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What is Wealth Management and how did the Royal Commission change the sector?

Introduction

In Australia, at this point in time, nearly all aspects of the wealth management industry have been under a spotlight including wealth management firms and not a positive once since the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has come to light. 

From fees for no service, through to charging trailing commissions on deceased peoples accounts, the financial services sector has certainly not passed the ‘pub test’ of late. The wealth management segment was certainly not immune to the scrutiny, allegations or proven misconduct.

According to the Boston Consulting Group, global personal financial wealth grew by 12% in 2017 to $201.9 trillion in US dollar terms. The total was roughly 2.5 times as large as the world’s GDP for the year at $81 trillion[1].

That is a great deal of money to be managed for individuals across the globe and the wealth management and financial planning segment are the people that manage finances on behalf of those with money to invest.

[1] http://image-src.bcg.com/Images/BCG-Seizing-the-Analytics-Advantage-June-2018-R-3_tcm20-194512.pdf

 

1. What is wealth management?

According to the RBA, wealth management is defined to include various forms of funds management (superannuation, managed funds and life insurance) and financial advisory services[1].

The segment itself according to IBISWorld had revenues in the financial planning and investment advice segment at $4.8 billion in the year to April 2019[2], while the fund's management services in Australia is estimated at $8 billion[3].

This figure shows the sheer size of the financial advice and wealth management segments in Australia, not to mention how much is at stake when unscrupulous operators are able to work within the industry.

Wealth management is more than simply booking an appointment with your local financial advisor, although that is not only the first step for most clients but also the first step of a wealth manager to start out as an exceptional financial planner.

 

So, what is wealth management?

 

[1] https://www.rba.gov.au/publications/bulletin/2016/sep/pdf/rba-bulletin-2016-09-banks-wealth-management-activities-in-australia.pdf

[2] IBISWorld Industry Report K6419B Financial Planning and Investment Advice in Australia, April 2019

[3] IBISWorld Industry Report K6419a Funds Management Services in Australia, June 2018

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IBISWorld had revenues in the financial planning and investment advice segment at $4.8 billion in the year to April 2019, while the fund's management services in Australia is estimated at $8 billion.
2. Wealth Management and HNWI?

From the affluent individual’s perspective, wealth management is the science of solving/enhancing an individual’s financial situation.

From the financial advisor’s perspective, wealth management is the ability of an advisor or advisory team to deliver a full range of financial services and products to an affluent client in a consultative way[1].

Its size and growth make the HNWI+ segment of the global wealth management market particularly attractive. Today’s market for net investable assets (NIA) already exceeds US$55,000 billion. According to the EY Global Wealth Model, global NIA will reach US$69,607 billion by 2021, increasing by almost one-quarter of the current volume, or at an annual growth rate of 4.7% through 2021.[2] 

So, how is that different from the other sorts of financial services offered to retail clients and investors?

 

Wealth Management

Where fund managers and managed funds work to a pre-defined strategy or work to strategies that they dream the best for their client, wealth management is a consultative process.

Not consultative in terms of the client & advisor, but the consultative approach of enlisting additional specialists to better meet the client’s needs.

[1] https://www.forbes.com/sites/russalanprince/2014/05/16/what-is-wealth-management/#3a49485b133e

[2] https://www.ey.com/en_gl/wealth-asset-management/how-the-global-wealth-management-industry-is-evolving

3. The Royal Commission review of the sector

According to KPMG, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry established four clear observations and these were:

  • The connection between conduct and reward
  • The asymmetry of power and information between financial services entities and their customers
  • The effect of conflicts between duty and interest
  • Holding entities to account[1]

The commissioner Kenneth Hayne asserted in his findings that "advisers facing a conflict between self-interest and duty have too often sought to strike some compromise between the two competing forces rather than, as the law has required, to give priority to the interests of the client or member,"[2]


 

 In essence, with over $6 billion being paid to financial advisors in the past 5 years, the report established that trailing commissions across the sector must end, fees for no service must end and ideally that financial advisors would need to be individually registered in a similar way to doctors and lawyers due to the “position of trust” they occupy with clients.

