Objectivity and the Client Experience

Transcription

1 Objectivity and the Client Experience In everyday speech, independence and objectivity are two closely-related concepts that are often used interchangeably. In the UK financial services lexicon, however, these two terms are increasingly taking on distinct identities. As discussed in our last paper, independence is a term laden with regulatory significance. We observed that clients are implicitly aware of the regulatory connotations of independence. Indeed, when asked to define the term, clients describe a business model that is free from conflicts of interest; that is uninfluenced by commissions or incentives; and that is able to offer the best available solution from the whole marketplace. Objectivity, on the other hand, is a term that is not so clearly defined. Indeed, it is an altogether more emotive concept, which clients equate directly with the quality of their relationship with the wealth adviser and the wealth advisory firm. Clients describe the experience of having the wealth adviser sitting on their side of the table and analysing client needs, regardless of the solution or outcome. Putting it another way, objectivity is about client advocacy, where the client s needs are the primary focus of the relationship. This extends to having an advisory process that can give a forensic examination of a client s circumstances. As one client put it: I would expect them to look at my situation first and not through the lens of what solution can I provide. I want them to look at my situation forensically, rather than saying how can I solve your problems. In many cases, it is the willingness of the wealth adviser to say no that engenders trust that they are acting in the client s best interest. Clients are seeking an advisory relationship where the wealth adviser is prepared to forego financial reward, of any kind, if that is the right decision for the client. Independence is a term applied to the product offering. Objectivity is about understanding the needs of the client. Put simply, from the perspective of the client, if wealth management is a relationship business, then objectivity is absolutely core to that relationship. In this paper, we examine how objectivity relates to the client experience and the extent to which clients and wealth advisers are in synch on this important issue. The New Black Not so very long ago advisers regarded independence as the cutting edge of the wealth management proposition. Investment management was going global and, here in the UK at least, we started to realise that FTSE 100 stocks were not the only asset class. Funds were the big noise and not just in-house funds, but a whole world of funds. For wealth advisers, independence meant being able to access this world of possibilities and bring the very best of investment management thinking to private clients. But at the same time, the UK regulator was also considering what independence means in the context of financial advice. Through two separate regulatory regimes, whose names Polarisation and later Depolarisation perhaps unintentionally reflected the split personality of the UK financial advisory market, the regulator moved towards defining independence. To begin with, in order to call themselves independent, financial advisers had to consider the whole market of packaged products for their clients and charge a fee for their advisory services. There were clear disclosure rules in place relating to fees and commissions, but, there was also a certain amount of wiggle room. Fees could be offset against commissions and the onus was on wealth advisers to act honestly, fairly and professionally when implementing their whole of market solution and presenting their product range to clients. This meant for many wealth advisers that independence also continued to be a term associated with open investment architecture, but there remained a question mark over how open, exactly, that architecture had to be. Now, the Financial Services Authority is simplifying matters. Through the Retail Distribution Review (RDR), the FSA will require wealth advisers to consider all the relevant investment products that could be

2 used to meet the investment objectives of each client if they wish to be considered independent. At the same time, fee-based advice will also become standard right across the UK retail financial services business. These tighter standards are part of the FSA s ongoing drive to eliminate provider bias, sales bias and product bias from the financial advisory market. And most wealth advisory firms are in the process of getting to grips with the far reaching consequences. It is a painful process, but all agree that the RDR has the potential to improve professional standards of financial advice in the UK and to clean up the industry s image once and for all. And yet, in a market where the delivery of independent advice will be regulated and, dare we say it, standardised, wealth advisers will still need to seek new ways to engage with clients and offer them a new cutting edge wealth management experience. The question is: what will that new client experience entail? Beauty is in the Eye of the Beholder To get a better understanding of what the client experience of the future will be, we carried out in-depth interviews with 25 private clients and 25 wealth advisory firms to give us their perspectives. In the process of carrying out this research, it was striking how closely clients definitions of independence reflect the current regulatory requirements. Objectivity, on the other hand, is a term that does not have such specific regulatory overtones. It is, therefore, interesting that when asked to define this term, client responses go to the heart of their relationships with their wealth advisers. Above all, the idea that objectivity relates to the adviser s understanding of their personal circumstances was very commonplace. For example, one client observed: the most important thing is feeling that you are being listened to. Whereas another defined objectivity as: a feeling of shared experience and shared information. In fact, client centricity featured in 72% of client responses on objectivity. Figure 1: What do private clients define as the qualities of objectivity in their relationships with wealth advisers? 17% 11% By contrast, only 17% defined objectivity in relation to the investment process. They felt objectivity meant having an investment process that was not confined by asset management conventions. And only 11% interpreted objectivity within the regulatory context that advice should be unbiased by fees and commissions. 72% Objectivity requires real wisdom and patience. These are not qualities that bankers have as great strengths. and incentives Overall, the client responses were fairly specific about the type of experience they would regard as objective. Their responses typically focused on the two main aspects of the wealth advisory proposition; understanding their needs and implementation. 1. Broad-based sample of 25 UK private clients 2. Qualitative responses

