The wealth management industry is set to see some exciting times ahead, thanks to various forces that are reshaping the financial landscape such as technological advances and regulatory enhancements. The growth of automated investment services (robo-advisors and fintech) and more intuitive data tools are opening up new doors for investors as well as wealth management providers, particularly those in large financial institutions that have ample resources to invest heavily in the latest technology.
While these new advancements may serve to benefit investors in many ways, it is crucial to address and deal with the underlying deep-rooted challenges exposed by the weaknesses of the current wealth management mechanism before real sustainable change and transformation can take place. Simply putting a band-aid as a solution is not enough.
THE RESULT CAN ONLY BE AS GOOD AS ITS PROCESSES
The approach used by the players in Wealth Management 1.0 or WM 1.0 (the current system) is myopic at best, in that short-term considerations are applied without giving due thought to the client’s interest and benefits. This inherent Achilles’ heel in the current wealth management system is the very reason why the industry has failed to rise to customers’ expectations.
In a typical situation, wealth managers would assess the client’s financial position using only the client’s assets available in the bank and based on this information, recommend investment products and subsequently provide a report based on the performance of the client’s investments.
A little knowledge can be a dangerous thing
The process stated above is flawed right from the beginning, as the wealth manager has failed to take into consideration the information of the client’s wealth outside of the bank. Therefore, he is only looking at part of the client’s wealth and consequently, his advice is partial and incomplete.
As a result of looking at things partially, any subsequent investment recommendations will not be in line with the client’s overall financial goals. Worse still, the recommendations could be counter-productive and cause even more detriment to the client’s financial future. Suffice to say, the function of the wealth manager is basically relegated to recommending investment solutions and performance reporting.
In light of this tunnel vision, any recommended investment solutions do not come with complete risk calculation and management. As we know, every client’s needs are different and so too are their financial risks. Without taking into account the risk element when investing, how can the wealth manager be sure that the investment solution is beneficial to the client?
Secondly, performance reporting is basically just that. The client will be told how his investments are faring on an individual basis, but what he will not know is how the performance of each of his investments are impacting his overall wealth growth.
What good can come out of our current wealth management if it continues to operate in version 1.0, where the focus is only on investment product recommendation but without the entire blueprint?
Evidently, the client ends up being the victim of a system that does not take into account his financial needs and goals. When the client is asked to invest without his holistic financial position in the forefront, he will not be able to maximise his investment returns nor insulate himself from the risks attached. The end result – any wealth growth will be uncertain.
“No problem can be solved from the same level of consciousness that created it” ~ Albert Einstein
In spite of its obvious shortcomings, the fundamental reason why WM 1.0 has not been able to undergo a paradigm shift is due to business practices that prioritise and reward short transaction cycles and time efficiency. While it may simplify the wealth management delivery process for the providers, it comes at a price for the clients who are being denied key components of wealth management.
As long as the old mindset is fixated on partial wealth management, no amount of advancement in technology or human effort can bring about the necessary transformative results.
Wealth Management 2.0 is THE answer
Enter a new framework, Wealth Management 2.0 (WM 2.0).
The key premise behind WM 2.0 is that it requires an insight into the client’s ENTIRE wealth in order to deliver holistic wealth management.
WM 2.0 offers a panoramic 360-degree view of a client’s financial position by incorporating 5 critical components that is often overlooked or non-existent in the wealth management process under WM 1.0.
By filling in the gaps left by current practices, WM 2.0 is able to provide the wealth manager with a comprehensive picture of the client’s overall financial position and asset allocation. This understanding would help the wealth manager to craft customised strategies to minimise risks and optimise investment opportunities, which in turn grow the client’s wealth with high certainty.
Meanwhile, here is how end users, i.e. wealth management clients may benefit from the additional steps:
Step 1) Holistic Financial Planning: Holistic financial planning entails the wealth manager looking at the big picture and taking into account all of the client’s financial needs for the future. Examples would be projection of funds needed for children’s tertiary education or preparation for an impending retirement. By factoring in the timeline of these milestones, the wealth manager will have an exact guide on how one’s wealth should be grown and managed to fulfil the needs holistically.
Step 2) Cash Flow Management: WM 2.0 takes into account one’s cash flow management, which is the key to determining your investment holding power. Many people overlook this important principle when it comes to investing. The advantage of being buffered with cash reserves is that you can afford to wait for a badly-hit investment to rebound before cashing it in. In contrast, someone with no holding power will be forced to sell prematurely, sometimes at a loss, just for the sake of recuperating his cash now required for other purposes.
Step 3) Strategic Asset Allocation: The old way of allocating some part of wealth into one investment portfolio is not good enough. Instead, a strategic-level allocation method is applied which involves diversification of total wealth into different asset classes. As a result, you will be more likely to capitalise on various return opportunities available in the market. And the icing on the cake is, no matter what happens to any asset class, your overall investments will be better protected.
Step 4) Risk-Calculated Investing: Whereas typical assessment of investment options focus on the ROI (profits from an investment), equal importance is hereby placed on the return OF investment; i.e. the recoup of the initial capital should the investment fail. Under WM 2.0, the wealth manager takes into account the risk tolerance level of each individual client, and undertakes a thorough background and fact check of different investment products to report on the historical performance, the track record of the fund manager and fund related charges. As a result, you select only superior, best of breed investments to put your money into each asset class.
Step 5) Active performance management: A common mistake made by many investors is to expect the investment to take care of itself once they have invested. With WM 1.0, you may receive periodic performance report on your investments, but you will not know how these relate back to your overall financial goals. Active performance management enables you to be one step ahead all the time and gives you a window to make the necessary adjustments to your investment portfolio in a timely manner.
When applied together, the 5-step process works in synchronicity to deliver an incomparable and comprehensive wealth management experience which ticks all the right boxes in every aspect of a client’s financial needs.
The Winds of Change
A total wealth management industry overhaul brought about by the era of financial technology can signify the dawn of new beginnings for individual investors. However, it can only be a reality if, and only if, the process of re-engineering takes place as well. As long as the first 3 steps are missing from the entire process, the end result will always be uncertain and unsatisfactory to consumers.
In other words, the players in the wealth management industry need to first, get their house in order and address the elephant in the room, before embracing the new advancements and enhancements brought about by new technology and the supporting industry deregulation. Putting efficiency before effectiveness is akin to placing the cart before the horse; no matter how one strives to obtain results, he can only get so far because the right steps were not implemented in the first place.
In today’s online era, the power to change any industry lies in the hand of consumers – which means YOU. You hold the power to put the ‘wealth’ back into wealth management. If you want to improve the wealth management experience offered to you, start by demanding more from your wealth management service providers. Tell them, you want Wealth Management 2.0.Back To Article Page Get Started Today