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Financial Advisers Need to Tailor Advice Around Risk, Client Goals

Wealth managers may need to adjust to rapidly changing client needs and behaviors, a new report says.

The pandemic has changed clients’ attitudes about risk, diversification and future goals. Wealth managers need to change, too.

The events of the past year have had tangible effects on wealthy clients’ behavior, expectations, and perceptions of value, according to a new report published by EY.

And in response, “wealth managers need to integrate a deeper understanding of client beliefs into their services and interactions,” wrote the authors of the 44-page 2021 EY Global Wealth Research Report, Where will wealth take clients next? “This will build trust and create stronger, longer-lasting relationships based on a shared sense of purpose.”

According to the report, client behaviors are changing rapidly, as they seek to financially de-clutter their lives and refocus on their most important priorities. Among other things, EY noted that clients are becoming more risk averse, are increasingly focused on achieving personal goals aligned to their purpose, and want to enhance their financial protection, diversification and security.

And as wealthy clients they contemplate their providers, EY wrote that clients will value a range of tangible and intangible factors that span three key dimensions of the wealth experience: the expectation of core services they receive, how they engage with those services, and their ability to achieve purpose with their wealth.

Some of the key findings from the report include:

Service: Clients expect a greater range of tailored services than many firms can provide alone. Nearly half also want to consolidate all their financial activities in one place. Firms that can use partnering to integrate client services could unlock huge gains in wallet share.

Engagement: The growing use of digital tools is changing how clients view their providers. Many expect their wealth relationships to become less personal (e.g., less face-to-face) in the future. But clients are also far more open to sharing their data than wealth firms realize, especially among younger generations, in exchange for tailored experiences.

Purpose: Most clients now have sustainability goals, but providers’ understanding is failing to keep up. A broader understanding of purpose will help firms to implement clients’ beliefs, meet their growing expectations and build lasting relationships.

“Complementing a strategic focus on service and engagement with a clear emphasis on purpose holds the key to elevating client experiences and demonstrating the long-term value of wealth management,” wrote the authors of the report.

Other key findings:

Main financial goals. The main financial goals that clients discuss, manage and delegate to their wealth manager include:

  • Save to meet goals (retirement, education, home, etc.)
  • Diversify total wealth across different asset classes
  • Protect wealth (from investment loss, inflation, etc.)
  • Ensure adequate income/financial security
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A lack of investment knowledge is holding clients back from fully achieving their financial goals. Two-thirds of wealthy clients have met their financial goals or are well-prepared to do so, but younger and less knowledgeable clients feel notably less confident than their older, more knowledgeable counterparts.

The generational divide, according to EY, is apparent in investors’ experiences of major life events. At retirement, as they contemplate fewer distractions and the drawdown of their wealth, almost three-quarters of investors feel confident in achieving their financial goals. In contrast, confidence is typically weaker when clients get married or have children, reflecting their increasing responsibilities and growing need to accumulate wealth.

Covid-19 set to make the next generation of clients more risk averse. As a group, wealthy clients are risk-averse, with just a third of clients preferring investments with high or very high levels of risk. The wealthiest clients and male investors are more likely to have higher risk tolerances. It is also striking that nearly half of clients expect to become more risk-averse due to Covid-19. The youngest clients plan to reduce their risks the most, contradicting the stereotype of younger investors seeking out high-risk assets such as cryptocurrencies. The events of 2020 have changed this group’s investing outlook for the foreseeable future. Female clients and the mass affluent are also more likely to reduce their risk appetite.

Clients prefer performance-based discretionary investment management fees. Clients want to change the way they pay for specific wealth and investment services. For discretionary investment management, there is growing preference for performance-based fees, which create a stronger perception of alignment between charges and value creation. The demand for new charging models is climbing for advisory investment management services, too.

Service, engagement and purpose are key considerations when selecting a wealth management provider. As they commence a new provider relationship, clients are focused on a range of factors covering three key dimensions of the wealth proposition.

  • Core service elements, most notably performance, fees and the product suite, are the first and most obvious priority.
  • However, engagement-related factors such as branding, reputation and the digital offering are also seen as important indicators.
  • Finally, up and coming areas connected with purpose such as sustainable investing and the diversity of advisor teams are also increasingly valued.

So what do advisers say about EY’s report?

“EY’s report is spot-on that clients are more interested in achieving personal goals than return on investment,” said Roger Whitney, a certified financial planner with Agile Retirement Management. “Especially those entering the ‘decumulation’ phase of life.

Whitney doesn’t, however, agree that clients expect more for free, as the report says. “A better way to say it would be that clients expect services beyond investment management to justify the fees charged,” he said. “The wealth management industry’s model of advisors as asset accumulators and relationship managers is coming to an end. Clients are more sophisticated and expect more than portfolio management and a friendly face. They expect a professional that can help navigate life and money and simplify things.”

Whitney also said the future of wealth management, from his perspective, is less about more/better investment products and more about the elevation of softer skills into the planning and wealth-management process.

One exciting thing the report highlights, said Whitney, is the technology-enabled adviser. “The industry is navigating how to use technology to enhance experience for the client and empower the adviser to deliver better advice,” he said.

And one place Whitney is particularly excited about is the transformation of the wealth adviser to becoming the project manager of the client’s financial life. “This more dynamic approach has the potential to bring significant value to a client that’s well beyond return on investment or a comprehensive financial plan,” he said. “By delivering agile project management practice, an adviser can help clients feel more empowered in their financial life and focused on key tasks to make progress.”

Another expert, meanwhile, said EY’s research highlights some important considerations for wealth managers who are striving to maintain and grow successful practices. The areas that jumped off the page for Howard Eisenberg, president of WealthTec, were the following:

  • Clients are focusing on the connection of wealth to building a more purposeful life, along with a personal legacy.
  • Clients are investing for more than rate of return and are increasingly focused on sustainability and ESG. This is especially true for cohorts younger than GenX.
  • Similarly, diversity and inclusion is going to be more significant in this space going forward than perhaps it’s been in the past. This seems consistent with how “everything” is evolving, not just in the wealth management space. Successful wealth management firms will be the ones who stay on top of this, from an internal perspective as well as in terms of client diversity.
  • “Alternative investments” is becoming a big deal. Advisers need specialized training just to understand the language, the risks, and opportunities.
  • Partnering with specialists may be essential since one can’t expect to have significant expertise across all practice areas.
  • The hybrid service model that combines high touch with rich digital experience is likely to be the best way forward.
  • Wealth clients want it all. Firms delivering wealth management services face a lot of challenges in obtaining and retaining clients.