Should you build a wealth management arm?

Chris Pitt, senior management consultant at 1st Exchange & N4, discusses why adding a wealth management arm is the wise decision for the savvy adviser.

It is no secret the RDR aims to ensure all advisers are providing good quality advice tailored to each individual client, rather than selling products. It is also no great revelation that some advisers will already be nearer to achieving this ideal than others.

So, if we are to see RDR as an opportunity, rather than a threat, how can anyone who has that bit further to go, ensure there is more than a puff of smoke at the end of their yellow brick road?

In these times of austerity and tightening of belts, wealth management is not necessarily the first thing that springs to the mind of the most people. Indeed, when put in the current economic context, it almost falls at the first hurdle with the word ‘wealth’. Yet, as advisers prepare for RDR and the subsequent changes, this area should be very much on an intermediary’s radar. In 2011, it is crucial that advisers examine their core business model and assess their service offering within the context of client needs.

Changing the work ethos

In the past, advisers were traditionally viewed as a provider channel to the market, with many having started in provider sales teams. The RDR will turn this viewpoint on its head, with advisers having to focus on the advisory process as opposed to promoting products for commission.

This is good news and should be promoted as such. However, as a consequence, some advisers will have to do some soul searching of how they will add value to their service offering. To this end, many advisers have already started identifying potential revenue streams and additions to their service – as a result, there is a growing recognition of the value of wealth management as part of a core advised offering. But why wealth management, and why now?

The simple answer can be found in the demographics of this country at both the older and younger end of the scale. The UK, like the rest of the Western world, is ageing, and the Baby Boomer generation of the 1950s is now heading to retirement. Generally, asset rich and enjoying the last of the dying breed of DB pension schemes, they have money to invest and assets to manage.

Alternately, despite suggestions of an indebted younger generation, there is also a segment of affluent 30-somethings who, in the light of recent economic turmoil, will be keen to safeguard their financial future.

Holistic approach

As RDR will promote a more advised process, the chance to provide a more holistic offering will come to the fore and wealth management can play a key role. For smaller advisers looking to take the plunge, they can provide an effective but more advised service, making use of pre-existing back office technology and platforms.

In practical terms, this could take the form of an annual portfolio review and fact find into a client’s situation. As a result, client relationship management (CRM) tools will become crucial centring on the formation of a strong client-adviser relationship.

In turn, this could create further advice opportunities advisers look to manage finances in a more in-depth manner. For example, a client who wants guidance on wealth management may not have adequate insurance for their needs or lack a pension. The key is to know your client – unlike the past where it was a sales for commission process, the main reason to go to an IFA will be to get advice and further the professional relationship.

Following a discussion, if the client walks away with no more than an intention to buy a product independently on the basis of a financial review, then this will not be viewed as a failure for the IFA or the client.

However, for those who identify a real need among their client base, wealth management can be more than just an advised process with discretionary fund management taking it that next step further. Working on a mandate from the client, those taking this route will be more proactive, rebalancing portfolios on a daily basis and acting more as a portfolio manager.

To do this, an adviser will need to take the relevant qualifications. Demand for this sort of service will exist among certain segments and could prove beneficial to an adviser’s business, however, as with everything, it is important the IFA establishes clients’ needs and whether this demand from their current client base exists.

With regard to the route that advisers are likely to choose, we have recognised the majority of advisers will go down the advised route for wealth management. Indeed, demand among IFAs for practical, everyday assistance in this area is growing, and we are currently extending our back office system, Adviser Office, with a wealth management tool on the back of this.

By assessing your clients’ needs and looking to add to your core services, this will invariably effect the overall business model. As a result of this forensic assessment of your clients, it may be the case that an advisory business ends up with fewer people on the books. This is not necessarily a bad thing – by offering a more holistic and tailored service, attention to individual clients will increase and clients should feel and see a difference in service levels.

And so for all those with a feeling of dread around RDR, it is important to take a breath and look at the potential benefits. As with everything, it is important to firstly establish what sort of service you want to provide and know what your clients need. Wealth management is one such opportunity and for the savvy adviser, this is only the beginning.