The current market chaos, which is creating a widespread weakening of clients' confidence in their wealth managers, will force managers to reevaluate the way they determine a client's risk tolerance and the tools they use to make sure they are satisfying their clients' needs, according to a new report by Optima Group.
Wealth managers using the traditional investment policy statement (IPS) to determine a client's risk tolerance and investment mix need to review and adjust the strategies set by the IPS to accommodate the current volatility of the market, Optima, a strategic consulting firm that serves the financial industry, says in the report, Rethinking Wealth Management Today.
In order to accomplish this, managers will need to review the diversification strategies they are using and emphasize tactical investment allocations, rather than sticking to preset strategic allocations, to allow greater leeway in portfolio adjustments, according to the report.
Managers also will need to reconsider what constitutes true diversification, which will most likely lead to investments in more counter-cyclical vehicles. The search for more counter-cyclical investments will result in more investments in commodities, including commodity index exchange-traded funds and other passive investment. This will be driven largely by investor dissatisfaction with the returns and added costs of active management, according to the report.
In addition, most leading wealth managers already are switching to a unified management account structure and this will accelerate, Optima says. The unified account approach allows managers to more effectively allocate client assets by integrating the broadest range of holdings in one comprehensive account, which leads to better risk management.