Strategy

Wealth Sector Braces For COVID-Hit World - What To Watch For

18 February 2021

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There is no part of a wealth management business that is entirely recession-proof. The key is to take meaningful decisions, rather than slash costs across the business in the hope of survival, the author of this article argues.

Five things to watch for wealth managers as the industry prepares for a COVID recession in 2021

What sort of challenges do wealth managers face this year if the lockdowns and measures taken to cope with the pandemic show themselves? Potential tax hikes, spending cuts and the hit to business from lockdowns are likely to spell hard times for many people, including business owners (who can also be wealth management clients). And wealth managers who oversee portfolios must pay heed to the challenges ahead. With 2021 still young, it is a good opportunity to ponder what the rest of this year could bring. Here are some comments about what firms should expect. This article is from  Pershing, the business that is part of BNY Mellon.

The standard editorial disclaimers apply to such commentaries. To respond and jump into the fray, email tom.burroughes@wealthbriefing.com and jackie.bennion@wealthbriefing.com


Current estimates are forecasting the worst recession for the UK in 300 years as a result of the pandemic, which may only be truly realised when government support is no longer in place. [WealthBriefing: The initial UK gross domestic product data shows that it fell by 9.9 per cent in 2020.] However, this recession will be different from the 2008 experience. 

The advice and wealth management industry is in a relatively good position to weather the storm. The industry has come a long way since 2008, so it should not fear a recession as it once might have. However, challenges lie ahead for the broader industry, so businesses will need to consider the following five factors to both survive and thrive in the new world.

The hybrid model is here to stay, so hold fire on business model about-turns   
Wealth management firms had to respond to the nationwide lockdown by quickly manoeuvring to remote working and digital interaction. However, despite the challenges, the widespread use of technology in the industry meant that many advisors have been able to maintain interactions with clients, and can do it more cost effectively, potentially boosting productivity.

And whilst it should be acknowledged that the shift - for an industry that thrives on much face-to-face time with clients – has been testing, many of the benefits brought about from home working should be built into the business model permanently. 

In the end, this could bring down the cost of advice and help to widen the client base. This might also help to recession-proof wealth management firms’ business model to manage any further COVID-19 related shocks and their after-effects. 

Constant cost analysis will be key, but not at the expense of transformation   
If consumers are expecting a recession, then they will naturally start to tighten their belts. But wealth management businesses which operate with a variable charging structure are less dependent on asset-based fees. Therefore, a mix of ad valorem charges and fee-based advice could be considered or could be an option.

Whether there is a recession looming or not, cost analysis should be continuous. With costs rising, wealth managers and advisors will need to ask themselves which expenses are entirely necessary.

Businesses in the advice sector may find that they can still invest in capital projects at the same time as paring back expenses. However, cutting costs should not come at the expense of transformation and innovation.

Avoid procrastination at all costs
Wealth managers can be one step ahead if they identify the operational threats coming down the line. However, there is a risk that if they procrastinate when it comes to investing in technology and being willing to adapt their business model, then they will fall behind. Now is the time for small and medium-sized advice businesses to be asking: is my business model in the right shape?

It is likely that more incremental change will positively impact earnings' quality, scalability and resilience at a time when firms – and their clients – need these core capabilities most. This, in turn, allows change to be carried through the business without the risk of “capability gaps” becoming exposed.

Business owners who break away from procrastination and make a future plan – even if it does require taking risks – are more likely to come out of the other side of a recession.

Be prepared for capital adequacy rules  
2021 sees the introduction of a new capital regime for the investment industry which is intended to strengthen the industry when it is implemented. The new rules are likely to come into force in June 2021 in the EU and from 2022 in the UK, with a five-year transition period to follow.

Changes to minimum capital requirements could result in one of several outcomes, including increased take up of external settlement services by advisors or more industry-wide consolidation, accelerating a trend that is already underway. 

Ultimately, wealth managers will be forced to consider if they need to hold more capital, something they should be doing ahead of time in order to be in the best position possible once these changes come about. 

No business is recession-proof, so preparation is the best policy
In reality, there is no part of a wealth management business that is entirely recession-proof. The key is to take meaningful decisions, rather than slash costs across the business in the hope of survival.

However, carefully thought-out decisions can only be made with a future plan, requiring business owners to break away from procrastination and act sooner rather than later. Even if it does require taking risks, these are the firms more likely to make it out to the other side. They may even find that they are more resilient and in better shape too.

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