The beginning of a new calendar year is a time when many wealth management firms review the priorities related to the advice they provide their clients, as well as the factors likely to affect their business.

“Recent years have been a period of incredible change for wealth management firms,” said Cara Williams, Global Head of Mercer Investments’ Wealth Management Business. “The financial crisis severely tested the business model for many firms, placing alignment with client’s needs and interests under scrutiny, as well exposing the depth and responsiveness of the resources devoted to the business. These challenges come as a growing proportion of the baby boom generation moves into retirement, taking personal control of their accumulated wealth, and firms adjust to the continued disintermediation of the financial services business.”

Ms. Williams noted that client expectations have also been raised by the extraordinary rebound of developed market equities in 2013. “Now is the time to mobilise the best information resources as background to asking the ‘what if’ questions about market conditions in 2014 and beyond,” she noted. “With these critical challenges in mind, we offer five priorities for wealth management firms related to serving retail and high net worth clients, and five that relate to the structure and risk of a firm’s own wealth management business.”

Five priorities in 2014 for serving wealthy clients:

1. Ensure a fresh review of client portfolios and investment objectives to assess how the investments have weathered recession and market recovery:
   The extremes of the past several years, from the bear market in 2008, the recession and the strong bull market for developed market equities since 2009 have been a stress test for many investors’ portfolios and savings. Resolve to review how each client has weathered the cycle and whether they currently have a sound strategy to meet their investment objectives.
2. Revisit exposure to emerging markets, both debt and equity
   In light of the underperformance of emerging markets compared to developed markets, clients’ exposure to the former should be reassessed. The expected divergence between the individual emerging markets will make active management of both emerging market debt and equity more important than ever.
3. Position fixed income portfolios for growth in a flat or rising rate environment
   The period from 1982 to 2012 was the heyday for those holding a significant fixed income portfolio as interest rates declined from nearly 20% to low single digits. That decline is over. Resolve to review bond portfolio risk with your clients and position their fixed income portfolios for growth in a flat or rising rate world.
4. Evaluate the place of alternative investment strategies in portfolios
   Alternative investments are being “democratised” and are no longer exclusively available to the wealthiest investors or most sophisticated institutions. Resolve to evaluate how alternatives can be integrated into clients’ investment strategy to reduce risk, enhance returns or otherwise improve the likelihood of realising investment objectives.
5. Support socially aware investing strategies for clients concerned about where and how their investment managers make their investments 
   As control of record levels of private wealth pass into the hands of a new generation, a rapidly growing number of investors are looking for the ability to “do good while doing well”. That requires investment strategies which integrate environmental, social, and governance (ESG) considerations into management. Resolve to be prepared to integrate these strategies into client investment solutions.

Five priorities in 2014 for ensuring the firm’s success:

1. Make sound investments in the firm’s future competitiveness, including rational “build versus buy” decisions
   Rapidly changing markets, technology, the regulatory environment and competitive pressures have shattered the economics of the traditional wealth management business. To survive, thrive, and best serve the needs and interests of clients, wealth managers need to review the changing skills and resources that provide a competitive advantage, and evaluate which additional new resources are best developed internally or acquired through a partner, consultant or other vendor. Review the investment resource requirements of an evolving competitive landscape and evaluate what can be done better or more efficiently with external resources.
2. Assess evolving governance standards and ensure that your firm has a robust governance model responsive to changing requirements
   Traditional governance models are designed to protect the interests of the firm and its clients. Failure in this area can be costly and, at the extreme, can bring down a firm. Yet many firms have been constrained by limited resources, decision making that is not responsive to the changing investment environment or calcified operating models. Evaluate the governance environment, review the firm’s governance protocols and procedures and consider whether these are effective at meeting the needs of the firm and its clients. Most firms then find that they need to contract or develop the resources, data and processes that are necessary for a robust and fluid governance process in today’s investment climate.
3. Don’t shortchange due diligence regarding operational risk, including risk  at the investment managers responsible for client assets
   When an investment manager is selected who subsequently underperforms the relevant passive benchmark, client opportunity losses are limited to the spread between actual results and that of the benchmark. When a manager is selected who subsequently suffers a profound operational failure or fraud, the loss to the firm and its clients is much more profound. Yet few wealth management firms invest the same care in operational due diligence as investment due diligence. Resolve to evaluate your process for operational due diligence and take the necessary steps to protect the firm and its clients from operational failures.
4. Know your managers as well as their portfolio holdings
   Wealth management firms expect investment managers to know their portfolio holdings extraordinarily well. Yet, as managers of managers, many wealth management firms invest relatively limited resources in researching and knowing their investment managers. That leads to potential misfits between the managers selected to manage a portfolio and the clients who own that portfolio. This can lead to disappointing results and increased business risk. Develop a manager research and oversight process, internally or with a partner, which allows you to know your managers as well as you know your clients.
5. Remember that fees always matter
   Resolve to evaluate business models, services and enhancements that allow you to deliver exceptional service and products while continuing to reduce the cost to your clients.