Wealth managers must restore trust post-Madoff
THE world’s wealthy have been shaken by the global financial meltdown, not to mention Madoff and other scandals. Yet, according to research from wealth managers Scorpio Partnership and Standard Chartered Private Bank, confidence levels among the rich remain high with 72 per cent of wealthy UK individuals expecting their fortunes to increase next year.
The report makes fascinating reading, but smacks of complacency among the wealthy and highlights radical ambitions such as those who reckon they can quadruple their current wealth within five years.
On the surface this is good news for wealth managers. But it skirts the issue of trust – core to the future success of the industry – which has been dented badly by recent events, including the sale of complicated investment products which hammered investors’ portfolios while making fat fees for private bankers. One private wealth manager who looks after individuals with a collective £1bn fortune, says: “The banking industry has been crucified by the breach of trust that has occurred since 2008 but it stems from all the products that were being sold to wealthy investors even before then.”
He argues the big private banks have lost their way because they were selling too many high-margin products that were not transparent, leading to a breakdown of trust which has left many clients disillusioned.
Surely “wealth managers” are there to look after the wealth of their clients – the clue’s in the title. It is unacceptable to turn around when things go wrong and blame the products along with clients for not understanding what they were buying.
So how to restore the trust? Pricing transparency is key. Banks would not dream of giving institutional clients such opaque pricing and should not expect wealthy individuals to put up with it either. Education and a sense of partnership between wealth managers and clients can also be developed but are lacking in some bigger private client operations. Clients need to understand the bank’s definition of risk and compare that to their own so that both parties know how investments should be treated. Investing in financial markets should be about diversifying clients’ risks and preserving wealth, not gambling on untested products.
The problems come because big institutions holding client wealth are inevitably reluctant to give it up. Additionally, when a new stream of products are developed there is pressure to sell them to clients to boost fee income for the bank.
There are independent advisers out there who promise more transparency, personal relationships and trust between client and wealth manager, presenting a challenge to the big established private banks.
Yet there is still room for the big wealth managers provided they change they attitudes towards clients and think further than six months in advance. Essentially, wealth managers need to listen more carefully to what their clients are telling them.
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