A senior figure in the international wealth management arena talks about the requirements for success in the industry.

The following article is by Michael Morley, chief executive of Deutsche Bank Wealth Management UK and he is also a member of the Cambridge Judge Business School China Advisory Council. This article was first published in December 2018 by the China Advisory Council, in association with SEEC and the University of Cambridge Judge Business School. This news service republishes this article with permission. We are pleased to share these comments with readers and invite responses. Michael is also a member of this news service’s editorial advisory board.

Introduction
There was a time of course when the only wealth worth having was land. It was legal control over real estate that gave the global medieval elites access to both physical security and leverage with rulers, whether Kings, Emperors or local warlords.

Today, if we have it, we think of wealth as something that enables us to plan our lives. Partha Dasgupta, emeritus professor of economics at Cambridge University, has written that “wealth is [essentially] what enables you to plan by converting one form of capital into another.”

Wealth management has traditionally been thought of as a branch of financial services which is concerned solely with looking after the needs of very wealthy individuals and their families. However, the need to plan, to ensure an efficient conversion of all types of income and capital, both tangible and intangible, into a range of asset and liability outcomes that support the life of an individual or family, is a recurring need, whether you are very rich, of middle income, or of modest means.

Research from a range of independent organisations which produce regular commentary on how private client wealth is distributed across the global regions of the world has tended to confirm that over the last 25 years wealth has become ever more concentrated: i.e. the wealthy have become wealthier, and the very wealthy - so called UHNWIs - have become wealthier still, confirming the rise of a phenomenon that William Rees-Mogg and James Dale Davidson described in 1997 as the Sovereign Individual. 

Concentration of wealth appears to be one of the factors which has led to growing dissatisfaction amongst western electors and the rise of populism in a number of countries. The rise of the Sovereign Individual, with global resources at his/her fingertips equivalent to those of small sovereign nations potentially threatens the authority of governments in both western and eastern states. 

Wealth management as a strategic industry sector
Having spent the last twenty years running large, medium-sized and small wealth management organisations, and having had literally hundreds of conversations with wealthy men and women and their families over this time, I have reached the conclusion that part of the business of a wealth manager is to have a view on how countries should organise themselves to ensure that they successfully harness the private client capital resources that they need to drive growth in their respective economies. It is also to recognise that there is a vital social dimension to managing wealth.

Ensuring that all citizens have access to high quality advice and resources to enable them to take the appropriate decisions on what makes sense for them to plan for their own lifetime goals turns out to be both a macroeconomic necessity and a social good.

The philanthropy practised by many wealthy individuals and their families through foundations and institutes has had many positive benefits for societies across the world. John Ruskin, the 19th century art critic and author, wrote in his essay Unto this Last: “that country is the richest which nourishes the greatest number of noble and happy human beings; that man is richest who, having perfected the functions of his own life to the utmost, has also the widest helpful influence, both personal and by means of his own possessions, over the lives of others”. He had a point.

But governments cannot rely on philanthropy alone to get the job done and, as already mentioned, relying on so-called Sovereign Individuals to make objective choices for their fellow citizens, be they global or local, has its limits.

This paper will argue that investing in advice-led wealth management propositions which educate both those who have wealth, however modest, and those who pretend to advise on it, is a strategic necessity for China as a buttress to its Belt and Road strategy.

But what do we mean by wealth management?
To be in the business of “wealth management” means a whole lot of different things to different audiences. For some it means to be in the business of asset gathering and then managing the assets that have been “gathered”. For others it means to be in the business of private banking and to provide bespoke current and capital account services. For some it means to be in the business of providing structured lending facilities to enable better liability management for clients. For others it means to be in the business of providing stockbroking or platform execution services.

All of the services mentioned above may be valuable in and of themselves - but as standalone services to drive forward a growth agenda for a sustainable wealth management industry they are unlikely to be sufficient. Businesses which focus solely on providing investment management services may unintentionally end up in pushing products that may or may not be suitable for clients; simply concentrating on credit and current account banking runs the risk of too narrow a focus on a client’s overall needs; merely being a stockbroker runs the risk of making Woody Allen’s often quoted dictum come true: i.e. that a stockbroker is someone who invests your money until there isn’t any left!

The thing that almost all clients require is someone who takes the time to understand their needs and their lifetime goals: someone who has skills that are more akin to those of a professional services advisor, able to advise on both sides of a client’s personal financial balance sheet. The aim of the wealth management advisor is to make a positive impact on a client’s life by helping them to achieve their client’s lifetime goals. It is in this sense that the wealth manager of this century is in the life planning business, aiming to be the trusted advisor who ensures that a financial or wealth plan is in place that supports the client’s life plan.

