By CFA Institute Contributors :
By Shreenivas Kunte, CFA
Wealth has been central to human progress. But somehow, personal financial well-being, like health, is often taken for granted and the importance of managing wealth is overlooked.
This has resulted in puzzling disconnects. For example, not saving enough or not saving at all are pervasive trends in both developing countries as well as the developed world. The tendency to avoid financial planning despite relative affluence is another hard-to-explain paradox. Perhaps these disconnects point to opportunity areas for servicing end-investor needs.
In any case, the difficulty of managing prosperity across lifetimes and generations highlights the important role that private wealth managers play. Indeed, managing wealth is one of the most critical functions of the finance sector. But what about the challenges that professional wealth managers face?
Earlier this week, we asked CFA Institute Financial NewsBrief readers to identify the most significant obstacle confronting private wealth managers.
Which among the following is the biggest hurdle for private wealth advisors?
Winning and Maintaining Trust Is Topmost
The results from 521 survey respondents confirm some of the trends identified by earlier CFA Institute studies. In particular, a 43% plurality of poll participants believe that earning and keeping investor trust is the biggest challenge facing private wealth advisors. This finding is in line with the CFA Institute global end-investor survey from early 2016: When it comes to trust, the study found that financial services ranked a dismal ninth among 12 different sectors .
Suspicion of finance, however, is not new, and certainly not just a post-2008 phenomenon. Niall Ferguson's The Ascent of Money - a classic history of bubbles and busts, fortune and poverty - provides an engaging background. Ferguson shows that throughout the history of Western civilization, there has been a recurrent hostility towards finance and financiers. Inequality in opportunities and wealth, financial scandals and scams have all contributed to this distrust.
How should private wealth managers overcome this deeply ingrained trust deficit? The answer may not be an easy one given that the investment advisor is more a facilitator, mentor and market strategist at best, rather than someone who can alter market outcomes.
Training the end-investor on behavioral gaps and the benefits of long-term investing are important areas to address. As CFA Institute president and CEO Paul Smith, CFA, recently noted , a human touch and an ethical approach - one that embraces full disclosure, among other attributes - can also help bridge the trust gap.
Regulatory changes were ranked the toughest hurdle by a sizable 34% of survey participants. Most regulatory action, after all, seeks to protect the public interest. The poll result perhaps reflects how difficult it is to anticipate the public interest and regulator focus.
In the post-financial crisis era, there have been a series of regulatory changes, including the move towards implementing a fiduciary rule in the United States. Abusive practices can be regulated and guilty practitioners have been punished, but identifying and regulating excessive short-term greed may be impossible. All stakeholders would need to work closely to create incentive structures that empower everyone involved to be long-term greedy .
Investment Advisor Communication
With 11% of the vote, communication between investment advisors and clients came in third among the choices. Client-advisor communication is among the most critical of all wealth management activities. Using an investment policy statement (( IPS )) provides the framework for a disciplined approach. A well-designed IPS is a comprehensive, customized document that incorporates investor preferences and captures the complexities of the investment strategy.
But building an IPS takes time and effort and can cost money up-front. Developing a typical IPS requires anywhere from one to two business days of extensive and iterative advisor-investor conversations, according to Gajendra Kothari, CFA . Putting an IPS in place sets the tone and is a highly recommended best practice. It can serve as a guardrail that protects against the behavioral biases of everyone involved.
Technological challenges came in fourth with 8%. Certainly, modern technological tools can address some of the wealth management industry's dilemmas. For instance, a low-cost IPS that provides for most investor needs can now be delivered by robo-advisory platforms. Through gamification, using concepts and symbols that a financially unsophisticated retail investor can relate to, it may be possible for robo-advisors to achieve scale. But such innovations have the capacity to disrupt, and adoption costs are not insignificant.
Retirement planning is the least of the private wealth advisor's worries, according to respondents, receiving a weak 4% vote. This result is not altogether surprising when looked at in a relative and temporal context: Retirement planning is a long-term, slow-moving problem that needs to be solved tomorrow - not today!
Recent data , however, does suggest that most developed market pension funds are underfunded and facing a crisis , albeit a slow-moving one.
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