groups to re-examine compliance apparatus and re-assess profitability models, believes Bonaire’s chief executive Chris John. “The model has changed significantly,” he says, looking in particular at developments since the crisis. “There is now more oversight requirement in the industry to sell appropriate products to appropriate people, rather than the broad brush approach. Previously, the distribution model, in some way, got out of whack. It is now being looked at again, for good reason.”
The model’s partial collapse has seen European majors, including Credit Suisse, UBS and Deutsche Bank address the deterioration of this vital link, connecting centre to periphery, which in some places, had become little more than a fragile thread.
In some banks, lists of officially-approved products were updated on a daily basis, but not always communicated effectively to advisers, leading to significant client losses after the Madoff debacle. Now the Swiss banks in particular, are not just beefing up product creation teams, but making sure control of advisers is also being strengthened.
Those looking for conspiracy theories of private banks trying to line their pockets ahead of clients, both before and after the crisis, may be disappointed, according to Jonathan Chocqueel-Mangan of leadership consultancy Tyler Mangan, who works closely with wealth managers, including Lloyds Private Bank, on infrastructure development and change management. “The temptation to assume everyone was purely acting in their self-interest should be avoided,” he says.
“While there is some evidence centrally imposed asset allocations and recommendations may have been more in the banks’ self interests than in those of the customer, there is considerable evidence that advisers went ‘off piste’ in an attempt to take a stand against this and meet customer needs. On top of that, customers themselves were demanding access to products they may not have fully understood, while advisers were keen to be seen as responsive as well as not lose business.”
In Mr Chocqueel-Mangan’s analysis, all parties were either overtly or unintentionally colluding with a “flawed system”. Compliance with regulations, including the UK’s RDR, are among key drivers which will ensure advisers improve their technical skills and product knowledge, he says. “Private banks are being forced to invest properly in systems and processes – a level of expenditure that some may not be able to afford, which may lead to a degree of consolidation in the industry.”
These processes, needs and trends are exactly the same at the mid-tier wealth managers as the global giants, says Daniel Brüesch, head of investment consulting at Vontobel Private Banking in Zurich, who says regulatory issues in particular necessitate a strengthening of controls. “Nowadays, clients want to participate in the market, but don’t want to lose out when there is a downturn,” says Mr Brüesch, who oversees communications between the bank and its 700 client advisers.
“It is very important to have an asset allocation delivered by the investment committee and taken into consideration by all the relationship managers.”
One of the key channels of central influence and control of advisers is sending out electronic alerts, informing them clients’ portfolios, which are screened every night, have deviated from the recommended position. Each relationship manager (RM), typically dealing with portfolios of between 100 and 250 private clients, is also informed on a daily basis by head office about asset realignments which might be needed in the near future.
“This is not about trying to sell stocks and structured products, but about giving the investor the best profile and combination of assets,” says Mr Brüesch.
In one recent such re-aligmnent, Vontobel’s investment committee added extra emerging market bonds and equities plus precious metals to the asset allocation, while reducing fixed income content. “Over the next few years, we think it might prove very hard to make a return on bonds,” believes Mr Brüesch.
