After years of calm, volatility returned to global markets in 2018 with a bang. This HNW investors are expected to spread risks across multiple providers as they seek diversification, according to GlobalData Financial Services.
However, without transparency regarding clients’ total assets, it becomes increasingly challenging to provide the best possible advice and achieve true diversification.
Our data shows that HNW investors across the world already use an average of 2.9 wealth managers to invest their wealth. And indeed, there is a clear rationale for this: clients have become disillusioned with banks in the wake of the financial crisis, high-profile scandals such as the Bernie Madoff affair, and the failure of ‘too-big-to-fail.’ .
Spreading their portfolios across several wealth management firms allows investors to hedge their bets. Of course, HNW investors’ more complex needs may also justify the use of multiple providers that specialize in different areas.
This is bad news for wealth managers. Greater risk and strategy diversification across portfolios creates more competition among providers, which are continuously competing for the biggest slice of the pie.
Admittedly, on the client side this approach has the potential to minimize the effects of one firm seriously underperforming.
However, if markets turn sour, the differences between companies when it comes to ROI are likely to be marginal.
Difficulty for advisers
What’s more, spreading wealth across multiple wealth managers makes it harder for advisers to build a truly diversified portfolio, given that they are likely to be blind to their competitors’ investment strategies.
On average, a client’s main wealth professional attracts 60% of their managed wealth leaving another two wealth managers competing for the remainder.
For argument’s sake, assume that a client’s secondary and tertiary wealth managers attract 20% of managed wealth respectively: without knowing how the remaining 80% of wealth is invested, wealth managers will find it challenging to create a balanced strategy.
This means that diversifying wealth across multiple wealth managers actually has the potential to result in an overall less diversified portfolio.
Wealth managers must use this narrative to their advantage, highlighting the benefits of a single full-service provider in ensuring balance and diversity across the entire portfolio.