This interview forms part of WealthBriefing's latest research report that examines how to deliver superior client experience.

This interview forms part of WealthBriefing’s latest research report, The New Normal: Codifying Superior Client Experience In Wealth Management, which was produced in association with Barclays Wealth and Investment Management and launched earlier this week. (This report is free to download as part of WealthBriefing member benefits, as is access to an extensive webcast of senior executives discussing its findings).

Here, senior executives discuss the interplay of fees, performance and service standards on the client experience.

While the softer elements of the wealth management proposition are certainly important, firms must ultimately live or die by how effectively they help clients to grow, preserve and eventually transfer their wealth. Fees, investment performance and wealth preservation are inextricably linked to clients’ perception of value for money and satisfaction levels, but unpicking how these factors interplay with the overall client experience is a complex task.

Thanks to the Retail Distribution Review, the UK is at the forefront of a global movement towards greater transparency over what clients pay for the investment products they buy and the advice they receive. Such moves are certainly to be welcomed since, in the words of Paula Higgleton, “clients always like openness and transparency…regardless of their level of wealth they like to see what they’re getting for their money”.

But of course a client knowing what they are paying is quite distinct to how they feel about it. This, the contributors said, will be the result of a complex and in many ways idiosyncratic value calculation. According to Ian Ewart, head of products, services and marketing at Coutts, the question in clients’ minds is: “I know what I’m paying, so what am I getting in return for that? Where do I draw the line?”

When considering how these lines are drawn, one crucial factor is the fundamental difference between what clients and institutions see as the valuable parts of the value chain: while firms see things from a cost perspective and will see the value inherent in their infrastructure and systems clients tend to be more output focused. The crux of the matter is that clients (and perhaps the industry as a whole) tend to attempt to tie a fee to performance only, passing over the fact that it also pays for compliance, safety of money, custody and reporting etc (not to mention access to expertise). Taking fee transparency to its logical conclusion, it is perhaps conceivable that in the future firms might separate out all these elements to better align the value perceptions of institutions and clients.

Context and comparison

While investment performance is foundational to client satisfaction, the contributors pointed out that this too is subject to complex calculations in clients’ minds and that it is not simply a question of them wanting ever higher returns at all.

There is some debate over the extent to which clients and their peers openly compare the investment performance they are seeing against the fees they pay. Ewart believes, for instance, that performance comparisons are more “transaction specific” (around a particular fund or property venture a client may have invested in) rather than for a whole portfolio, however other contributors highlighted that it is human nature for wider comparisons to come up, and this can be a powerful driver of dissatisfaction. As Higgleton pointed out: “Nobody wants to sit at a dinner party with a portfolio that’s just plodding along when everyone is talking about how they’re getting fantastic returns”. This takes on even greater significance if we accept, as several panellists said, that most clients will be paying broadly similar fees regardless of their provider.

It goes without saying however that broader market benchmarks are where clients will really be looking – and this is a double-edged sword. On the one hand clients appreciate the up and down swings of markets and know, in the words of Higgleton, “that if the market is plummeting then you’d have to be a miracle worker for your portfolio to do anything other than head south as well”. On the other, clients will generally expect their portfolio to broadly track the market - especially given the preponderance of passive investments in portfolios today - and they will not tolerate underperformance for too long. Ewart’s view is that this grace period could be “any one year or perhaps two cycles” but failing to deliver clients’ expected investment returns over any longer period will test their patience to breaking point.

It is not just the duration of any underperformance which is important, but also whether a firm can offer a cogent reason for it. If a particular investment represents a long-term, thematic play then clients will mostly tolerate short-term pain, but the downside corollary to this is that when investments are more advice-led clients will look much more closely at them in terms of the value this advice has delivered. “If the advice is good, that’s fantastic and they value it, if the advice is bad then they question it,” one contributor said.

More modest expectations

As with so much of the client experience piece, clients’ assessment of the value they receive against the fees they pay comes back again to expectation management. Clients must know that a full-service, mainstream wealth manager probably won’t “blow the lights out” year after year and will focus instead on wealth preservation and delivering enhanced returns against its benchmarks. Indeed, from a suitability perspective in most instances firms won’t - in good regulatory conscience - be able to recommend investments offering high but hyper-risky hedge fund-like returns. “You have to be prudent about how much you would ever recommend a client to invest in something like that,” said Ewart. “It then ends up being tiny amounts so there are more efficient ways of them investing their money.”

The financial crisis and ongoing global uncertainty have acted to dial down clients’ performance expectations compared to previous “boom times”. “I tend to find these days that clients aren’t that interested in shooting the lights out. They want to beat inflation and if there’s a bit more on top then great,” said Higgleton. Most clients will be happy with modest, steady returns – what they don’t like are big shocks or further costs, the panellists observed. Increased regulation may have made it more expensive to provide wealth management services, but “that doesn’t mean that you can charge those clients more, because for the most part they won’t take more,” added Ewart.

Dominic Gamble, founder of Findawealthmanager.com, noted that post-RDR fees are coming up more and more as the reason why clients want to move provider, but he believes that at heart this is a service issue, in that many clients weren’t properly educated about the new regime (it was also said that some clients might have been under the misapprehension that fees would fall after its implementation). Moreover, his view is that in many cases “fees have been the final straw which broke the camel’s back” but these clients’ dissatisfaction is actually probably rooted in service issues. Here again it would seem that client satisfaction stands on the triple pillars of fees, performance and service.

How far superior service standards mitigate fees which are perceived to be a little high, or investment performance which is slightly sub-par is debatable, and will depend hugely on the profile of each individual client. What is more certain is that service is a key differentiator when fees and performance are within acceptable parameters, although again these parameters are by no means static.

The value calculations going on in clients’ minds are then dynamic and depend on a whole range of contextual and comparative considerations – which again brings things back to client insight and the need for firms to get a firm handle on what makes their clients tick. Value calculations might be about hard numbers, but there are a host of soft factors at play too.