WEALTH MANAGEMENT : Money Works – But gearing up is expensive

Despite the setbacks caused by the devastation of fortunes following the global financial crisis, individual and organisational wealth is growing again, and surprisingly rapidly.
The wealth management industry is, therefore, under pressure to grow with the increasing demand to find safe and rewarding homes for the funds available. Globally, the wealth management industry business model is under pressure. Pre-crash, the industry was product obsessed, complex and reactive, and did not generate reasonable earnings growth, market share or margins.
New Zealand suffered the additional disaster dimension generated by seriously unregulated finance services market that spawned poorly governed finance companies which, when they collapsed, took unwary investors’ savings and the money market’s reputation down with them.
Now, with formalised workplace savings scheme in place with KiwiSaver, the first wave of baby boomers reaching retirement age and, according to an ANZ Bank survey, tide of small-to-medium size business owners and farmers looking to cash-up over the next five years, the money mountain is growing.
Opportunities undoubtedly beckon, but first there are some challenges the industry must confront, according to Paul Hocking, executive director of New Zealand’s Institute of Finance and Investment Professionals (INFINZ). For start, it must improve its reputation and standing with retail investors to obtain greater public buy-in. Public confidence has been shattered by the finance sector debacle.
To lift the industry’s standing it must “improve transparency and information flows”, says Hocking. And to accomplish that, the industry must learn to live in lower fee environment as management funds become more commoditised. Then there is the challenge of introducing performance fees – poor performance, less fee.
And finally, says Hocking, as fees fall so will brokerage rates paid to advisers. Advisers will have to offer broader service to take fee directly from the investor. “This means the industry may become reliant on investors being willing to pay kind of entry fee.” This will take some selling.
Hocking agrees that KiwiSaver has created the industry’s first real opportunity for growth in years. He sees the flow-on impact into other savings vehicles by KiwiSaver members as significant. And then there is the potential switch away from the traditional Kiwi addiction to property investment as tax changes level the playing field and drive more people to financial asset investments.
As New Zealand’s population ages and claims against an increasingly difficult-to-fund national superannuation scheme grow, so Hocking believes younger people “might finally grasp the need to undertake serious saving for retirement via the managed funds industry”. Then there is the possibility of an emerging annuities market as older investors look to turn assets into defined fund flows.
The wealth and asset management industry is, according to Hocking, changing in readiness to meet the challenges and exploit the emerging opportunities. “There is realisation that the environment needs to change to transparency and openness, to lower fees and full disclosure.” Regulators and legislators in particular are determined to drive out old industry practices. “No longer will funds management be seen as means of creating excess wealth for the manager without it being directly tied to the returns to investors, and then at very realistic percentages,” he warns.
John Cobb, chief executive of financial services company JBWere, thinks that new financial advisory legislation due to be enacted later this year is long overdue and necessary. It will, in his opinion, help “fire up the market” though it will not “change things overnight”. The tougher regulations should “give some surety to investors that the financial advisors they are dealing with are competent and skilful”.
Guardian Trust’s head of distribution Philip Morgan Rees agrees that the financial advisor regulation should be significant. “It should mean that less sophisticated investors don’t have all their life savings in two finance company debt issues,” he adds. “Investments should be well diversified. And, risk or risk of leverage is clearly more important now and regulation will continue to have large impact on the way the industry and business evolves.”
In the meantime, Cobb believes the industry will continue to suffer talent shortage because of its traditional lack of growth and consequent limited career opportunities. “The wealth management sector has not attracted enough good people,” he says. “Those with promise have gone overseas, attracted by the vibrancy and growth of the market in other countries. The career opportunities did not really exist in New Zealand. There are talented and skilled people here, but not to the extent that there are in other markets and possibly not to the extent we may need them in future,” he adds.
Jonathan Eriksen, of actuaries and investment strategists Eriksens Global, is less persuaded that the proposed regulatory changes will do anything to help the industry. “They may even hinder it,” he adds. “Regulating financial planners was effective in Australia in the sense it drove out many fly-by-night operators and people who were not prepared to get properly qualified. But, it did not actually raise the quality of advice very much,” he says.
Eriksen thinks the industry already has the basic tools in place. “The investment managers and people in the industry are lifting their game,” he adds. “They are just doing it very slowly, probably because they are under-resourced.”
And the reasons for the slow rate of change are, in his opinion, consequence of the industry having to cope with massive tax changes introduced by the Portfolio Investment Entity (PIE) regime in October 2007 and the introduction of KiwiSaver in July the same year. “It has been nightmare trying to implement and manage all the necessary administration and compliance system changes,” says Eriksen.
The software, infrastructure and personnel costs of tooling up for the future are high, he adds. “These additional costs, coupled with the capital constraints imposed on the sector by the dramatic drop in their asset values has the industry struggling at present.”
Cobb agrees that funding the industry upgrade won’t be easy. “One of the biggest challenges for the New Zealand wealth and asset management industry is its lack of scale,” he explains. “Things like administration fees are significantly higher because of the smallness of the investment dollars involved. Wealth management is an economy of scale industry. However, as the savings pool grows those economies will flow through.”
But there is, in his opinion, tremendous opportunity on the financial advisory side of the industry. “The bulk of JBWere’s new business comes from people who have sold business or farm. And that will grow as the pool of potential investors grows as our aging population cashes up.” His prediction is supported by an ANZ Bank survey released last year showing dramatic upturn in the number of SME owners expecting to sell up over the next five to 10 years.
The investment advisory industry is, says Cobb, moving toward more holistic investment approach which requires different way of thinking and different internal resource to deliver. Investors are showing little less interest in the yield and little more interest in not losing anything when markets turn down.
“This means the industry must gear up and invest more in its infrastructure,” he adds. “The new investment products mean more investment in research, people development and information technology support systems.”
Hocking agrees that the deployment of more sophisticated technology will help the industry deliver better customer solutions. These will include “real time outcomes for investors with direct access to account balances and more timely switching opportunities”. But, he cautions, deve