Crunch puts discretionary-only models under pressure

Wealth managers may be forced to accept greater client involvement in portfolios in the wake of the financial crisis, which has left high net worth investors disillusioned.

A report from management consultancy MDRC, which surveyed 4700 high net worth clients, some 800 of whom have portfolios of more than £5 million, found that the majority believe their wealth managers have fallen short during the market crisis.

Despite attempts from wealth managers to focus on client communication during the downturn, the majority also said that communications have been insufficient.

The report concluded that high net worth investors
are going to be seeking more control over their portfolios in the coming years, a move that will put pressure on those discretionary firms that do not accept advisory business from the wealthy and do not diversify into financial planning.

Richard Williams, the managing director of MDRC, said the extent of the change in attitudes to personal involvement in portfolios over the past year is so great that MDRC has changed the way it segments the high net worth market, creating a new group to market to called ‘The Disillusioned’. He said: ‘Our research points to a decrease in the traditional type of wealthy individual who is content to have his financial assets managed at arm’s length. In 2009, the majority of high net worth clients want to have a degree of control. As a consequence, maintaining client profitability and re-building assets bases will be challenges. Too many wealth management businesses are pursuing business models that were developed a decade ago.’

MDRC said the trend will cause firms with a more diverse range of services, particularly an advisory arm, to gain market share as they
can allow for ongoing client input.

The trend looks set to put discretionary models under pressure. Hannah Edwards, head of new clients at Killik & Co, said she has noticed a preference for advisory services among high net worth clients as a key trend in the past 18 months that is likely to continue.

Edwards said: ‘On the new client side in the past 15-16 months there has been a shift towards advisory. People want time to understand what is happening underneath the bonnet of their investment portfolio.

‘A few years ago, people were much happier to opt for a discretionary service. Now they want to cut their teeth with an advisory relationship first.’

The report concluded the high net worth market as a whole will experience no growth in the next two years and will probably shrink in 2009. It found that since 1996, more than 60% of the growth in the number of high net worth individuals has been driven by the two sectors now devastated by the crisis: property development and sophisticated financial services.