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The Wealth Management of the future

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Guest article for the FuW "Private Banking" supplement on April 20, 2013


If Swiss banks want to enjoy future success, they must – as they have always had to – continue to set the right course. Simply implementing the latest batch of regulatory requirements – which has to be done no matter what – is not enough. What is now even more needed is investment in know-how and innovation.

Promoting expertise

Almost 65% of investors spend a whole hour every day looking at the markets and financial issues – and this figure is on the rise. This places considerable demands on client advisors, as they must be able to provide their clients with precise information about global events and all asset classes at any time. Expert advisory skills and a good relationship have to be complemented by in-depth financial and market knowledge. This means that know-how is a decisive competitive factor and a distinguishing feature, and adequate training of client advisors will become much more important. In Switzerland, too, the quality of financial advisors should be certified by means of a recognized diploma and title.

Understanding clients better

The tools we use to draw up useful client profiles are constantly being improved and refined. Nowadays it is more important than ever to explain the relationship between risk and return to clients in as clear a way as possible. To do so, banks are making far more efficient use of the possibilities offered by information technology. By using technical tools, advisors can visually display and simulate the relationships between expected returns, risk tolerance and risk capacity for their clients. As is the case for institutional investors, private investors should have their investments undergo a historical stress test and account for a variety of scenarios. This allows both bank and client to develop a more objective and precise understanding of the personal investment goals.

Closing the information gaps with regard to the growth regions

Nowadays we can no longer expect the financial markets in the West to rise continually; the return potential of bonds has already been largely exhausted. The shift of free funds into companies has buoyed stock markets considerably in recent years, with many investors having again missed the right time to re-enter the market. In future, return opportunities driven by fundamental growth will largely be found in the emerging markets of Asia and South America, as well as in those sectors that benefit from their growth. Nevertheless, investors in the western hemisphere still know relatively little about these markets and their economies. There are widespread prejudices and diffuse skepticism based on decades-old experience from crises in Asia, Russia and Latin America. However, the world has changed since then. In-depth knowledge is required to invest successfully. Anybody wishing to invest in emerging markets must close any gaps in information regarding these regions. In order to provide their clients with credible advice and offer them profitable investment solutions, banks will increasingly need to have their own global research networks that closely follow local events. Today, a successful investment strategy requires global diversification and a focus that extends well beyond the home market.

Making investment processes more professional

An "Investment House View" – i.e. clear positions taken by the bank regarding markets and investment categories – is an important prerequisite in order to provide professional advice. Economists, analysts and investment experts provide analyses of the relevant markets and investment categories to help shape a nuanced view of the markets. The House View should also be critically scrutinized on a periodic basis by external specialists to prevent the bank developing a blinkered view of affairs.

However, an Investment House View is not enough on its own. The bank's own view must be professionally reflected in its long-term strategic asset allocation so that value can be added for investors. Strategic asset allocation accounts for around 80% of a portfolio's returns. It also needs to be flexible so that tactical action can be taken in response to short-term market events. These, together with the careful selection of investment vehicles, are the ingredients for a well-thought-out portfolio. If clients trust a bank to manage their portfolio, they should have a completely clear overview of their investments at all times.

Raising quality standards

Volatile markets and currency fluctuations – which today have become the norm – can quickly alter the weightings within a portfolio. This results in the investment's targeted risk profile deviating – as if on its own – from the agreed limits without any shifts whatsoever. Equally, the risk profile of individual asset classes can quickly change; until a few years ago, for example, government bonds were seen as a safe investment, but many of them now contain new and unexpected risks. With a view to creating a service quality that runs throughout a company, banks should systematically review their client portfolios on a weekly basis according to a variety of risk metrics, while actively providing their clients with investment proposals. From a technological perspective, this requires high-performing systems.

Creating price transparency

Clients justifiably expect their bank to offer them a transparent and understandable price system. In future, many investors will ask more questions about the combination of custody account, transaction and other fees. They will demand real added value through professional and systematic advice – a service they will be happy to pay for.

Protecting reputations

Banks must have a solid set of rules in place that ensure compliance with all the applicable regulations, particularly with respect to cross-border business. Client advisors must have received training on every market they deal with; they must be familiar with all the applicable regulations, and aware that their company's reputation depends on them complying with them.

Wealth management is still an attractive business

The barriers to entry in the asset management business and the requirements for providers are exceptionally high. To be sure, there is considerable pressure on earnings, and costs have to be kept as low as possible, but there are a number of factors in favor of the business: demand for investment expertise is undiminished, and, in a complex world, is set to grow still more. The available assets belonging to wealthy people are continuing to grow faster than GDP. The business is scalable and, not least, requires only a relatively small amount of capital resources. Growth is possible and the business will remain attractive provided it maintains a critical size and its global presence. For banks that invest in innovation and content and are able to honor their promises to clients, wealth management is a very attractive business.