After watching their portfolios crater in 2008, North American investors will become an increasingly conservative lot whose retreat from risky investments could change the face of wealth management, according to a report from Celent, a financial research and consulting company.
Among other things, says Celent, the credit crisis-induced meltdown has damaged the reputations of big Wall Street firms, and caused some clients of independent advisors to question the value proposition of paying high fees for damaged portfolios. One possible outcome: more mass market and mass affluent investors will gravitate toward the self-service model.
The mass market will favor life insurance, annuities, cash and bank deposits, as well as fixed-income vehicles. Similarly, the mass affluent segment will be inclined to go with low-risk, guaranteed-return products, which will benefit insurers and retail banks. In both cases, says Celent, mutual fund companies and equity product providers will suffer.
Celent expects a different story for high-net-worth and ultra-high-net-worth individuals. Among the former, hedge funds and private equity are out while fixed income is in, and mutual fund holdings will decline modestly as HNW households gravitate toward unified managed accounts. The UHNW crowd lost the most money in absolute terms, but aren't likely to become do-it-yourselfers due to their complex financial needs. If anything, they're expected to consolidate their finances with a single advisor, and these advisors will likely be either independent advisors or private banks at the expense of the wirehouses.
Investors are using the financial crisis to renegotiate their wealth management fees toward more flexible models where managers charge both a low fixed fee and a variable fee based on portfolio returns. The fixed fee could be on assets, but at a much more modest level from today's levels, says Robert Ellis, Celent's senior vice president of wealth management.
"Think about a 20-basis-point fixed fee for managing the assets as a whole," he says. "Next would be a cost component: what the advisor's firm is paying to the outside manager for the model plus execution costs. Lastly comes the incentive component that kicks in only with a positive return that exceeds pre-established benchmarks. This creates a strong value proposition for the HNW and UHNW clients, while identifying the better managers and rewarding them accordingly, and appropriately."