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Wealth managers must improve business model to retain clients, report says

In an effort to retain assets and regain the confidence of high-net-worth clients, wealth managers must find ways to improve their overall business model, according to a new report.

The financial crisis resulted in “seismic shifts in the wealth management industry, heightening the prospect that only some will emerge from the disruption as winners,” according to the annual World Wealth Report, issued last week by Paris-based Capgemini and Merrill Lynch Wealth Management of New York.

Losers may include independent advisers and smaller boutique firms, the report stated.

Wealthy individuals around the world with net assets of at least $1 million, excluding their primary residence, will use independent advisers 8% less this year than they did in 2008, according to the report. The survey results are also roughly comparable for the United States, said Ileana van der Linde, a principal for Capgemini who is based in New York and was an author of the report.

What’s more, wealthy individuals’ confidence “in the ability of some independent advisers to provide adequate due diligence and risk-management capabilities” was undermined by the financial crisis and scandals, the report stated.

Bigger wealth management firms that can employ economies of scale will fare better in the years ahead, said Dan Sontag, president of Merrill Lynch Global Wealth Management, which has about $1.1 trillion in assets.

“Clients want big names and big brands,” he said.

Boutique firms have “very little” appeal to wealthy clients, Mr. Sontag said.

The growth of smaller firms is deceptive because their base is small, he said.

“They’re not particularly players [in the market],” Mr. Sontag said.

But Steve Lockshin, chairman and chief executive of Rockville, Md.-based Convergent Wealth Advisors LLC in Rockville, Md., disagrees. The firm has about $10 billion in assets under management.

“Large firms have had to take government money, sell or merge themselves over the past year simply to survive and have suffered [client and employee] defections, while most boutique firms not only retained the bulk of their clients but their employees as well,” Mr. Lockshin said.

Mr. Sontag’s argument should be seen through the prism of Merrill Lynch’s need to bolster its own “tarnished” brand, said Alois Pirker, a senior analyst for Boston-based Aite Group LLC.

“There’s no doubt bigger gets you more scale, but bigger also gets you more risk,” Mr. Pirker said.

One example was the “integration risk” faced by financial services giants such as Citigroup Inc. of New York, which failed to successfully integrate Smith Barney with its wealth management unit, he said. “Only time will tell if Bank of America [Corp. of Charlotte, N.C.] will add to or discount the value of the Merrill Lynch brand,” Mr. Pirker said.

Industry consultant Jeff Spears noted that the question of scale poses a dilemma for the industry.

“Scalability does facilitate a number of services, including reporting and the ability to provide due diligence and risk management, which is critical,” said Mr. Spears, chief executive of San Francisco-based Sanctuary Wealth Services LLC.

“But advice is not scalable, and if you scale advice, you homogenize it,” he said.

In addition to the question of size, wealth management firms are also weighing other options as they seek to bounce back from last year, which saw the number of high-net-worth individuals in the United States drop 18.5% to 2.5 million, from 3 million in 2007, according to the World Wealth Report.

And more than 25% of all wealthy individuals surveyed said that they withdrew at least some assets or left their wealth management firm altogether last year, Ms. van der Linde said.

To retain existing client assets, the report cited several areas that offered firms “the highest potential for improvement,” including statement and reporting quality, online access and capabilities, risk management and due diligence capabilities, and fee structures.

The report also said that the need for better online portals has increased in the aftermath of the financial crisis.

Improved technology tools for online access and communication “will be essential going forward to provide a factual basis for client-adviser collaboration and meet the heightened demand for transparency,” according to the study.

In addition, such tools are likely to be seen as critical for keeping the business of younger high-net-worth clients, who were found to be more likely to defect.

Although wealth management firms are working to attract younger investors, the Capgemini report showed that clients wanted to work with advisers over 41, indicating the need for experience when guiding clients through a crisis.

Advisers who kept clients last year were also likely to work as part of a team, the survey found.

Heightened client demands will have to be addressed in a market shaped by the financial crisis, Ms. van der Linde said.

“Wealth management firms need to be partnered with clients and understand their needs. They have to demonstrate objectivity and spend time getting to know the client so that as the client grows, their services also grow,” said Mindy Rosenthal, New York-based managing director for North America for CampdenConferences, a unit of Campden Media Ltd. in London.

The World Wealth Report surveyed 1,361 advisers from 31 wealth management firms and 212 wealthy individuals in person and online in March.

E-mail Charles Paikert at [email protected].