HOW TO RECLAIM TRUST IN WEALTH MANAGEMENT
World Economic Forum – January
Reputation and trust are hard to build but easy to lose. Wealth managers know that well. Trust in my industry, and the whole financial sector has declined in the past 15 years following a series of events and developments – often of the sector’s own making. The global financial crisis led the way. More recently, technology-led business models attracted doubts about their infallibility. Now, the next generation of wealth management clients is questioning if the financial institutions of today will be a part of their future.
In challenging times like these, we need to make a change and set out to reclaim lost trust. We must advance transparency, add greater value to clients and create more worth for our shareholders.
The global financial crisis that followed the bursting of the dot.com bubble in the 2000s, triggered state intervention to save some large banks from collapsing. In parallel, the real economy struggled, leading to wider distrust in an industry accused of greed. Supervisory bodies introduced complex regulations to avoid further crises. Yet, despite these preventive measures, the sector was hit by more scandals and confidence in the system was further eroded.
Digitalization boomed after the financial crisis as many turned to technology and digital offerings to spur disintermediation, return control to clients and bypass human emotions. The final digital frontier appeared to have been assigned to digital assets, an ultimate attempt to create trust in a fully decentralized system that circumvents institutions. However, in contrast to what many hoped, they failed to solve many issues, nor did they outperform their more traditional equivalents. At the top of the pyramid, the recent collapse of FTX has once again highlighted that the need for accountability and transparency must not be limited to old-school banking.
Generational change also plays an important role in how wealth managers are perceived. The next generation is looking at brick-and-mortar banks and wealth managers and questioning how those institutions and their “old-school” services will cater to their needs in a more digital world.
Plus ça change, plus c’est la même chose
The origins of trust in banking can be traced back to ancient Mesopotamia, some 7,000 years ago, where temples and royal palaces, deemed the safest and most sacred locations, were used to protect valuable commodities like grain. Trust can also be found in the etymological origin of “credit”, which derives from the Latin “credere” meaning to believe, have faith, and trust.
Even today, trust remains the ultimate currency in wealth management as clients seek to preserve their wealth in an increasingly complex world with their business interests and multigenerational families spanning across different jurisdictions around the globe. Wealth managers have to recognize that trust has been damaged and that to regain it, three crucial angles need to be addressed: a culture of transparency, value for customers and shareholder value.
Culture of transparency
Wealth management clients and the general public will only trust what they know and understand. It is our responsibility to ensure we provide the transparency to build this trust. However, this also presents challenges, given the intrinsic nature of wealth management as a risk business and the legitimate confidentiality we commit to clients.
Wealth management has become a highly regulated business in recent years and operates at higher standards than ever before. Yet, the risk remains inherent: we cannot exclude the illicit conduct of an employee or client. Changing political and regulatory environments can shift our legal position overnight, and an evolving public moral compass can make previously common behaviour appear to be lacking in judgement.
In wealth management, transparency and confidentiality have to live side by side – despite the apparent contradiction. Our clients have a right to protect their privacy, but broader, higher rules and commitments must be adhered to, such as the right of states to enforce fair taxation. In this reality of risk and confidentiality, how can we reclaim trust in our industry?
It starts with culture and a clear, principled compass of what we do and what we don’t. This fosters consistency of actions and long-term transparent communication, which is critical to building trust. Secondly, our industry needs to get ever faster in detecting failures – and remedying them. The final and, perhaps, most important aspect is the development of a strong best-practice culture. The whole sector could learn from each other’s mistakes if an industry-wide practice of sharing information was encouraged and developed, as seen in the airline industry.
Value for customers
Trust in wealth managers will be accrued if we add greater value to clients. This may sound obvious, but it is not. Wealth management has historically been a product and feature-led business with a heavy focus on “the next trade” on the investment side. Portfolio performance matters (especially risk-adjusted performance) but there is much more we can do for clients. Wealth managers have to understand their clients’ needs and values to build lifelong partnerships and wealth management strategies aimed at multi-generation wealth growth and preservation.
What did 2022 teach us about global families? Image: Julius Baer Family Barometer
This will be initially harder to measure in a P&L but will lead to greater relevance and long-term relationships. This change in the wealth management model requires considerable investments and may lead to further consolidation in the sector as only the most professional players will be able to rise to the occasion.
The last topic to discuss is shareholder value, which inevitably and strictly correlates to increasing client value. Banks and wealth managers have suffered from depressed valuations. To address this, we have to create long-term client value add, as explained in the previous section, which in turn will set the base for pricing, revenue generation and margin preservation.
Scale is also vital. As a people-driven business, this is not automatic. The digitalization of administrative requirements will free more time for relationship managers to focus on client needs. Extra client time, however, will have to be used efficiently. Client knowledge will enable exponential growth. The final point of shareholder value is differentiation: only through differentiation can we command a premium price. Without this, we will be limited to competing on pricing and commoditizing our business.
As wealth managers, for the benefit of our shareholders and clients, we have to be true to ourselves and focus on what we do best: acting as the trusted long-term partners of our clients. The road back towards trust will not be a short nor a straight route, but it has already begun, and the wealth management industry is not planning any detours.