Technological and regulatory change combined with a clouded financial future keeps the financial services industry in general on its toes, but wealth managers in particular have to be nimble to keep up with these challenges.
That was the commentary on a webcast by financial analysts from New York-based Mercer this week.
“Wealth management firms face numerous challenges,” said David Hyman, Mercer’s U.S. wealth management segment leader. “By adopting a flexible framework, firms will find themselves in a more stable position and more competitive going forward. Establishing a game plan up front helps chart a more successful course for 2016 and going forward.”
Wealth managers must overcome three challenges, according to Hyman: Managing risk in a volatile investment environment, containing the cost of doing business in a shifting regulatory landscape, and attempting to enhance returns in a low-return environment.
Hyman said that the concern about risk management is driven by multiple factors, but the largest issue for advisors is the regulatory landscape. Mercer believes that the Department of Labor’s final version of the fiduciary rule will be released as soon as early March.
“Regulatory change dominates the agenda for wealth management firms around the world,” Hyman said. “We believe adherence to new regulations can be used to differentiate a wealth management business as more robust than the competition.”
The fiduciary rule is particularly onerous for U.S. wealth managers, Hyman said, because their clients are searching for enhanced returns through alternative products. As a result of the rule, regulatory scrutiny is going to increase on more complex investment products.
“We’re thinking about how wealth managers will streamline investment solutions going forward,” said Michael Curtin, a Mercer senior consultant in Europe. “The plethora of products on platforms has exploded. … Regulators are rushing wealth managers to explain the products.”
Firms should conduct investment and operational reviews and attempt to simplify their investment solutions when there is volatility, Curtin said, or adopt a two-tier process for due diligence on investment products—a streamlined process for simple products like index funds or ETFs, and a more detailed due diligence for complex or esoteric offerings.
Regulatory changes are also a major consideration as firms look to improve efficiency and contain costs.