Why We Bother With Wealth Management


Speech given to students of Masters in Financial Planning and Wealth Management at Manchester Metropolitan University, 10th October 2011

Thank you for inviting me as your first guest speaker to this special group. Since I’m the first, I can talk about what I like, so I have decided that I want to talk to you about why we’re doing ‘wealth management’. Put simply, because it makes our firms more profitable. Some firms use ‘wealth management’ to mean the kind of work they do when designing a new product to sell. Some firms use it as a philosophy and put everything they do for clients to the test of whether it helps the client achieve the lifestyle the client wants.

You may wonder, why would I suggest that ‘wealth management’ is profitable, because there is no market. Nobody walks into a private bank and says “what’s the best way for me to build enough money so I can be independent?” You could argue that the reason why the question is not asked is because no one knows it can be asked. If you believe that, then we’re in the phase where we need to develop the ‘profession of wealth management’. Steve Jobs who died recently, was known as a passionate man, one who believed in a product a decade before it became wanted. You can read his profile online any time. If you do, you might notice as I did how many people said that nobody wanted tablet PCs ten years ago but he said they wanted one that worked well. People want a financial services industry that works well. In the absence of one that works well, they mill around, and ask whoever they can for advice.

For those of you on Linkedin, if you look through the questions and answers made in the personal finance section, you will never find a retail client asking the question “where can I find a good financial planner?” Nor do they say “where can I find a wealth manager?” They ask about their problems. Here is one question I answered very recently:-

“What are the implications for a UK resident French house owner (with a French mortgage) if the Eurozone breaks-up?”

And so we are problem solvers. A client will turn to whoever is nearest for a solution to the current problem. They don’t care if they’re talking to an accountant, stockbroker, banker, IFA, financial coach or friend. But if the advisor doesn’t contribute to the solution, the client will tend to drift off, slowly, and without really saying the reason. As wealth managers you will solve problems like these, and I am asserting that even if you have a strong relationship with the client, your retention rate is at risk unless you assist in cases like this. You can study the research showing that retention rates are higher when a strong professional relationship exists. But the relationship isn’t about trust. The clients are not blindingly trusting you. They don’t care if you have an M.Sc. after your name or a Ph.D. They are looking for solutions to their problems, and they are waiting for those. They might trust you to deliver a solution in due course, but that’s a measure of their patience. What we need to make wealth management work well is twofold.

First we need a methodology to solve problems for clients. It’s up to you how you apply this. You could use it to design products. You could use it as we do to help your clients achieve their aims in life. Either way, you probably have not had the time to model your own business. When you do, I suggest you put in two particular variables and see how they impact your future earnings. One is the referral rate: and the other is the retention rate. Assume your referral rate is constant at 10%. That means if you have 100 clients, 10 people are referred to you every year. Most firms says 70% of their business comes from referrals. But study what happens in your model to your personal income if your retention rate is 95%, and then 99%. Only 4% difference and you’ll probably find it means double the salary for you, in six years time, assuming your overheads are kept low. You get twice as much, all other things being equal.

Banks know this, but have chosen not to implement. They have tried, notably American Express and Devonshire Life, but ended up probably with the belief that it was too expensive to deliver. That’s a guess, of course, I have no direct knowledge of their reasons. Accountants have in the past been spoiled with a monopoly: stockbrokers think they’re there to generate transactions in the local share market: broker/dealers or IFAs, think they’re in business to sell financial products, as long as they are ‘appropriate’, and whether or not the products do what they say on the tin. At the moment the FSA is requiring everybody to get trained to a particular level of competence. But I think that their idea that they can force all salesmen to adopt a fiduciary standard will fail, because there are many fiduciary standards. There’s the standard of a pharmacist, and a standard of a GP medical doctor. They’re both well-trained, but the pharmacist will never present him or her-self as the professional responsible for analysing the best way forward. Firms that sell financial products don’t want anything more than “this should be appropriate thing to do, but we haven’t checked whether it is likely to be your best solution”. The mistake the FSA has made in my personal opinion is to let the public think they’re entitled to the opinion of a doctor, while actually making regulations for pharmacists, and then compounding it by allowing the distinction between the two to be so confused as to make it impossible for a doctor-like core to emerge. So if you want to build your own practice, there’s a significant brand challenge.