[1] https://home.kpmg/au/en/home/insights/2019/02/financial-services-royal-commission.html

[2] https://www.afr.com/business/banking-and-finance/banking-royal-commission-final-report-financial-advisers-to-be-individually-registered-20190203-h1at2b

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4. Wealth management in Australia

Investment management is in a period of rapid change, driven by shifting investor preferences, margin compression, regulatory developments, and advancing technologies.[1]

With this rapidly changing landscape and an industry that is already under the microscope of regulators, political parties across the divide as well as the community as a whole, there are five key trends as identified by Accenture that will shape the new wealth and investment management landscape as we know it today.

These key trends are competition, demographic shift, client expectation shift, technology, regulation, all of which we will discuss in more detail.[2]

Competition

As the market shifts and international firms and digital portfolio management platforms enter the market, there are also attacks to the ‘traditional business paradigms’ coming from non-financial companies such as Apple and Google that have the size, capital and scalability to dominate should they wish to.

Demographic Shift

With the rise of the tech-savvy millennials and more women asset managers than ever before, wealth management will look different in the future, as the generational values change not simply about the profit requirements of the individual, but the collective or greater good.

There could be a rise in activist investing, investing in renewables and fin-tech, moving away from traditional financial instruments and shares.

Client Expectation Shift

The demographic shift comes in an age with millennials want complete transparency, fee disclosure and they have little issues in changing funds, moving money or calling out companies on social media and other platforms who have higher fees, bad service or inferior returns.

 

Wealth Management

 

Technology 

Like every industry, technology has changed the wealth management segment forever. Digital management platforms, online customer portals, collaboration as well as virtual interactions will see many traditional jobs being iterated or even redundant in the short to medium term in the sector.

Regulation

One trend that should come as no surprise in the wealth management sector is regulation.

Firms and being forced not only to comply but also to exceed the regulations and expectations of the regulators and the communities they are serving. Fraud prevention, rogue trader activities, dishonest conduct and much more are all on the radar, with new penalties – both financial and legal – for those who not only fail to abide by the laws and regulations but also those that fail to call out what they see.

All in all, the changes in the industry will see a far greater level of accountability, transparency as well as a ‘changing of the guard’ when it comes to what is deemed as acceptable and what is not when it comes to managing others money.

[1] https://www2.deloitte.com/au/en/pages/financial-services/articles/investment-management-industry-outlook.html

[2] https://www.accenture.com/au-en/insight-future-wealth-management#search

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5. So, what is in store for wealth management

So, what is in store for the wealth management industry with all these changes?

The key changes to the industry will require iteration by the wealth management industry. This will largely be driven by the need to add value to the products and services they offer.

In addition, there will need to be transparency and accountability beyond that of an oversized PDS or product disclosure statement that is often filled with jargon and terminology that the ‘regular investor’ would struggle to comprehend.

Areas such as loyalty programs, education platforms and events are all ways that value can be created. In addition, having options that suit those customers who require human interaction or self-service through online platforms is key to better meeting the needs of customers.

Technology is obviously key in the wealth management industry. Utilising the online tools and platforms that are available to advisers to make better and more efficient moves on behalf of their clients as well as their own businesses.

Holistic solutions across the client’s specific portfolio, rather than a ‘cookie cutter’ or ‘one-size-fits-all’ approach to wealth management. Ensuring that wealth management professionals are not looking at the most profitable products for themselves, but the client.

 

Embracing diversity and providing agents within a wealth management firm that associates with a particular demographic. Be it by age, culture, language or current socioeconomic status, wealth advisers need to be able to effectively put themselves in the client’s shoes and effectively act in their best interests. 

A final word on wealth management 

There is no question that the wealth management industry within Australia has been through some self-reflection and a reality check of sorts, leading up to, during and after the fall out of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Where industry leaders will form will be through innovation, customer service and transparency, just like in any other industry outside of the services sector. 

While wealth management by many is only seen as a product that is useful to the HNWI or high net worth individual, which is simply not the case. Like with anything, with a well-laid plan and professional advice, everyone can benefit from the wealth management sector.

Looking to get started in Investing:

1. Schedule an appointment (Conference Call) with an Investment Manager

2. Submit a Managed Discretionary Account (MDA) application with Walker Capital Australia.

3. Open a trading account with the Walker Capital Australia’s executing broker.

4. Select from our range of investment strategies and choose your asset allocation between the choices of accounts.

5. Once all accounts are opened, and funds have been chosen, our team gets to work and begins trading.

 

We welcome you to give our team a call to discuss your investment goals and objectives.

You can call Walker Capital Australia on +61 2 8076 2210, and we’ll see how we can help you achieve your investment goals.