If the service begins with a comprehensive financial or wealth plan which is designed to advise clients on both sides of their personal balance sheets, credibility and trust are more easily established. The advisor is then much more likely to be entrusted with the job of executing the plan, bringing to bear the skills and services of other parts of his/her wealth management operation (banking, credit, investments etc.) and enabling further expertise to be established, deepening the trust between client and service provider.

Most wealth management organisations that developed in the west began as product organisations, often with strong links to their retail, commercial or investment banking arms. Experience has shown that, whilst innovative and effective products are essential, a wealth management business needs to start by building long-term trusting relationships. As China begins to develop its own wealth management industry, it can build effectively on some of the lessons which have been learnt empirically over many years in the West.

There are a number of key attributes that are essential in establishing the right culture and framework for a successful wealth management industry. Let’s start with the attributes needed for looking after those who have significant capital wealth - so-called high net worth individuals (HNWIs), and we will then consider the needs of both the super-rich and those of modest means.

1. The first attribute is: understanding what it means to be wealthy
Scott Fitzgerald and Ernest Hemingway supposedly agreed that the rich were different: they have more money than the average citizen. If you work in the wealth management sector, one of the challenges is that you may find yourself advising someone who has been more successful than you are and is richer. Why should they take advice from you - an employee, even if a very hard working one, a salaried individual, not an owner nor an entrepreneur?

There is of course no short cut to solving this dilemma. Time, wisdom, experience and professional qualifications eventually help you out. But the key skill set is to be good at putting yourself in other people’s shoes; to try and see things from others’ perspectives; to spend time getting to understand their goals, their background, their families, their likes and dislikes, their passions, their weaknesses.

It was Mme de Staël in 19th century France who said that “to understand all is to forgive all”. In wealth management “to understand all is to advise well”.

2. The second attribute is: empathy 
Wealth managers who hope to be appointed as a trusted advisor to their clients need to start by showing that they care. Nobody cares what you think until they think that you care.

Showing that you care can manifest itself in many different ways: it might be spending time getting to understand a client’s particular interests, understanding the way their family thinks about next generational planning or the legacy of their family business, or it might simply be about showing that you care about a favourite wine that they drink or a piece of music that means a lot to them. Showing that you care about them and their life goals is often a much more important starting point than the traditional product led strategies of many wealth management houses.
 

The third attribute is: integrity.
Not so very long ago integrity would have been synonymous with what was expected from a financial services professional. “My word is my bond” was a motto famously used in the City of London over many centuries to characterise the trust embodied by the City’s financial community.

Today in the post “great crash” era, banks need to re-establish their professional credentials and their moral integrity. This will be a slow job, but a necessary one and it is an essential pre-requisite for success as a wealth management firm. For it is integrity that builds trust and it is trust that sustains wealth management relationships for the long term. And it is this sustainability that creates the virtuous circle of profitable service provision for customers and clients, based on their needs - not the needs of the financial services provider.

But what is integrity exactly? There will be many views as to what it really is or indeed how to define it. As someone who believes in the benefit of pursuing life-long learning as a habit acquired at school and university, I wonder if the importance that academic communities attach to the freedom to search for the truth may not be a part of it. Being open and honest and truthful about the needs of your client and your ability to serve them is certainly a good start. As John Milton, the English poet and alumnus of my own college at Cambridge put it: “let her and Falsehood grapple; who ever knew Truth put to the worse in a free and open encounter”

4. And the fourth attribute is: professional competence and behaviour 
Wealth Managers look to advise their clients on both sides of their personal balance sheets. So they need to be extremely well qualified. Those offering banking services need to have sat and passed the relevant banking exams. 

Those offering financial planning and investment services need to have sat and passed the relevant chartered financial planning and securities exams. All need to have a good understanding of the professional standards that are expected of them.

In the UK we have a number of organisations (e.g. the Banking Standards Board, the Personal Investment Management and Financial Advice Association (PIMFA)) which look to set the standards of competence and behaviour that are expected in our market, and against which financial services professionals can expect to be measured and held accountable.

Is wealth management just about looking after wealthy people?
One of the challenges for the wealth management industry has been whether the advice-led model and the attributes required for success for HNWIs are applicable for all levels of wealth. The needs of the super-rich, it is claimed, are very different to those who have mere millions. And it is regularly stated that the very high costs of delivering the personalised HNW model to those of modest means effectively renders it uneconomic to deliver the HNW model to less wealthy people who may lack the means to pay for it.

