The Wealth Management evolution: Investing with purpose and impact part two

Part II: The new client: beyond financial security by Carina Schaurte
While the last generation of mostly male investors focused on wealth accumulation for the next generation – driven by post-war experiences of their childhood or of their parents – the focus was on a risk-based outperformance of the market. Today, priorities are different.

As already discussed in part I of ths series, we are currently in the middle of a massive wealth transfer: not only from baby boomers to millennials but also from men to women. A recent BCG study shows that women already hold about one-third of global wealth, with growth rates in accumulated assets higher than those of men. This shift is accompanied by changing expectations of the role money and investments should play and changes in the financial needs of wealth owners. 

Growing up in an environment of steadily increasing prosperity and without the personal experience of fundamental shortages, but having experienced economic downturns driven merely by financial market activities like the dot.com and 2008 financial crises (both caused by speculation and (too) complex investment products that in the end destroyed more economic value than they created) millennials do not focus on asset growth alone. They also feel a strong urge of responsibility for the planet and the society as a whole, as first indicative research from the pandemic crisis has shown. Two seemingly contrarian needs are at the center of the financial and investment philosophy of the new wealth owners: wealth preservation and long-term financial security, especially ensuring security in retirement; and the need for flexibility of funds to accommodate unexpected events in a modern lifestyle, such as divorce, patchwork families, working abroad, and similar situations. Furthermore, the relatively comfortable life of the new and future wealth owners allows them to consider the impact of their investment decisions on global development and how that fits with their underlying values. Thus, there is an increasing desire to use investment not only to accumulate wealth, but also to “do good” with the money and invest according to personal beliefs. For example, people living a certain lifestyle, e.g., vegetarian, care about organic agriculture and want to foster that rather than industrial farming.

Financial advisors have to rethink how they are accommodating these changing client needs. Once it was enough to show a strong performance track record, i.e., outperforming a benchmark, based on financial fundamentals for why one stock is preferred over the other. Today, clients are tired of highly sophisticated models they cannot relate to and realize that convincing research stories on the financial prospects of a company have very often little to do with stock market developments. While these often-complex quantitative models still constitute the backbone of a well-built portfolio, it is unlikely that clients (other than passionate mathematicians and scientists) will get excited about them. And as we discussed in the previous article, diversification efforts alone may not lead to satisfactory results in a globally intertwined economy.

To make investments more appealing it is therefore necessary to understand underlying needs which don’t necessarily correlate with existing wealth. A HNWI with a regional life focus, a simple lifestyle and no complex family structures may be happy with a simple product solution, e.g., a discretionary mandate with a strong bias in home currency, but wants to make sure that this mandate is managed in line with her believe in a healthy lifestyle.

However, an internationally active young professional working in London and Zurich, but with family roots in Munich or Paris, needs cross-country access and solutions regarding tax, retirement and financial planning, even if wealth accumulation is still at an early stage. Investments must take this into consideration as well as personal priorities like for example climate change. Such a client, who travels a lot and has an accordingly poor carbon footprint may want to compensate by investing in carbon negative companies. And client advisors take center stage in implementing this new approaches.

Client advisors are not obsolete, but have to reinvent themselves

Contradicting the common belief that client advisors are a last-century concept, recent LGT market research showed that they are increasingly in demand – but confirms that they face shifting requirements. The increasing complexity of clients’ lives and financial situations, as well as the underlying values discussed above, should be at the center of the client-advisor relationship. The future value-add of a personal financial advisor is not the selection of individual investment opportunities (cynically described as “reading the paper faster than the client”) – clients have access to information and digital solutions and can do this themselves. The client advisor must shift his mindset and capabilities from mere investment advice to a comprehensive wealth-impact approach.

One reason why sustainable investing in general, and impact- and value-oriented investing in particular, is not progressing as well as it could may be that most client advisors are not comfortable with the topic and don’t address it in client meetings. But in the future of private banking, this is precisely where the added value of the relationship manager should come into play: responding to the client's needs and values and helping them to use their money in line with their beliefs – not just their financial goals – and measuring their results against these values.

From advisory process to wealth impact circle

Given these circumstances, the classical advisory process based on a “tick the box” approach to risk assessment and financial goals needs to be reinvented. Instead, the  focus should lie on client’s life goals, challenges, and values. Understanding what drives the client helps to determine what the financial impact should be – and this is not a “one and done” approach purely driven by regulatory requirements. Only with an in-depth understanding of the client’s values, circumstances, and world view can the right investment goals and opportunities be defined. And not only this: the quality of a relationship based on shared value discussions and personal beliefs is completely different from one based on setting financial goals and measuring against them.

In addition, questions regarding the flexibility of an investment to address unforeseen life events – which are inherent in our modern lifestyle – need to come more into the center. In the end, successful financial advice accomplishes two objectives: it allows investors to support the values and beliefs that are in line with their “personal purpose,” while sustaining the flexibility of a modern cosmopolitan lifestyle. When these criteria are met, the question about performance maximation very likely loses some of its importance. However, this development requires the client advisor to shift from being an “Investment advisor” to becoming a sparring partner and “financial project manager” for the client’s financial needs.

A boost for digitalization

To support this paradigm shift, digital support for the advisor is key. The complexity of today’s financial landscape requires a shift in the focus of the financial advisor’s daily work, and also makes it impossible to be on top of all financial information and market developments. When client advisors have to spend more than 50% of their time with administrative and regulatory tasks, it’s impossible to implement a real change in their job profile. Allowing the new “financial project manager” to focus on value-adding activities for the client like identifying his or her values, beliefs, and expectations for the personal lifestyle, is far more important to reach the above defined goals.

There is still a long way to go, both on the digital side as well as in the change of mindset. Digitally, the efficient and lean solutions that address regulatory requirements and administrative support and are affordable for banks vey often do not meet the complex reality of wealth management yet. This results in expensive in-house and patchwork solutions that result very often create less-than-satisfactory situations in terms of usability and system performance. Secondly, the self-perception of most client advisors – being an investment consultant with a focusi on personal relationships – needs to change. This is a huge change management endeavor that must go hand-in-hand with the complete reinvention of the role of the client advisor.

Here, the last few months of unprecedented challenges have paved the way for such a shift. While client advisors as well as their clients were reluctant to move to digital and omnichannel solutions in the past, experience shows that working this way is the “new normal.” It is now up to financial service providers to use this momentum for further digital support in standard services and for repositioning the client advisor as a comprehensive “financial project manager” This requires digital process support, training, and best practice sharing in addressing client values, as well as available solutions to address the client’s identified values and needs. We’ll conclude this series by looking at potential solutions in part III.

About the author:

Carina has over 15 years of experience in strategy consulting for international and boutique wealth and asset managers. While at a leading European strategy consulting firm, she advised private and universal banks and asset managers in Switzerland, Germany, and Austria and was a wealth management expert on international assignments. Her broad expertise covers offer development, advisory process re-design, pricing, post-merger integration, strategic positioning, client segmentation and market entry assessments. 

As an independent strategy advisor, Carina’s focus is on supporting strategy definition and business model transformation – including implementation support – for wealth and asset managers and family offices, taking digitalization, regulatory requirements, and sustainability/impact into account. She also acts as a sparring partner and coach for (project) managers. In 2020, Carina completed her master’s degree in Leadership in Financial Development, which furthered her passion for impact/sustainable banking and investing.