Lessons from turning points in wealth management over the past decade

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The most significant event of the last decade-and-a-half has been the global financial crisis: A time when investors not only lost their money but also their trust in the financial system. For firms working in the financial services space, the last decade has been all about rebuilding that trust and cementing new relationships.

Trust forms the bedrock of the wealth management industry. Wealth managers also had the challenging task of contending with digital disruption. When we look back at the decade, there are a few key changes that stand out. These were instrumental in shaping the industry and are likely to influence the industry’s growth trajectory in the future.

From a product centric to a customer-centric approach
There was a time when wealth management meant investing in the most popular and contemporary products. There was more focus on product specifications and the returns it could potentially generate than on the idiosyncratic requirements of the customer. Over the last decade, wealth managers have adopted a more customer-centric approach where the client’s needs and requirements are central to the advisory process.

This shift has been integral to the way we view wealth management today. Another noteworthy shift has been with respect to the product offering. A decade back, there was a paucity of firms offering a comprehensive set of products and services. Typically, clients had to deal with multiple banks and demat accounts. Additionally, banks seldom took ownership of the client’s entire portfolio, making it difficult for an individual to effectively track all investments. This system of wealth management finally gave way to firms that offered clients a holistic service proposition that covered the entire gamut of their wealth management needs.

The Investment Policy Statement (IPS) becomes a key imperative
Among the most important changes is the adoption of the Investment Policy Statement. Wealth managers and clients have grown to appreciate the need to define strict policy guidelines that can guide portfolio allocations and are robust enough to weather the peaks and troughs of the market. An IPS ensures that the investment portfolio is built in line with the client’s mandate. This has helped managers deliver consistent performance and keep a tight leash on risk exposure.

Commission-based models eschewed in favour of fee-based models
For long, the primary business model for the Indian wealth management industry has been distribution, where instrument/investment-wise commission is booked. However, this often meant that the product recommendation was not always aligned with the customer requirement. Recognising the need for more transparency and conflict-free advisory, the wealth management industry is now slowly appreciating “fee-based” models. In such a model, a significant part of the firm’s revenue comes from fees and not commissions. This eliminates all product commission/brokerage and ensures no conflict of interest.

Technology becomes a key enabler
As technology percolated every aspect of our lives, it also shaped the expectations of customers. Wealth management firms have started to leverage technology in two main domains: product side innovation, using data and analytics to better understand the customers and create personalised solutions; and in process efficiency and product/service delivery. Wealth management firms continue to leverage technology to give a wow experience to clients with innovations like video statement of portfolio.

Talent
As the industry evolved, so did the role of the relationship managers (RMs). Many managers upskilled themselves and came to assume a more significant role in their client’s life. From being merely financial advisors, many of them became trusted advisors, legal advisors, and in some case, trouble-shooters. However, even as several RMs redefined themselves, there continues to be a paucity of trusted talent in the industry.

The wealth management industry in India is currently at the cusp of unprecedented change. A new generation of investors, whose expectations and preferences have been shaped by the changing investment landscape and new technologies have brought new standards to the industry in terms of industry-client relationships, investment product types and product delivery. As we reflect on the changes in the industry, the entire wealth management ecosystem needs to gear up for even bigger changes in the future.

The writer is, Executive Director of IIFL Wealth and Asset Management.

The thoughts and opinions shared here are of the author.