December 8, 2017

United States, New York

Identifies eight ways Wealth Management firms need to adjust their strategies

Mercer, a global consulting leader in advancing health, wealth and career, and a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), today detailed key areas of focus for wealth management firms to navigate the current industry landscape as it evolves over time in a white paper entitled, Key Areas of Focus for Wealth Management Firms in 2018.

“Wealth management firms need to constantly evaluate and adjust to the shifting landscape as economic, political and other factors affect markets and investment outlooks.” said David Hyman, US Segment Leader, Wealth Manager Solutions, Mercer. “We have outlined focal points that firms should consider as they provide their clients with support and strategy to address the market in this ever-changing world.” 

The key areas for 2018 outlined include:


    Establishing and communicating investment beliefs is critical for maintaining relationships with both internal and external stakeholders. Consistent, strategic communications can be used as a differentiator and as a client retention tool, and can also help solidify the firm’s culture and performance. Communication channels should be evaluated for effectiveness across different client segments. Digital interfaces are now considered standard so firms that do not employ them are encouraged to develop them. 


    Many firms are re-thinking their governance structures as the market moves more towards fiduciary relationships. Governance for advisor-driven models should aim to keep an advisor “on track” in his/her recommendations to clients. Firms with more of a centralized model should ensure that there is a “credible challenge” process in place and that the right stakeholders are involved. Additionally, having appropriate, professional and robust support for inputs and decisions is becoming an increasing requirement to ensure adequate governance.


    Programs that provide advisors more discretion to execute client portfolios should be considered as firms evaluate their largest opportunities and risks. Over the last five years, the Registered Representative as Portfolio Manager (“Rep-as-PM”) segment of the market has grown significantly, signaling both opportunities and challenges to firms and investors. These programs can provide operational efficiency and role segmentation but they also have potential to present risk challenges to a firm since more clients are invested in a model portfolio that the home office may not have fully vetted.  As such, firms are developing programs to both vet new Rep-as-PMs and provide increased monitoring and support to help manage investor and firm risks.


    To enhance efficiencies and client outcomes, firms are best served by focusing on their competitive advantages and sourcing other duties to partners. For some, this may be working with technology firms for some middle and back-office functions. For others, this may mean partnering with a firm to provide investment management capabilities while advisors focus on client service and client development. When selecting a partner, firms are advised to complete investment and/or operational due diligence, including reviewing potential cybersecurity risks.


    Increasingly, ESG (environmental, social and governance) is being perceived as a strategic, long term investment expected to yield more alpha over time. Also, there has been a growing trend of investors wanting to have a positive impact and a “feel good” utility about their long-term savings. For advisors and investors, strong investment options exist in many asset classes. And while the product landscape is evolving rapidly, ESG investing need not be all or nothing; single sleeve approaches can provide an entrée into the space.


    With equity valuations reaching new highs, investors should be strategizing how to mitigate market risks for their portfolios. Liquidity and ongoing rebalancing may provide the optimal investment structure moving forward for some, while taking risk off the table may be limited by illiquidity constraints or tax implications for others. For the remaining investors, alternative investments such as option overlay and/or hedge fund strategies may be appropriate. As wealth managers allocate more client capital to alternatives (both liquid and illiquid markets), greater analysis and understanding of their clients’ overall factor exposures are critical. Support from home office or external providers may play a significant role.


    Investors have typically built portfolios using rather constrained mandates, be it geographically or asset class specific, with the expectation that specialization likely leads to alpha. Conversely, allowing for broader, more global mandates can increase a manager’s available opportunity set and allow them to make tactical decisions between geographies or asset classes. Often, breadth vs. depth depends on the firm’s investment philosophy, asset allocation know-how, and implementation capabilities. However, providing portfolios with broader mandates is consistent with the belief that tactical/dynamic decisions can add value and that managers are closer to the market and thus can more quickly act on market dislocations.


    After-tax returns can be crucial to wealth managers’ overall value proposition with clients in the current market environment. Implementing strategies designed to drive “tax-alpha,” such as digitally enabled tax-loss harvesting, among other strategies have the potential to improve after-tax returns, while maintaining a client’s target risk profile. Recent enhancements in trading and digital portfolio analysis can allow wealth managers to routinely apply quantitative techniques to client portfolios in a highly scalable and cost effective manner that can have a significant impact on after-tax returns.

The 2018 Wealth Management white paper can be found here.

About Mercer

Mercer delivers advice and technology-driven solutions that help organizations meet the health, wealth and career needs of a changing workforce. Mercer’s more than 22,000 employees are based in 43 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With more than 60,000 colleagues and annual revenue over $13 billion, through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit Follow Mercer on Twitter @Mercer.