What are the risks and rewards of expanding into wealth management?

Joanna Faith finds out the risks and benefits of adding a wealth management proposition to your organisation.

More and more advisory firms are adding wealth management to their service proposition. Advisers who have gone through the process argue the benefits include increased profitability, greater respect from clients and a more comprehensive offering.

However, some maintain wealth management should be left to the traditional providers: the banks. They say advisers do not have the knowledge or resources to advise on investment at this level to high-net-worth individuals.

Yet banks may not have all the answers, as critics say they do not provide a holistic planning service. One Shropshire-based adviser slammed wealth management within banks, saying it is not about advice at all but rather selling. She says: “I sweat away at exams and go through the agonies on investment, whereas at the end of the day if you are young, personable and intelligent, the world [in banks] could be your oyster.”

IFAs say this is where they can add value as financial planning should drive wealth management. They believe wealth managers need to understand the lifestyle and goals of clients to provide the right investment advice. For advisers who have taken the plunge into wealth management, the outcome has meant a broader client offering. But they stress it is a process that should not be undertaken lightly, because it can be expensive, time-consuming and risky.

Wealth management or financial planning?

For those considering the move, the first – and arguably most important – step is to distinguish wealth management from financial planning.

Castle Court Consulting’s Richard Gough, who introduced wealth management to his firm, says many in the industry have not grasped the two definitions. He says: “It is important to know what you mean by wealth management. Is it a name, a title, a service? Or is it a disguise used as a way of hiding the fact you’re a commission-hunting bonds salesman?”

Simon Gibson, director of Atkinson Bolton Consulting, another adviser who has undergone the transition, describes wealth management as an integration of financial planning and asset management. Others define it as a combination of financial and investment advice, accounting and tax services, and legal and estate planning for one fee.

Gibson advocates not rushing into the decision, saying advisers need to ask themselves three questions before embarking on the journey: Is wealth management for me? If it is, am I ready and prepared? If it isn’t, what will I do to ensure clients get the best wealth management service?

He says: “If you have the time and skill, and you have considered the costs of delivery, costs to the FSA and the costs of potentially hiring someone, then I’m all for it.”

The next step is to decide what the investment proposition will look like. There are a number of options such as outsourcing or in-house and advisory or discretionary. Whichever route a planner decides to take, risk management needs to be top priority.

“If you go for an in-house investment service, you need to ask yourself if you have the necessary expertise,” Gough says. “If you outsource the service you need to make sure you carry out detailed due diligence.”

Lee Robertson, who added wealth management to his offering at Investment Quorum, previously outsourced investment decisions to a discretionary fund manager. However, he decided to take the service in-house because he felt there was a disconnection between the financial planning and investment management, especially if the fund manager went off mandate.

“I hired an investment specialist who had 30 years’ experience at Cazenove,” he says. “We spent heavily on investment. The manager is a capital cost and has no client capture, but he is worth his weight in gold.”

His team runs eight multi-asset portfolios that have a tactical overlay and regular rebalancing. There are three growth, two income, one absolute return, one ethical and one balanced vehicle. Funds are overseen by the CIO and an investment committee. The firm also uses the input of a compliance consultant when necessary.

“We have seen credible returns and more investment money coming in since going discretionary. Clients like and respect us more since adding the investment piece. As a business owner that can only be good,” Robertson says.

According to Gibson, an investment committee sets the broad asset allocation at Atkinson Bolton. The team comes up with the strategic asset allocation by taking into account time scales and risk before tactical asset allocation is applied by the investment adviser.

As well as formalising the investment proposition, firms transitioning from financial planning to wealth management need to ensure they have adequate access to a chartered tax adviser.

“Tax planning is an essential part of the business,” says Gough. “It’s not just about pensions, ISAs and inheritance tax any more. It could be clients need advice about VCTs, EISs, QROPs, partnerships, or converting CGT to income loses. Clients’ biggest cost is always their bill to the Treasury every month.

When they pay less tax, they have more money to invest, which means more money under management,” he says.

Risky business

There are plenty of positives for advisers if they decide to add wealth management to their offering, but the process can be risky.

Simon Webster, managing director of Facts & Figures Chartered Financial Planners, added wealth management to his business two years ago to offer a complete proposition to clients and additional credibility with introducers. He says risks could arise if back-office research is not carried out rigorously enough. “There are risks with picking the right funds for the right clients, getting it wrong or not being good enough and clients losing money and complaining,” he says.

This is one reason Critchleys Financial Planning decided three-and-a-half years ago to fully outsource the investment part of the business.

Previously it used Fidelity FundsNetwork and Cofunds and made judgements based on fund managers and historical fund performance.

Jason McGuigan, the firm’s director, says: “We decided we didn’t have the resources or expertise to manage money. Following a couple of stock market crashes we realised it was difficult to be a trusted adviser if we lost money. The best thing was to choose a preferred provider to refer investment cases to.”

The firm selected Deutsche Bank Wealth Management from a beauty parade. McGuigan says they were looking for processes behind decisions so if a manager left there was a mechanism in place to manage money. He says: “One benefit is from a time point of view. For instance during ISA season we would be running around like headless chickens. It was unproductive.

Outsourcing to a discretionary service meant this was all done. They do all the CGT planning too.

McGuigan says bringing the investment process in-house means advisers have more control, but as long as you outsource to the right provider and create a proper working relationship it can work well. He says: “We have Deutsche’s managers in our office nearly every week and they see clients every six months. We have a tight hold over the manager.”

The decision to add a wealth management proposition should not be taken lightly. Clearly there are risks from both a cost and client relationship perspective. But the benefits could outweigh the complexities and result in a more successful business and fulfilling job.

As Richard Gough says: “Discussing wealth management is much more interesting than flogging an ISA or pension.”