10 Ways Wealth Management Firms Can Beat Rivals: Mercer

Mercer has come up with a list of strategies and priorities for wealth management firms and advisors to tackle in 2015 if they want to stand out in an increasingly competitive environment.

"There are three sets of challenges that we find are common to wealth management firms competing in today's environment," said Cara Williams, senior partner and the global head of Mercer Investments' Wealth Management business and Global Technology Solutions, in a statement. "These are strategies to improve investment results in a low-return environment, strategies to reduce risk, and strategies to contain costs."

Mercer takes a look at these three overarching strategies that Williams outlined above and recommends 10 priorities for wealth management firms to address in 2015.

Strategies to improve investment results a low-return environment

1. Position portfolios for growth in a low-growth environment.

With rates at near-historic lows and the U.S. in its fifth year of a bull market in equities, Mercer says to assume that returns in both equities and fixed income in 2015 will be below recent levels.

In order to position portfolios for growth in this environment, Mercer suggests advisors should "look beyond the traditional and consider less constrained funds or those with longer-term perspectives."

2. Determine if alternative investment strategies are appropriate for a broader group of clients.

Alternative investments, no longer exclusively available to the wealthiest investors or most sophisticated institutions, can be a way to reduce risk, enhance returns or otherwise improve the likelihood of realizing investment objectives.

Mercer says to evaluate how alternatives can be integrated into a broader group of clients' investment strategies.

"In some cases, there may be a 'liquid' alternative strategy that will help meet client investment objectives, and in other cases clients may benefit from the illiquidity premium expected of other alternative strategies," Mercer states.

3. Consider impact and socially aware investing as part of portfolio design.

"Investment that considers sustainability isn't about changing the world — it is about how the world is changing," Mercer says.

Integrating environmental, social and governance factors into the investment process can be a way for wealth management firms to distinguish their offering and products.

4. Adopt a client communication technology strategy.

A common frustration among clients is frequently communication and direct access to portfolio information. Mercer suggests that wealth providers can fix this frustration and enhance client satisfaction, as well as better manage fixed costs, by adopting smart technology.

"Disruptive technology is transforming the wealth management industry and we expect the pace of change to accelerate with increased use of cloud computing, applications, social media and mobile," Mercer states.

Staying up to date with technology, Mercer notes, will require investment to remain ahead of the competition.

Strategies to reduce risk

5. Review the resources required to deliver value to clients and resolve the "build versus buy" question.

Successful wealth managers will be those that effectively assess the evolving requirements — things like rapidly changing markets, technology, the regulatory environment and competitive pressures — and decide how best to allocate resources and focus on serving their clients.

As Mercer puts it, "To survive, thrive and best serve the needs and interests of their clients, wealth managers need to review the core skills that provide them with a competitive advantage, and evaluate which resources are best sourced internally versus through an external partner, consultant or other vendor."

6. Conduct investment and operational product risk assessments.

Advisors should examine product and portfolio risk from both an investment and operational perspective.

Mercer points out how important it can be to protect the firm and its clients from operational failures, just as wealth managers do for potential product and portfolio risk in the investment process.

"When wealth management firms select an investment manager that subsequently underperforms its benchmark, losses are limited to the spread between actual results and that of the benchmark," the firm says in a statement. "When a manager is selected that subsequently suffers a profound operational failure or fraud, the loss to the firm and its clients is much more profound."

Yet few wealth managers invest the same care in operational due diligence as they do in investment due diligence, Mercer states. Thus, Mercer suggests all wealth managers should take steps to protect the firm and its clients from operational failures.

7. Beware rear view product risk assessments.

Mercer believes that the industry models that assess product risk are overly reliant on measures of historic volatility, which may not provide a complete view of potential outcomes. Instead, as Mercer suggests, wealth advisors and clients should place more emphasis on the forward-looking and qualitative indicators of risk to fully appreciate potential outcomes.

8. Evaluate the firm's governance process.

Is the firm's governance process that's in place effective at meeting both the firm's needs and the clients' needs? Traditional governance models, which are designed to protect the interests of the firm and its clients, realistically often fail. Often, it's a result of limited resources, stuck-in-their-ways operating models, and an inability to adapt to the changing investment environment.

Mercer suggests wealth management firms should "contract or develop the resources, data and processes that are necessary for a robust and fluid governance process in today's investment climate."

Strategies to contain costs

9. Discuss fee budgets with your clients, and ensure they get what they pay for.

Fees should be a factor in investment decision-making. As Mercer says, "some clients prefer the certainty of lower investment expenses coupled with greater use of index-oriented products; others are more comfortable with active fees and the potential for alpha from active management." Thus, Mercer stresses how important it is for advisors to help clients distinguish between alpha and beta and to reserve higher fees for strategies with the potential for higher alpha.

10. Remember that fees always matter.

Lastly, Mercer suggests to always keep in mind that fees matter especially to clients. "Evaluate business models, services, and enhancements that allow you to deliver exceptional service and products while continuing to reduce the cost to your clients," Mercer says.

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Mercer identifies the things advisors need in order to compete in today's environment