Exciting opportunities for wealth managers are starting to appear from the rubble of the credit crash. This new era will create opportunities for firms which combine investment with packaging skills.

Exciting opportunities for wealth managers are starting to appear from the rubble of the credit crash. We believe that this new era will create opportunities for firms who combine investment with packaging skills. This trend for “solutions – not products” is especially favourable to the wealth management industry.

When is a Product not a Solution?
The term “investment solutions” generally refers to holistic products that offer outcomes over and above investment performance: Target Date, lifestyle and LDI schemes are some examples. They are often hybrid products which combine collect funds with tax wrappers. They could also be discretionary managed portfolios designed to achieve non-financial outcomes. There is often a strong component of advice.

What “investment solutions” are not is most of the investment products being offered today. Much less than being solutions, many of these have failed to achieve even their core objective of producing a return on investment.

The truth is, very few players are positioned to capitalise on this trend. Across the investment spectrum, traditional and alternative providers alike have failed to deliver positive outcomes. This especially applies to fund manufacturers but traditional fund distributors are also guilty of “failure to innovate”.

The Market is Ready, But Providers Aren’t
However, there are some firms who have a natural advantage in producing “investment solutions”. They include a handful of insurance companies, private banks and higher end IFAs with open architecture fund platforms and tax, portfolio management and risk management skills that can be combined into solutions for high net worth and mass affluent individuals.

Let’s start with the insurance companies. Given the importance of tax to “solutions”, you might think that pension providers are in pole position to win this trend. Unfortunately, most insurance companies are lumbering under the constraints of outdated annuity products, commission based distribution models and an actuarial culture that sees investment as a function of longevity risk.

How about the banks? With their emphasis on portfolio management and customer service, the private banks should rightfully be the natural inheritors to the world of “investment solutions”. But some in the market think that many private bankers are simply salesmen for the structured products invented by their investment banking colleagues.

That leaves IFAs. A small minority of advisors are successfully moving into fee based planning where their skills in tax and pensions are in demand and profitable. Unfortunately, the majority are still mired in a commission induced dependency on life insurance products and are woefully under qualified for the more complex investment packaging and solutions work.

Innovation and Collaboration are the Key Skills
So what are the skills that a firm needs to win in the solutions world?

First of all, it has less to do with producing alpha and more to do with collaboration and innovation. The emerging “solutions” providers that have come to our attention are both innovating through the novel combination of new tools and collaborating with their colleagues in ways that are more likely to produce positive customer outcomes.

Genuine cross-functional collaboration is a rare and difficult thing to achieve so not surprisingly many of the winners we see emerging have hybrid business models.

Investment focused life and pensions companies: L&G, Scottish Widows and Axa are insurance companies where the asset management operations are being increasingly integrated into unit linked tax wrap propositions such as DC pensions, group SIPPS and portfolio bonds. If they manage to succeed at this collaboration, they could be a real threat to the private banks.

Advisory focused wealth managers: Alexander Forbes, AWD Chase de Vere & Towry Law are all IFAs morphing into wealth management companies. They offer a mix of open architecture portfolio management and financial advice but without the advisory product push typical of the banks.  They are grabbing market share from insurance companies and private banks on the back of risk, strategy and financial planning services to their customers.

Tax and trust focused private banks: Royal Bank of Canada, BNP Paribas Wealth Management, and Stonehage, amongst others, have put trust and estate planning at the heart of their customer proposition. This makes it much easier to generate non financial, but extremely valuable, solutions for their clients' wealth, succession and inheritance problems. Their natural playing field has been offshore but they are now starting to move onshore as well.

Secondly, innovation almost never happens in a bull market or where an incumbent product can be damaged. So it is equally unsurprising that players with traditional models and dominant market shares are absent from the trend for “solutions – not products”.

Fortunately, the market has evolved over the past few years such that most, if not all, of the components of the wealth management value chain are now freely available “off the shelf”.
These components include:

- wraps & trusts for tax optimisation;
- multi-manager platforms for investment research, due diligence and execution;
- risk profiling tools for compliance and regulatory risk management;
- asset allocation talent for investment returns and market risk management; and
- administration technology for back office and counterparty risk management.

The innovation that we are now starting to see is the combination of these tools by smaller, emerging players in novel ways that satisfy specific customer outcomes.

Investment performance is only one component of these propositions, and in many cases it is not the main driver.

Some of the other outcomes that we have seen include: tax optimisation, administrative aggregation, custom risk profiling, asset allocation guides, market concentration & risk analysis, online valuation and execution, T+1 switching capability an straight through processing.  

The Customer is Finally King
What all of these solutions have in common is an overriding objective to produce a positive outcome for the customer. In the future, the customer will be king rather than an afterthought to investment performance. The customer will also have much more control over their portfolio through smart enabling technology.

What do firms have to do to win in this space?

First, recognise that the skills to produce customer focused innovations sit in various silos both inside and outside the organisation. They need to be brought together through cross-functional roles and processes.

Second, take control of product development away from the investment strategists and fund managers and give it to the marketing and business development people whose job it is to look after customers.

Third, either build or buy the enabling technology that is needed to combine the building blocks of the wealth value chain into customer focused solutions.

Finally, conduct consumer and intermediary research to find out precisely what kind of pain customer have and what they want their solutions to look and feel like.