Unfortunately that’s the second requirement to make financial services work well. We need a clear distinction between the advisors who analyse what is best for an individual but who are not permitted to sell, and the salesmen who can’t give people-advice (but are well able to give product-advice and products-that-help-common-ailments advice). I think that would let the whole industry settle down and work well. We need a methodology for solving problems: and finally, we now have one. Drawing on many disciplines, the methodology at the moment is:-

  1. analyse the problem by using a stochastic financial model of the client
  2. decide the appropriate trend and standard deviation (or skewed deviation distribution) of the variable you want to investigate (in this case a currency risk) and plug it in the model to see if the client’s financial targets are compromised in the future. If they are:-
  3. state options and test the strategy in the model and tactically with a cost/benefit analysis.

There is software on the market to give a stochastic model, and perhaps financeware.com has a current good offering. But if you’re going to plug in a variable like the Sterling / Euro rate you’d have to build your own. You could do it with a spreadsheet, and by making a bald assumption that the distribution of the standard deviation of the actual rate around the trend is normal. If you do that then you can model the rate by using (in Excel)

(1+trend)*ExRate+ ( NORMSINV( RAND() )*stddev*ExRate) )

Since historically the trend has been down, you might look ahead and decide there’s no reason to change that trend (or you might). When you plug this formula into your financial model, you may decide that the client has a significant risk of a cash flow problem. To make financial services work well, as wealth managers, we have to build a system to do that within five minutes. In the case of the question asked, having identified that there is a strategic problem, the tactical options would be:- a) re-mortgage in sterling b) re-mortgage to a managed currency mortgage c) change her business to sell more in Europe, and start billing in Euros and probably the latter is the way she might choose for most result from least money. Notice just how many subjects you are covering to make this assessment. That’s economics, investment, tax, business studies, psychology, politics, law.

Actually at this point it’s worth pointing out that here is the difference between using wealth management as an ethos, and using wealth management to design products which will sell. In the first, you’re trying to find the least cost to the client which achieves the result, and in the second, you trying to find the most cost which achieves the result.

Of course, you can’t build a wealth management business simply by solving every problem in sight. Unless you want to establish yourself as a consultancy, you also need a stable regular income from a turn-the-handle type of activity, such as accounts, or tax return business, or asset management. Bankers get that from current accounts and private bankers from account fees. You need a good on-going proposition: and most wealth managers choose asset management. In which case, you’re solving an ongoing problem – how to get the most return for least risk: and how to compute the risk and return pairing that gives the client the best chance of achieving their objectives. Quite extraordinarily this is not taught in the Institute of Financial Planning’s exam for CFP licensees in the UK, nor in the Stock Exchange exams that I took, and is not in the RDR list of required knowledge. Neither is it in the American examination for CFP, which is several levels ahead of the UK’s. For this reason, at this Masters level I think it would be a good idea, especially as we think this is such a fundamental topic that we include it in our initial briefing book for new clients.

The reason why you are studying wealth management is that it helps you solve problems for clients, and that your retention rate. It also helps you design new products and market. To do this well, you need to have a methodology for solving all kinds of financial problems and I have suggested the one that is growing in acceptability. The second part we need is branding, and I suggest that the best way to do that is to create a professional core of fee-only wealth managers who develop common solutions together and who act as an impartial knowledge-base for the media to refer to. If you’re interested in the latter, when you’ve graduated, look me up on LinkedIn, and I’ll explain which group to join.

by Rob Noble-Warren, founder, Independence Wealth Management

Source by Rob Noble-Warren

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