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SPECIAL ADVERTISING SECTION
A Wealth of Attention The Changing Wealth Management Landscape 
"While the 6% growth in wealth created in 2000 was down from the 18% posted in 1999," said Merrill Lynch chairman Winthrop M. Smith, Jr., "the combined wealth of the world's high net worth individuals (HNWIs) has grown more than three-fold, by 375%, since 1986." And the future looks even brighter. The "World Wealth Report" forecasts a growth rate of 8% per year for the HNWI market over the next five years, when the world market is expected to be valued at just under $40 trillion. These numbers combine to make the wealth management sector the fastest growing component of the financial services industry. What Do The Wealthy Really Want? "We believe that the high net worth and mass affluent markets remain crucial to the success of key segments of the industry," states a recent report by Andersen Consulting. As the HNWI market grows, so does the need to listen to what the client really wants: • Despite a tradition of protecting inherited wealth 62% of HNW investors place either equal or greater weight on increasing yields rather than on minimizing risks. • Some 61% of HNWIs use the Internet to manage their financial affairs and to research investment opportunities • Most HNWIs prefer performance-based fee arrangements rather than the traditional ad valorem fee structure which is based on the value of assets under management.  Perhaps the most revealing finding from surveys like Andersen's, however, is that HNW investors simply want more--and more dedicated--attention. For instance:
• In the Andersen survey, 39% of HNWIs want advisors to be well-versed in a variety of investment areas, but only 29% of firms thought that this was important. • A PricewaterhouseCoopers study found that 41% of HNWIs preferred to have a central relationship with one person who could put them in direct touch with product specialists according to their needs, but only 17% of the banks they surveyed offered that kind of relationship to their HNW clients. • And a study of ultra-high net worth individuals (U-HNWIs) by the Chicago-based strategic consultancy Spectrem Group concluded that U-HNWIs seek a provider who offers highly customized solutions. These individuals "expect solutions and ideas to be brought to them without having to ask for them and they expect to be kept fully informed so there are no surprises." An Explosion of Products Wealth managers and financial institutions offering products and services for the HNW market are starting to pay close attention to changing client attitudes like these, and with good reason: their future depends on it. The PricewaterhouseCoopers study found that, although only 22% of respondents described themselves as dissatisfied with their primary financial provider, nearly twice that percentage, or 43%, were considering changing their provider, in large part because they wished for a deeper, more proactive advisory relationship. The Spectrem authors support this view. HNWIs "are willing to pay for quality," they write. "In financial services, quality translates into attention, responsiveness, and proactivity." The explosion in product offerings is probably the most obvious of these developments. Most notably, observes the Merrill Lynch/Cap Gemini "World Wealth Report," several specialized investment products "are becoming increasingly important to HNW investors." These products offer some key potential benefits to HNW investors in terms of performance and risk management, and "constitute a growing market that any player serving HNWIs would be wise to incorporate" into their offerings. The "World Wealth Report" identifies two classes of specialized investment products being offered by the more far-sighted financial institutions: (1) structured products, like principal-protected notes (PPNs), income-generating notes, and index trackers, all of which are designed to produce some significant market upside while minimizing risk; and (2) alternative investments, like hedge funds, private equity, and managed futures funds, which tend to generate higher average returns that are directly correlated with market swings and so can play a key role in risk-diversification strategies.  The use of these structured and alternative investments is growing rapidly. During the past five years, for instance, assets devoted to hedge funds have risen by 13% per year, while those directed toward private equity offerings have climbed by 21% per year. This growth has been fueled in part by substantial reductions in minimum investments. Mostly the growth in such products is the result of changing customer preferences. "There has been an increasing demand for alternative investments given the volatility in more conventional markets," notes Mark A. Hemenetz, executive vice president of the Bank of New York.
Nor, contrary to some common perceptions, are such alternative investments necessarily riskier than more traditional options. According to the Merrill Lynch/Cap Gemini study, during the 1990-2000 period, hedge funds exhibited about the same degree of volatility as the S&P 500 index and less than a third of the volatility of the Nasdaq index. Aggregating Account Information As the range of products available for investment has become more diverse, so have investors' portfolios. According to the Investment Company Institute, an investment research firm, a typical investor with just $100,000 in investable assets holds 25 positions across six different accounts. Not only that, notes the Spectrem Group study, but 55% of the wealthiest investors now use four or more providers. Such investors believe that it is important to have an advisor who "can understand my total financial picture." The PricewaterhouseCoopers North American Banking and Wealth Management Survey determined that account aggregation will be one of the principal initiatives that successful wealth management entities will undertake in coming years, thereby "providing clients with information about holdings across multiple institutions, even those unaffiliated with the provider." Some visionary wealth management firms are already implementing advanced account aggregation initiatives. SunGard Asset Management Systems recently launched a private-labeled Internet portal that integrates brokerage, trust, retirement, and private-banking into a single wealth management service. The portal provides HNW clients with single-screen access to account details across their entire range of investments from multiple institutions. Similarly, Prudential Financial's PruFN.com web site permits clients and their Prudential financial advisors to view and share data simultaneously. All Prudential account information is automatically integrated into the PruFN.com database, and clients can add information on assets held in other accounts. Because both clients and advisors have real-time access to all account information, advisory sessions with Prudential advisors are typically more well-informed and timely than those provided in more traditional consultations. Turning to Technology As these two examples suggest, the more far-sighted wealth management firms are increasingly relying on the Internet and related technologies to serve their HNW clients. According to Celent Communications, a technology consultancy, more than 80% of the top 100 financial institutions are expected to be offering sophisticated online services by 2005. Online financial planning service usage is likewise projected to grow from a base of 2.1 million people today to more than 20 million by 2005. But HNW client information needs increasingly are extending beyond merely having access to relevant investment information to being able to adequately interpret the available information, for as the complexity of financial portfolios grows, so does the need for personal attention and customized investment solutions. "Affluent clients are looking for a personal chief financial officer, someone who is going to manage the variety of professional specialties that they need to protect and expand their wealth," asserts Charles Andriole, senior vice president of Prudential Securities and head of the company's Andriole Investment Management Group. Many financial institutions address their clients' "personal financial manager" needs by deploying teams of advisors skilled in an array of financial fields, such as tax, estate planning, trusts, and business succession. Others are adding technology to the mix. In the PricewaterhouseCoopers survey, for example, responding institutions indicated that they expected to be devoting one-quarter of their IT budget to client relationship management software three years from now, up from one-fifth of the total allocation total. The section was written by Kevin Hopkins. Print Design: Francis Klaess Design, www.interport.net/~franad1 |
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