Who is better for clients’ needs: Banks or wealth managers?

You can seek investment advice from both banks and individual wealth managers. Banks, however, have historically proven to be highly controversial as wealth managers. A sales culture driven by profit maximization and commissions has often come at the expense of clients. Most of the large banks have been seen to patronize the products of their subsidiaries (asset management companies and insurance companies). But some believe that banks are ideally placed to cater to the all-round needs of a client. Neil Borate asked experts if banks serve clients’ needs better or individual wealth managers

Established banks ideally placed to cater to clients

Wealth managers today need to look at all the aspects of a customer’s financial well-being and not restrict themselves to a particular investment or insurance offering. With a significant shift in the regulatory landscape and risk-return matrix, some practices have become must-have for wealth managers. These include an established framework of sound processes for understanding the risk preferences of clients and doing the due diligence in choosing products, particularly when the products are from the group entities of the distributor. Wealth managers must also ensure focus on balanced performance metrics (non-revenue centric) for their relationship managers, safeguarding fair client outcomes.

Established banks are, however, ideally placed to deliver the above outcomes, especially given the significant focus on compliance and reputation, and the scale and stability they provide.

Also, given the unique 360-degree view they have of the client, banks are able to tailor multiple solutions to meet clients’ needs fully.

A non-bank entity may understand client better

Wealth manager should ideally understand the process of money management as well as the variety of client behaviour towards money and different kinds of products and options available for investment. This understanding should be communicable with simplicity and absence of frills.

Most of the large banks have been seen to patronize the products of their subsidiaries (asset management companies). Also, they have steep revenue targets nudging them towards not-the-best-products or towards the flavours-of-the-season.

In contrast, non-bank set-ups or managers that may be smaller in scale may give personalized service which lasts for the long term. They may better understand the clients’ needs and goals, the dynamics of family, and how the members perceive money, and address such issues appropriately.

Both the banker and non-banker can have access to professional third-party research at a cost. On that count, both entities can be at par.

For HNIs, banks can address business and personal needs

Regulatory pressure, transparency and decline in business environment has resulted in many companies and groups facing liquidity pressures. In this scenario, to high net-worth individuals (HNIs) and ultra HNIs, banks present the advantage of being present on both sides of a balance sheet and cater to their individual as well as business requirements.

This way, the client is able to consolidate his investments and loans (personal and business) and have a holistic view. Wealth managers led by banks, with experience in global markets, will be able to add value to Indian investors. Well-managed bank-led platforms offer safety of securities, follow ethical practices, have robust processes, ensure suitability and monitoring of investments.

They recognize that the needs of HNI and UHNI clients are unique and most bank-led wealth management firms have gone towards private banking. Using their investment banking expertise, they also help such clients to buy or sell businesses, making them a one-stop for all their needs.

Linking advisers’ salary to revenue doesn’t work

There are two ways of managing wealth. The first method, which is commonly used in the industry, involves choosing a product and marrying it with the liquidity that we have at different intervals of time. Your relationship manager has access to your account information and calls you when he finds that there is liquidity in your bank account. Unfortunately, managers are not appraised on how they manage wealth but on the basis of revenue generated.

Second, while open architecture is shown as a USP of organizations, it is the biggest risk for a client because some products have zero upfront commission, while a few others have 10% commission. To top it all, the wealth manager’s remuneration depends on the revenue he generates for his company instead of the value he generates for his clients.

Therefore, an important criteria before appointing a wealth manager should be to check the risk-adjusted return he generates for his clients, and not go by the recommendations for the flavour of the season.