Our last two articles in this series have very much focused on why high net worth and ultra high net worth individuals have been increasing their exposure to private assets and why they are increasingly doing so directly rather than through funds. Direct private assets have never, however, been much of a consideration to wealth managers advising these individuals so in this piece we want to delve more in to why wealth managers should care.
Evolving propositions to meet the needs of clients
The first and foremost reason wealth managers should care about private asset investing is because it's what clients are now demanding. Clients are increasingly entrepreneurial; more hands on in their investments and their personas are more akin to that described previously, at a time when wealth managers are already lagging in their appeal to this client base. When this changing demographic is combined with the upcoming greatest generational wealth transfer ever known (Deloitte research suggests 90% of inherited assets change wealth manager, presenting a risk and opportunity), the need to evolve a proposition to meet these clients’ needs has never been clearer.
It is about evolving a proposition. Innovation should not just be about taking stagnant propositions and delivering them through digital channels, as technology has the power to enable new solutions and new approaches. When entrepreneurial wealth management clients, the key demographic for many institutions, have almost half of their wealth in private assets, having nothing to offer in this space yet still refer to oneself as a “holistic” wealth manager, or purport to advise on “every aspect of a clients’ wealth” is far fetched.
It is worth restating here that the passion, emotion and inspiration are as much a factor as the financial rewards in driving this desire for clients. This is important in so far as wealth managers, in the face of competitive pressures, increased transparency and low returns, are looking to differentiate themselves and justify fees on service levels and deep personal advice; to achieve this they need to play to the heart of their clients demands.
For a wide variety of firms, this emotional appeal is working its way in to the proposition through philanthropy services or a next generation offering. This is a very welcome step in the evolution of what they bring to high net worth and ultra high net worth clients. But to the entrepreneur, to the DIY investor, to the millennial and many more client personas direct investing creates just as much passion. The ability to engage over that £5m trust mandate is far easier if there are other aspects of the relationship that increase client interaction. A private asset offering can play a crucial role in strengthening relationships with clients.
We should also not overlook the important financial benefits of a private asset offering.
The clearest and most pointed way to assess revenue impact of a private asset offering is with those institutions that choose to directly monetise their offering. Those that charge their investor do so in one of two ways. The first is on a per transaction basis, typically taking a percentage fee based upon investment amount as an introduction fee or non-advised execution fee. Whilst this is highly demonstrable and tangible it is not without problems. The most common difficulty institutions face with this approach is having a pricing strategy commensurate with the level of value they bring and the larger the fee the larger perception of involvement and consequentially risk. The second approach is through a membership fee model. For this to work successfully there is also trade-off considerations when pricing appropriately but this time between making a meaningful contribution to profitability and ensuring enough uptake so as to facilitate liquidity.
Fee sharing arrangements with institutions bringing deal flow or charging companies within your network for the privilege of accessing your client base comes with conflict issues which need to be properly addressed and disclosed but, again, can also provide a highly successful way of improving revenues in the current difficult environment. Each of these direct monetisation strategies can have a strong and measurable impact to the business as this is typically a high ROA offering which does not suffer from the margin compressing competitive pressures of other more commoditised offerings.
For many good reasons a lot of institutions however prefer the more subtle approach to commercialising a private asset proposition. Some are more ‘subtle’ than others and would treat a private asset offering as more akin to a marketing tool. In this scenario they are relying upon tangible differences to their success in beauty parades or the increasingly varied conversations with clients to drive asset flows in to their core offering which in turn makes the financial contribution. Whilst this is clearly an advantage the most successful firms are more proactive. Using a private asset proposition as part of a targeted share of wallet and client referral programmes can have significant impacts on helping advisors achieve asset targets.
As one would expect though the right approach varies across institutions and depends very much on their client base and how they scope and use a private asset offering. It is crucial that an institution assesses the positives and negatives of different approaches. As we work with institutions building their private asset proposition, we are generating detailed analytics of which is the optimal strategy under which circumstances and we share this with our clients to help them build a private asset proposition that meets their clients’ needs and has a strong commercial impact.
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Articles will delve more in to such topics as what the wealth management industry is currently doing and where it is going, what private assets the UHNW and family office population are investing in and how they are making their decisions.
To find out more about how we are helping organisations to build direct private asset propositions that enhance their offering, please get in touch via our website or email firstname.lastname@example.org to arrange an initial conversation.