In the case of the super wealthy, it is true that often much of the financial/wealth planning advice that is provided as part of the wealth management package for HNWIs is either in-sourced to a single family office, or outsourced to a multi-family office or to discrete single service providers. The wealth manager in these circumstances becomes more akin to an institutional product and service provider, focusing on the particular investment or structural financing needs of the client, and often utilising the resources and capabilities of an in-house investment bank. But the validity of an advice-led wealth management model has not changed; it is simply that the packaged integrated service gets unbundled and delivered by a range of different specialist providers. There are a few cases around the world of integrated multi-family offices who provide a holistic service - but scalability and the logistics and costs of delivery prove challenging. 

In the case of mass affluent and retail sectors the challenge remains how to deliver an advice-led model at a price point that is bearable for the consumer and profitable for the provider. And in many ways, solving for this conundrum is the most pressing and relevant issue for the global wealth management sector.

It is no less critical for an individual or a family of modest means to get good advice on how to save, how to spend their income, and how to use their resources to plan for the future. In fact, for an individual of modest means, it will often be relatively more important to get good advice and to make the right choices than for those with greater resources. The working assumption is that the knowledge engineers and data scientists working in fintech (or perhaps outside fintech) will find an AI solution to enable true robo-advice. To date what some industry practitioners have termed “robo-advice” is in fact simply a digitised way of enabling strategic asset allocation and fund manager selection to take place online in a convenient way for consumers. As far as it goes it’s a good innovation, but it’s really focused on just one side of a client’s balance sheet and on arguably the most commoditised component of that balance sheet.

The real prize is to be able to offer a digitised solution for a comprehensive financial planning service that probes client needs and gives relevant personalised advice, based - as in other segments - on individual life goals. 

Many say that this cannot be done and that the intervention of a human advisor will always be necessary. 

But it may be the case that millennial knowledge engineers will indeed find a true “robo” solution - either entirely AI-based, or part AI, part human. It feels like an exciting area where innovation and data science will combine to solve a much demanded consumer need and which will provide governments and the industry with a solution to a much demanded social need. China’s commitment to AI, its significant scale population with long-term financial planning needs, and determination to progress quickly to a technology-led economy will give her a potentially strategic advantage here.

A wealth management road for China
So what advice might one give to the leaders of the China Wealth Management industry as they set about the great task of convening private client capital as a strategic imperative to support OBOR and as a social good to bring advice-led wealth management services to the greatest number of people?

For wealthy individuals, one important starting point is to understand how individuals make their wealth in the first place. Here there are essentially two basic profile types: those who are accumulating capital and take the full spectrum of a working life to accumulate it; and those who suddenly acquire capital, for example by selling a business - a so-called monetisation event - or perhaps by inheriting money from a family member. 

The needs of a client who is accumulating capital are different to the needs of a client who has an immediate capital investment sum. So the advice they get has to be different and the products and services they require will be different too.

If you are a bank, the good news is that you should have the balance sheet capacity to lend your clients money as they are accumulating their wealth, as well as the ability to develop planning and investment services to advise them once they have made and realised a capital sum.

For less wealthy individuals it will also be important to develop a range of services which are based on how income is generated, the extent to which savings can be made now and in the future, and the scope and appetite to take on debt - but above all understanding and caring about the goals, hopes and fears of the client and their family.

At a high level, my recommendations would be:
a. At country, industry and individual service provider level conduct a detailed customer survey to ensure that you truly understand customer needs and how they generate income and accumulate capital.
b. Be certain that you understand their attitude towards risk. They may have a very different attitude towards risk once they have made their money as opposed to the attitude they had when they were making it in a business in which they were expert.
c. Make client profiling a skill set that everyone in the organisation, from the CEO downwards, practises every day. Become the financial services equivalent of the local doctor. Be sure that you understand your clients’ goals, dreams and fears: and update your knowledge often. Let them see that you care.
d. Develop appropriate value propositions for the different levels and complexities of client balance sheets. The way you reach out to billionaires and family offices will be different to the way you reach out to HNWIs and retail and mass affluent clients. But the first engagement point of a clear plan that supports long term goals and objectives will be the same starting point for each segment. It’s just the delivery that is different.
e. Put in place a comprehensive educational programme, starting at school for all pupils so that they understand the importance of saving, planning and managing their own personal balance sheets from the moment they enter the workforce. Understanding the need to have a personal financial plan alongside a personal health plan is likely to be a critical component of a long and happy life.
f. Aim to make technology and the knowledge engineers your friends. They are writing the next chapter of the wealth management business, both in terms of the ability to solve the provision of the advice gap to less wealthy households, but also in terms of ensuring that our personal data remains secure, accurate and privat.

Conclusion
In summary, build a wealth management culture which will stand the test of time based on long-term relationships and advice, not short-term transactions. China has a renowned reputation for thinking strategically and planning for the long term. Wealth management is a slow-burn business, but it’s very sticky once you get it. Building a sector on solid foundations with care paid to individual needs will serve both to convene private client capital and to serve the public good.