Wealth managers need to rebuild trust for disillusioned clients

Fundamental to restoring trust is the basic principle of understanding the needs of the client and then providing them with a bespoke service unique to their varying requirements. This involves taking the time to discuss and establish what a client truly hopes to achieve from giving their capital to a wealth manager, as well as their appetite for risk. Wealth managers need to be able to position themselves to allocate assets and populate a client's portfolio with the funds or stocks that are most likely to achieve the goal for that asset class.

Effective communication

Hand in hand with understanding and meeting a client's needs is communication, which is of the utmost importance in developing the client's trust, especially in difficult investment conditions. Whether a manager has exceeded a client's expectations or was not quite able to meet them, keeping lines of communication with the client is crucial. A good wealth manager keeps lines of communication with the client open at all times, offering considered explanations for investment strategy decisions, whether these have led to meeting and exceeding targets, or otherwise.

The industry must also become better at communicating the risk, volatility and expected levels of returns for each asset class and work with the clients to determine the appropriate percentages to be invested into the various asset classes. This process would clearly take into account the client's need for large returns or for the preservation of capital, helping them understand all of the risks related to the products offering returns in excess of the expected levels of the underlying asset class to which they are linked.

This is particularly important as investor sentiment is so highly correlated with personal experience and reports from acquaintances and the media. This was underlined in 2008 when there was shock among many investors following the realisation of the downside potential in a number of 'cash equivalent' and structured products. The guarantees that were assumed to preserve capital did not exist, meaning that many investors started to question the products. Enhanced communication would have prevented this and the subsequent negative perceptions of the wealth management industry.

Understandably, lack of transparency in the industry is one of the biggest causes for concern among clients. This relates both to the marketing and selling of products and to fee structures. Due to internal pressures and the desire to promote the latest offerings, managers, particularly from the bigger banking firms, are increasingly trying to sell products that may not suit clients' requirements.

Differences in appetite

While there are common, general needs among clients, such as the need for income or to build or preserve a capital sum, there will be differences in the appetite for various types of investments. For example, if a client would prefer to use exchange-traded funds over active management, wealth managers should help facilitate this and levy their fee on the structuring and asset allocation advice. In some cases, this makes the client feel more comfortable as there is no bias towards pushing the institution's own products– investments will be tailored to the clients' needs.

Fee transparency is increasingly seen as a worry for clients who are concerned that wealth managers are biased towards promoting their own products rather than concentrating first on the needs of the client. The compensation model of the wealth management sector is a crucial factor in aligning interests. Vestra's approach is to charge a management fee on the portfolio and rebate any retrocessions back to the client. This negates investing into any product to receive a higher commission or to turn over a portfolio purely to generate commission.

A partner at Vestra is remunerated through the profits of the firm. The profits allocated to a partner will be determined by the revenue that the partner is responsible for and the contribution to the overall success of the firm through a discretionary allocation. As the firm's success will be driven by its focus on the customer, so the partner will benefit from creating long-term value. We have found this model to be popular with both clients and wealth managers alike, as both are working as a team to achieve the same, agreed long-term goal.

At Vestra, we believe that the wealth management industry is at a crossroads. By promoting understanding, communication and transparency, there is an opportunity to restore faith in the industry and, most importantly, to increase returns for investors.

David Scott is managing partner and co-founder of independent wealth management partnership Vestra Wealth, and a former head of UK wealth management at UBS