North American clients of wealth management firms will become increasingly conservative about investments, favouring cash at the expense of equities, while even independent firms that have not suffered reputational damage will struggle to justify high fees in the face of asset falls, a new report says.

Investors will move to traditional low-risk asset classes with old economy financial institutions which have survived the credit crisis with their reputation intact. These institutions include the regional and community banks, medium-size insurance firms, and investment firms that correctly positioned their clients for the downturn, said consultants Celent, a Boston-based consulting firm.

The report said that large providers have suffered significant reputation loss from the credit crisis.

The wealth management sector in North America and other regions is bracing itself for what is expected to be a tough next 12 months as economies continue to languish in recession, at least for a significant part of 2009. Analysts have told WealthBriefing they predict some consolidation in the sector, fewer structured products and an asset allocation preference for cash and bonds and only the highest-quality equities in terms of earnings power.

“Investors are disillusioned with the way these larger providers allocated their assets and how they have responded to their concerns as they watched their accumulated wealth slip away,” said the Celent report.

“Independent firms, while not suffering the reputational problems of the larger firms, are having their value proposition called into question due to the extensive declines that some clients have faced while still paying high fees,” it said.

After the crisis, clients will be more likely to take direct control of their own affairs, which puts a spotlight on technologies to help investors manage their finances, the report said.

High net worth and Ultra HNW investors will continue to ask for advice, while mass affluent and mass market clients will accelerate their trend towards self-service wealth management. The report also said investors will put downward pressure on fees. 

North American equity markets have seen a dip averaging between 30 per cent and 40 per cent in the past year. Celent believes that, in the near term, the equity markets will continue to be extremely volatile. This volatility will continue until the Securities and Exchange Commission, the national financial regulator, reinstitutes the "uptick" rule on short selling, or until the vast majority of investors have abandoned equities and their associated mutual funds.

The uptick rule used to allow investors to only short-sell stocks when the previous move in a price of a security had been up. The rule is regarded by analysts as a way to enable short-selling while removing some of this practice’s potential for causing disorderly markets in extreme conditions.

“In the long term, an upturn in equities is predicted before any other asset class shows sign of recovery. Generally, this will occur about six months before the economy shows signs of recovering,” the report added.

The report said that advisors will continue to encourage their clients to diversify portfolio risk by investing in commodities. The volatility in commodities as an asset class is usually higher than that of equities, but this also creates opportunities for higher investor returns.

Meanwhile, the real estate market in North America continues to spiral downward. This decline will put pressure on rental housing and result in declines in apartment portfolios. Commercial real estate has just begun to feel the impact of the economic slowdown. Returns on REITs and REMFs have been poor, and exposure to this asset class is still considered risky.

There are also signs of weakness in the art and collectible sectors, as auctions by houses such as Christie’s and Sotheby’s have struggled in some cases to attract buyers, the report said.

Overall, the North American art scene has witnessed a significant slowing down in the wake of the credit crisis. Celent believes that, in the near term, art and collectibles will continue to suffer but will enjoy faster recoveries if inflation is identified as a future problem.