The year in review: Reassessing wealth management

It has been an extremely challenging year for the Australian wealth management industry, with a period of volatile returns during the fallout from the global financial crisis (GFC). Following the crisis there has been some soul searching and questioning of traditional investment paradigms.

The two buzz words for 2009 were ‘risk’ and ‘liquidity’. The industry has redefined what risk, defensive assets and growth assets are — as well as their roles in portfolios. Clients have generally become more focused on allocation of the investment risk budget.

There has also been a new appreciation of the role of liquidity and what liquidity is actually worth. Clearly, liquidity is worth much more than it was priced at in 2006 and 2007. Hedge funds and direct property funds, in particular, have been heavily affected — and their diversification benefits have been lost due to illiquidity.

Another trend has been a proliferation of life products, responding to the realisation that a retiree’s capital base funds a retiree’s income stream. If you destroy one, the other is impaired permanently. There has been an acknowledgment that funding adequate retirement lifestyle is more important than delivering investment performance relative to a market benchmark.

Over the last 18 months we have put significant effort into working with our wealth management clients to help them understand and manage the investment impacts of the GFC. We have also been actively responding to changing investment patterns and the demand for more regular updates in a volatile market environment.

For example, we launched a service rating separately-managed accounts (SMAs) in response to increased interest in these products, and have seen increasing demand for ratings on equity income funds. We have worked to enhance our ratings surveillance services through more regular communication with our clients, including bulletins on key market events such as investment team changes.

Overall, the year has seen a focus on raising the bar to address the critical requirements of fund managers and wealth managers.

Regulation has been an enduring theme in 2009. We have seen the Ripoll Inquiry of the wealth management industry call for a fiduciary duty on financial advisers, the phasing out of commissions and the creation of a professional standards body. A review of the superannuation industry is pending in 2010. These follow an earlier review of credit rating agencies and research houses by Treasury and the Australian Securities and Investments Commission in 2008.

This review confirmed the requirement for all research houses to have an Australian Financial Services License, and introduced a new requirement that all research houses be required to issue an annual compliance report covering the management of conflicts of interest and the procedures, methodologies, and assumptions that result in investment research outcomes. This review should provide users of investment research with additional confidence that research houses are subject to appropriate regulatory oversight.

In the wake of the GFC, the entire retail intermediary market value chain has been under intense media and market scrutiny. Research houses have not been immune from criticism. What we believe is needed is an informed debate about what the industry wants from third-party research houses, how that investment research is funded, and how research houses and wealth management groups can work together more effectively to meet the needs of the end investor.

We continue to believe that it best serves the marketplace to provide access to research houses with multiple business models, as long as appropriate regulatory oversight is in place to ensure analytical independence and from potential conflicts of interest. The fundamental goal of all research houses should be to continue to strengthen their respective business models — particularly in the areas of transparency, quality of performance, and prevention of conflicts of interests.

Mark Hoven is managing director of fund services at Standard & Poor’s.