What exactly is meant by wealth management? In defining wealth management there seems to be two polar extremes. For some people, it is simply a good marketing term for flogging investment products at exorbitant commissions.
The previous term they used was wealth creation but that was eventually embarrassing because it so rarely happened. On the way to the more defensible wealth management it became wealth protection.
This term was limiting, however, because not enough people had wealth to protect and those that did were mostly too smart to pay large sums to people who admitted that they could not help them improve on what they already had.
I once studied customer segmentation for a bank. After a while, sifting through all the MBA verbiage, it occurred to me that the segment they were targeting was people who were both rich and stupid. I wondered if this was a large segment.
There is another group of people who seem more thoughtful in their definition of what they mean by wealth management. It seems to mean something more like using the resources of the banking and finance industry to facilitate clients in achieving their financial goals. Does this seem trivial to you? It doesn’t to me. I believe that in the interplay of these two points of view, we could see the new banking and finance industry emerge. If the second view prevails, it will be very different.
A current reality of the wealth management industry is the rise of third party intermediaries. Advisers who are, or at least pretend to be, representing the interest of their client to financial institutions. When most people think of financial planners they think of investment products, but that is not the whole story.
About a quarter of mortgage lending is now arranged through intermediaries known variously as brokers or introducers. At present, little overlap between mortgage loan brokers and financial planners exists, and they are not much seen in each other’s territory. This is a little surprising and I suspect that it may not hold true for much longer. After all, investment property is just another investment and so, come to that, is a home. Wealth management could come to be seen as everything that can be achieved with the products and services of the industry to help clients achieve their goals.
In one of my roles, I study the business banking market. The major banks have a stranglehold on it. In a sense, this is easy to understand. It is a difficult market to break into. The skill of relationship management (often a polite word for selling) and analytic credit assessment must frequently be found in the same person. The information systems that support it are complex and expensive. Compare business banking to wealth management.
In business banking there are four major banks, and two or three others with not much more than a toehold. In the wealth management industry there are around 30 players or so, some occupying every node of the value network, some hopping in and out of various niches. Every one of these players faces a unique strength, weakness, opportunity and threat (SWOT) analysis. Each of them has to find some way of changing the rules of the game. This part of the banking and finance industry is as unstable as I have known it since deregulation.
I was once asked how the position of the majors in business banking could be attacked. Well, only with difficulty I guess, but there are some clues.
It is not unusual to find a bank segmenting, say, a dentist as a high-net-worth individual in its consumer banking division and as a small to medium enterprise (SME) in its business banking division. However, it is still the same person they are dealing with in both cases.
It does not just apply at the small end of business. I suspect that a large number of business people do not necessarily strictly delineate their business from personal finances. The purpose of being in business is, after all, to make money. So I do not think of wealth management as an add on to banking and finance, in the sense that some industry insiders do, when they argue that their institution needs a presence in wealth management (read ‘investments’) because there will be a drift away from bank deposits to superannuation.
I do not see a major distinction between business and personal finance. A most appropriate distinction is between people with complex financial decisions and those with simple ones. Some of the complex decisions may be business rather than personal. Facilitating those decisions depends more on understanding the client than any arbitrary separation between business and consumer finance. In a sense, the way to attack the business banking market is to redefine it and change its boundaries.
A presentation I sometimes give to clients is called “From Intermediation to Wealth Management”. One of my early mentors told me that the strength of banks was that every transaction had to eventually go through a bank branch. Profit was like a toll collected on the way. Intermediation was reactive. The customer had to come to you. It was rule driven (the bank’s rules) and bureaucratic. Making all this work were lots of people working within a well-developed corporate culture. Predicability and a safe pair of hands were valued. I don’t think it’s like that now. There is an opportunity to rethink the game.
One of our perceptive respondents said: “We are getting more efficient at a model that doesn’t work.” Wealth management has the ability to transform banking and financial services. It need not be another product added to the range. It can be a new way of doing things. Whether or not it realises its potential will depend on the movers and shakers in the industry. One or two of them have to break ranks and give proof of concept to a new business model.
Geof Johns is a financial services management consultant and market researcher.