3 Figure 2 groups the client responses on these two issues. The size of the bubbles represents the number of responses on each theme. By far the largest group of clients believes that wealth advisory firms should have a clear process in place to understand their needs. A smaller number suggest this is the sole responsibility of the individual wealth adviser and their responses tend to focus on the ability of the adviser to listen and interpret their needs. Figure 2: What traits best define objectivity in your relationships with wealth advisers? Understanding client needs Implementation A process for analysing client needs A team-based approach Original investment thinking An adviser who listens Flexibility to react to client circumstances 1. Broad-based sample of 25 wealthy UK clients 2. Bubble sizes represent the number of qualitative responses The risk profile is so blasé. It is not constructive. It should not be a tick box exercise that puts you into a certain category. It should be about understanding the objective of the clients and obtaining information on an ongoing basis. Several clients also commented on the importance of implementing solutions through a team-based approach, offering flexibility and delivering portfolios that demonstrate original investment thinking. These responses point clearly in the direction of a specific client experience. Clients want to walk through the door of a wealth advisory business and know that there are processes in place to examine their situation, to respond accordingly and to make sure that the response continues to change as their circumstances change. The obvious next question is whether clients believe wealth advisers can deliver an objective proposition. Is it an expectation that clients have of the wealth advisory business? Out of our sample group of 25 clients, 12 said no and nine said it was more of a hope than an expectation. Only four clients felt wealth advisers could deliver objectivity in the client experience given the current conditions and the industry structure.

4 Figure 3: As a private client, is objectivity an expectation you have from wealth advisory firms? Yes 16% More of a hope than an expectation 36% No 48% 1. Broad-based sample of 25 wealthy UK clients 2. Qualitative responses In fact, the client responses indicated they believe only some wealth advisory firms have made significant steps to delivering objectivity. In simplistic terms, the larger the wealth advisory firm, the less likely the relationship and the advisory process will be built around the client. As one client put it: Objectivity is absolutely what I want from any financial provider. I would expect it from a good independent financial adviser, but not from a large bank or insurance company. I don t blame them, it is probably the most profitable way to set up a business, but it is not in the interests of clients. Many regard objectivity to be at least as important as independence, but where the FSA has acted to remove provider, product and sales bias in the implementation of a portfolio, the asset allocation and financial planning processes are areas where firms need to make steps forward. The Tipping Point However, to date, wealth advisers have not necessarily engaged with clients on this territory. This may well reflect the fact that objectivity, by definition, relates directly to the client s personal experience of the investment advice offered by a wealth manager and it is notoriously difficult to evaluate the client experience as a measure of business performance. Consequently, most firms define objectivity in terms of their processes and not the client experience. Among the 25 wealth advisers we approached for this research, 80% cite open architecture as their primary demonstration of both objectivity and independence, as can be seen in Figure 4. You can demonstrate objectivity by identifying the circumstances the client is in. Objectivity relates to the asset allocation. And independence relates to the product selection.

5 Figure 4: How do you demonstrate objectivity to your clients? Financial planning Open architecture Training Risk profiling 1. Broad-based sample of 25 wealth advisory firms 2. Bubble sizes represent number of qualitative responses This partly reflects the complexity inherent in each term. For example, some argue that in investment management terms they bring objectivity to the investment process through rigour and discipline that takes account of the clients risk profile and circumstances, but is neutral to their investment whims. Intellectually, this argument has underpinned a long-term shift towards more standardised investment solutions in the UK market. Over time, many wealth advisory firms shifted toward model-based investing where the very best investment thinking of the firm was reflected in multiple portfolios with different risk profiles and could be selected and blended, depending on the client s profile. So, the best available managers were selected in each asset class from the whole of the market and in-house investment management capability started to be used only when research and judgement suggested there was no significant incremental value to be obtained externally. A similar process began to be employed when selecting the investment structures, vehicles and products that most effectively met the liquidity needs, risk profile and tax position of the client. A number of firms are now wrestling with the challenge of making this process-oriented investment approach more relevant to individual clients, not simply a tick box exercise. But, currently only a minority refer to processes that connect the client to the individual investment portfolio, either through financial planning or risk profiling, when they describe how they deliver objectivity to their end clients. This can also be seen in the bubble sizes in Figure 4. In other words, many wealth advisory firms today appear confident that they can deliver an investment process that is reasonably free from bias, but they are less confident in their abilities to put client needs wholly and objectively at the centre of that process. This is clearly out of synch with client expectations, even among the small sample group polled for this research. The question is whether the introduction of the RDR will be a tipping point in this debate. For wealth advisory firms that wish to operate as independent advisers under the new regime, the scope of their open architecture will be expanded significantly to incorporate all investment and financial products. Inherently, this throws even greater emphasis on the ability of the firm to match client needs against a plethora of relevant solutions. Equally, wealth advisory firms that opt to restrict their advice to a particular type of investment solution will need to differentiate the quality of their offering versus, for example, those offering independent advice. In this case too, the spotlight will be shone onto a firm s ability to match clients investment needs more precisely with a more restricted, but finely tuned, solution. In either scenario, the ultimate basis for differentiation and competition will be on the quality of the relationship and the ability to understand client needs, because the implementation of the solution and the delivery of the product will be prescribed by a standard regulatory framework.

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