Mercer outlined the top ten ideas for wealth management firms to prioritize in 2017 so those firms can best serve their clients and remain competitive in a market challenged by increasing regulation.
"Regulatory changes and technological advances are shifting the wealth management landscape," David Hyman, U.S. head of Mercer Investments' Wealth Management business, said in a statement. "To stay competitive and to best serve clients, wealth management firms should embrace these changes as opportunities to revamp their offerings, their strategies and their approach to their clients."
In its new paper, titled 2017: Positioning Your Firm For Growth Moving Forward, Mercer suggests that wealth management advisory firms focus on the following areas for 2017:
1. "Are you ready for pending regulatory changes?"
The first thing Mercer suggests firms focus on in 2017 is preparing for regulatory changes.
In the U.S., wealth managers have until April 10 to comply with the Department of Labor's fiduciary rule — if it goes according to the Obama administration's plan. Meanwhile, in Europe, MIFID II legislation will place additional regulatory requirements on wealth managers.
"Between regulations and pressure on fees, wealth management firms should take this chance to revamp and differentiate their businesses," Mercer says. "Communicating a more robust model relative to the competition as their value proposition in order to retain and attract clients is recommended."
2. "Are your revenue and compensation models aligned for client success?"
The trend from a transactional to a fee-based business has been accelerated by new regulations, particularly in the U.S, Mercer notes in its paper.
The traditional brokerage business is being supplanted by a more relationship-oriented and lower-initial-revenue fee-based business, according to the paper. As a result, firms have had to adapt their models to focus more on scale in order to maintain profitability.
"Technology and outsourcing solutions should be explored by wealth firms so advisors can focus on client service and new client acquisitions," Mercer says. "On the compensation side, firms should not only consider how their programs attract, retain and incentivize sales talent, but also the unintended consequences of their programs."
(Related: Bob Doll's 10 Predictions for 2017)
3. "Is active management still worth it?"
According to the paper, large flows of capital continue to move from active to passive management, driven mostly by lower fees and recent underperformance by active managers. "Nearly eight years into a bull market and with interest rates at all-time lows, the prospects for return from beta (passive management) have diminished while the prospects for alpha (active management) appeared to have increased," Mercer says.
Firms should consider active strategies that seek to protect downside risk and focus on idiosyncratic return streams within client portfolios, Mercer suggests.
4. "Are you leveraging technology to provide economies of scale and to cater to changing client communication preferences?"
"Fintech is the new normal for the wealth management industry," Mercer says.
Many technology companies can provide back-end and front-end solutions, with many aiming to support efforts to comply with new regulations, and streamline process and decision documentation.
"The more wealth managers can successfully automate to free up their time for clients, the more scalable their businesses will become," according to the paper.
Mercer notes, though, that vendor selection must be "undertaken prudently," as it is a fiduciary decision.
5. "Are 'robo-advisors' a good fit for your operation?"
Wealth managers should not consider robo-advice as competition but instead should embrace it as part of the firm's long-term strategy, Mercer suggests.
"Robo-advisor options are typically ideal for less complex client segments and less tapped asset pools such as millennials who are just beginning to invest and are amenable to using online financial services," Mercer says.
