Wealth Management is much more than Portfolio Management

1. Wealth Management is much more than Portfolio Management JHC Wealth Management Seminar London – 14th October 2010

2. How did we get here? • Pre 1970’s: private client stock-broking • covers only the share portfolio & stock selection primary activity • asset allocation a minor exercise mainly in domestic equities and bonds • transaction based charges and no measurable objective • 1970’s and 80’s : investment management and asset management • responsibility for performance & fees based on portfolio value • much broader range of assets to choose from • asset allocation increasingly important • open architecture • 1990’s: private banking • integrated banking and asset management (trusted advisor) • 2000’s: Wealth management / family office • provide trusted advisor across all aspects of financial affairs

3. Two motivations for most banks • Provide quality personal banking service for HNW customers • Investment management revenues from steep rise in HNW population

4. Client proposition was theoretically quite compelling • One stop shop single relationship • Saves time and cost • Bridged gap between bank deposits and investment • Better decisions through holistic approach BUT • Had to overcome strong brand resistance • Banks NOT seen as competent investment managers • Need to develop expertise and culture on substantial scale • Term ‘Private Banking’ not understood

5. Three main successes • Successfully sold new concept of private banking • Recruited clients on considerable scale to build significant businesses • Massive increase in availability, range and sophistication of investment products

6. But early misjudgements undermined delivery • Excessive emphasis on investment management, rather than banking • Underestimated importance of sophisticated service • Assumption that HNW’s a soft touch willing to pay for ‘bows and bells’ rather than substance • Grossly insufficient thought given to use of technology • enhance service • contain costs • focus additional costs on delivering added value • High cost base and narrow focus, led to excessive revenue requirements, hence product sales culture

7. Combination of developments led to standardisation • Benchmarking led to index hugging • Regulation to giving clients similar advice • Diversification to increasing numbers of experts far away from the client • Desire for scalable model diminishes individuality • Standard portfolios with minor adaptations and personalised delivery • Client relationship manager mouthpiece for organisation rather than advisor • Perception of product sales

8. Failed to deliver consistent quality relationship management • Severe shortage of suitably experienced R/Ms for trusted advisor role • Excessive turnover of R/M undermines core of proposition

9. Use of ‘wealth management’ to counter product sales image • Designed to suggest trusted advisor relationship • But no definition of new proposition • New term a re-badging or genuine attempt at new service? • Implies advice across full range of affairs

10. Open architecture used to assert independence BUT • Asset allocation held out to account for 90% performance • Outsourced element hence accounts for less than 10% • Questions over diligence by in selecting managers • Seeking to justify high fees on fees through overcomplicating the role

11. Crisis highlighted deficiencies in wealth management advice • Many clients did not know whom to turn to for help with big decisions • Clients going over heads of R/M seeking more experience and wisdom • Investment manager driven more by fears of performance track record than by analysis of client circumstances • Standardised measures of risk inadequate for circumstances • Risk tolerances changing rapidly • Advice led by corporate policy rather than understanding of client

12. More complex clients reappraising needs • Need for far deeper strategic appraisal – more like management consultancy project than KYC exercise • Better co-ordination between asset allocation and other aspects of their affairs – deep understanding of risks in their business essential • Clearer, better defined decision making processes which ensure risks of all family members properly taken into account • Need for better understanding of all the chain of advisors • Need for one, overall trusted advisor – wealth manager

13. Need to define wealth management • Wealth management must be embrace the whole spectrum of client affairs • Confine use of term to those clients whose affairs fall within the competence of their relationship managers • Remuneration model must reflect independent status • Family office is wealth management for UHNW families and is defining the space

14. Risk Management at the heart of it • Better communication of roles and limitations of risk management tools • Exploring and defining risk from client perspective (you are part of it!) • Counterparty and complexity risk • Impact of directly owned businesses and other assets on risk appraisal • Family risk, decision making and governance

15. Assess and cater for client desire for involvement • Willingness to trust • Need to understand - transparency / complexity • Active interest / expertise • Desire for involvement in key decisions Pro’s & cons of client involvement : • Cost • Accountability • Commitment to strategy

16. Key steps for re-building trust • A clear proposition aimed at well defined client segments • Genuinely meets needs of target clients • Demonstrates innovative approach which addresses concerns • Well researched and economically deliverable • Easy to articulate and defines how it adds value • Clear, truthful & coherent communications • No unrealistic claims • Communicate from client perspective in client language - no jargon • Clear, consistent messages through all channels from brochures to interviews • Train managers in communication and facilitation /advisory skills • Make sure actions consistent with words • Relationship manager to match proposition • Training and experience • Incentive and management

17. MASLINSKI & CO LTD 31 Morpeth Mansions London SW1P 1ET 44 (0)20 7828 9468 info@maslinski.com