Wealth management professionals face many challenges from the current economic climate, mainly how to retain assets. However, this is only the beginning of the matter as these assets must be put to work not only to preserve wealth but enhance it.

Wealth management professionals face many challenges from the current economic climate, mainly how to retain assets. However, this is only the beginning of the matter as these assets must be put to work not only to preserve wealth but enhance it.

Wealth managers of all descriptions have to deal with poor performance, extensive redemptions and declining assets under management. Added to which, recent surveys are suggesting that equity commission pools for 2009 are likely to fall approximately 35 per cent, a move that will force the purchasers of both proprietary and independent research to scale back significantly on what services they can afford.

Will the reduction in purchasing budgets available for research by wealth management professionals lead to more selective and imaginary ways of sourcing research outside of the traditional offerings put forward by the global investment banks? We think so.

Independent research as a sector is seeing a resurgence of interest. The perceived value of independent research over a more commoditised mainstream offering is compelling. By default, independent research can afford to be opinionated and thought provoking since it can sing to its own tune with no corporate structures to satisfy. I am often asked, is independent research good? It has to be otherwise it won’t survive.

Any research product that can help an investment professional stand apart from the crowd or help in the selection of suitable strategies or appropriate managers in varying asset classes should be investigated, which means looking at a diverse range of research providers. IRPs, or Independent Research Providers, also provide a valuable due diligence function depending on the level of in house investment decision making that individual wealth managers are making.

Recent regulatory changes talk about the “unbundling” of services provided to wealth managers and investment managers. This essentially means the splitting out of research charges from execution services.

While this has been moving forward, the trend has generally been that the buy side have been overpaying for execution, leaving smaller balances available for research remuneration. Trading or execution flows have become concentrated into a small number of global banks’ commission share agreement platforms, which, in the current climate of heightened counterparty risk, is less than ideal.

CSAs allow the creation of “pots” of cash generated by execution commissions and these allow wealth managers to pay directly to the research providers that they find valuable. More often than not, these are held as “wholesale” pots which allow wealth managers better flexibility as operationally they are a little easier to reconcile and track. Efficient CSA management means that commission budgets are fully maximised to reward research providers more fully for their services which hopefully further incentivises the research providers to continue with the provision of top quality services. 

Independent research rather obviously lives and dies by the quality of its investment ideas. In my experience, an investment decision maker either likes or severely dislikes an independent view – there is generally no middle ground.  But whether you agree or disagree with an IRP view, now that due diligence is required to support an investment decision - either in the creation of new products or in the selection of asset allocations - the fact that research is unconflicted and independent can provide that valuable sounding board towards that goal.

With superior performance being a key factor in the success of any wealth manager, independent research should be viewed as providing a valuable tool box for idea generation for wealth management professionals to differentiate themselves.