This is the latest in a series of views from consultants about the shape of national, and global, wealth management markets. KPMG takes a look at the big changes taking place in the UK.

This publication has approached a raft of consultants operating in the wealth management sector to give their views about a range of challenges and opportunities for the industry in different parts of the world. A number of articles will be released in these pages in the coming weeks and we hope readers find them stimulating. The articles have been sought by this publication and also by Bruce Weatherill, of Weatherill Consulting, and also chairman of ClearView Financial Media, publisher of this news service.

This item is from Richard Barnwell, who is head of investment management, regulatory risk consulting, at KPMG.

The wealth market, once the preserve of society’s elite, was characterised by wealth managers engaged in face-to-face meetings, regularly advising their affluent clients on their financial affairs. However in recent times, driven by well-informed empowered consumers, the spectrum of the wealth market has broadened, covering from the wealthy elite at one end to mass lower-end affluent at the other.

The latter has become one of the fastest-growing sectors, presenting a unique opportunity to be capitalised. However, traditional business models coupled with complexities such as regulation and technology, are presenting new challenges to those wishing to serve this sector.
This sector has become an increasingly complex playing field to compete in, although by understanding the challenges in the context of how the industry has evolved, we can begin to develop approaches that can be adopted to maintain a competitive advantage.

It has certainly been a busy time in recent years. The busy political agenda and regulatory regime has shaped the way advisors and providers operate in the market. The Retail Distribution Review in particular has had the most profound impact on the market, of which we’re still seeing both its intended and unintended consequences.

The current model of the wealth sector is one which presents customers with a range of options that are tailored to their life-goals and financial ambitions. However, the customer requirements for the aforementioned mass market end of the spectrum are changing as they are presented with more products and options.

At present, the majority of customers are in a position where they still seek a level of security around their assets. However in turn, we are also seeing an increasing number of customers, particularly in the mass market, who want the option of self-servicing their assets.

Our observation is that this is a fast-growing sector, with empowered customers realising that they do not always need to seek advice to complete a transaction or manage their portfolio. This has been driven by a number of factors including providers who have been obliged to provide more information, the availability of tools such as self-service wrap platforms and the internet, which has boosted access to financial products.

On the other hand, we have seen RDR increasing the adoption of the vertically-integrated restricted advice model (VIRA), where advice is coupled to the tax wrapper, akin to the traditional model of wealth management. As such, we are also seeing an ever-increasing distribution of discretionary fund managers, although it remains to be seen whether this is being driven by the advisor or client demand.

Embracing such market change is not an easy undertaking. Many firms are looking at how they can best service this market segment, albeit the challenge remains how best to do this without offering a conflicting product and service proposition. Consider a customer looking to take out a self-interest personal pension (SIPP), whilst also contributing to a defined contribution scheme. This presents a conflict under most propositions who will want to attempt to aggregate both products into a single policy, which may not necessarily be the best option for the customer. This can be a significant challenge for firms and finding a solution may not be easy.  

Technology

In recent years, technology has also proven to be a disruptive force in the market. On one hand, it has become a key enabler in terms of helping meet customer requirements in today’s market. For instance, access to online platforms has helped bridge some of the gaps in delivering real-time advice with customer requirements. Whilst this has helped strengthen offerings, ironically over time it has also weakened service propositions.

As technology has matured, offerings have become more and more commoditised and it is now increasingly difficult for firms to differentiate their business beyond the cost of service. As a result, firms have been increasing their investment in service, reliability, and there is even evidence of re-platforming.

This is having a direct impact on margins and as these continue to be squeezed. We are seeing providers scrambling to dominate the value chain to increase their direct proximity to the ultimate decision maker – the customer.

The implementation of the RDR however has also bought a number of unintended consequences. Its implementation across the wealth sector has resulted in a growing number of people who are now looking to act without advice, given the transparency around the cost of advice, tools and information made available to them.

As such, many firms are now looking to target clients that have been orphaned by IFAs, which in time will increase the distinction between clients being actively advised and those who aren’t. It is not hard to imagine that it is only a matter of time before the regulator will place onus on the advisors and providers to prove they have an active relationship in order to receive future trail commission. In time, demonstrating that you truly know your customer could be back on the agenda.

The result of this is that the preferred business model for the industry now appears to be defined by vertical integration, both up and down the value chain – coupling investment management and advice. In other words, incorporating restricted advice has seen the wealth management market move towards a revival of the “Man from the Pru” sales force model, albeit we expect clients to be more conscious of their need for occasional advice for their workplace pension and become directly involved in more complex investments.

Although not necessarily a negative thing, it is unlikely that this was an intended consequence when the then regulator outlined the mechanics of the RDR, given the impact that this has had on the number of advisors who have remained truly independent.

We are also starting to see firms increase their customer centricity in the way they operate. Firms are becoming multichannel, thus moving beyond face-to-face or telephone servicing and supporting online or multi-device communications. Firms are also innovating their propositions at a client level, for example through tiered fees, access to planning tools and multi-account switching. However, we still see those with multiple propositions, whether this is workplace, advised or direct, struggle to make the transition to servicing clients that roam across these channels.

We envisage that the regulator will become more intrusive in demanding firms to demonstrate that they are providing appropriate customer outcomes, based on how well they know their customers. This will present a big change as the risks appear to be currently managed purely at a product level as opposed to the proposition level, where the client and the adviser are basing their decisions.

Successful firms will realise that whilst technology has a fundamental role to play it is by no means the panacea. To achieve the desired outcomes, firms should focus on reviewing their business models to ensure they holistically consider the points discussed, including technology, customer centricity, anticipating regulatory intervention, conflict management and vertical integration.

This change presents a big risk for the sector, given the growing number of players being met with decreasing margins to play for. Clearly such market structure is a challenge and potentially unsustainable unless action is taken either through radical innovation from within the market, or intervention from the regulator. Thus, the oversight and role of the regulator will become increasingly critical. Should the worst come to fruition, it remains to be seen whether the regulator is in a position to ensure that any failure is on a soft basis, and one which can be managed with the client in mind to ensure the impact is minimised. The alternative is that we could we see a hard fail which has significant ramifications for clients.

A hard close in these circumstances could see significant detriment for clients, as money or outright financial future could not easily be extracted from the firm in the short term with little or no planning in place for the ongoing management of the client who may be so inextricably wedded to the platform. Unpicking them from a situation such as this could be very difficult to achieve.

The current marketplace as it exists today presents a number of regulatory challenges to firms, so we can certainly expect the industry to evolve even further in the coming years. As history dictates, the “Man from the Pru” model arguably has not ceased to exist, but has rather evolved it’s business model and is even making a potentially successful revival, albeit under the guise of new breed of wealth manager.

Without doubt, success will be enjoyed by those who are able to demonstrate a good relationship with the regulator, respond to changes in the market, as well as adapt their business models to achieve the required scale in the market place to remain relevant and competitive.