Industry-Association Programs
The Knowledge Edge: Tough Clients Turn Advisors into “Decathletes”
A recent survey by Prince & Associates found that 81 percent of investors with $1 million or more in investible assets plan to take funds from their current advisor. Even worse, 86 percent plan to tell other investors to avoid their advisor. While good advice is at a premium in today’s environment, it is clear that high-net-worth clients are becoming even more demanding.
To succeed in this environment, advisors not only need financial and investment skills, but also have to be skilled at educating clients, and managing expectations and complex relationships with wealthy individuals and families. “When you look at surveys and research on what clients want, you see they want trust and education,” says Christopher C. Geczy, assistant professor of finance, who serves as academic director of the Wharton/CFA Institute Wealth Management in Practice along with Professor Richard Marston. “Clients want the advisor to be educated and educate them about markets.”
When you look at surveys and research on what clients want, you see they want trust and education. Managing wealth today is by its nature a holistic activity.
–Christopher C. Geczy, Assistant Professor of Finance; Academic Director, Wharton/CFA Institute Wealth Management in Practice
In a time of losses, investors become more critical of their advisors. “During a market run-up, it is easy to confuse a bull market with genius,” Geczy says. The advisors who maintain their business in this tough environment are “those who have the skills that are 360 degrees in nature — top-level technical skills as well as an understanding of what high-net-worth investors want.”
A Decathlon
“Wealth management is like being a decathlete,” says Stephen M. Horan, CFA, head of Professional Education Content and Private Wealth at the CFA Institute. “Like Bruce Jenner, you have to be pretty good at a lot of different things. The key to wealth management is that you are looking at the whole picture, and it extends well beyond the financial assets.”
The Wharton/CFA Institute examines investment and portfolio strategies, including alternative investments, for high-net-worth investors and families with global footprints. Faculty explore the implications of current tax regulations and the emerging political environment. But the program does more than look at finance. “It is blended and connected,” Geczy says. “Asset allocation, communication, estate planning, family governance — unless all those things are connected, you will not give the best advice. Managing wealth today is by its nature a holistic activity.”
Advisors need to understand their clients to construct a well-diversified portfolio that meets their needs and tolerance for risk. For many investors, this risk tolerance has changed after recent losses in the market. “The program will help advisors manage a client’s changing risk tolerance,” Horan says. “Families are notorious for changing their preferences. It is easy to be tolerant of risks in bull markets, but when fluctuations are more severe, risk tolerance has a tendency to change more than in an institutional setting. There is a constant dynamism.”
Wealth management advisors also need to understand critical thinking and planning under uncertainty, topics that are covered during the program at Wharton. They need to understand how they and their clients can fall into “decision traps” in making investments. “In times of stress, human biases can lead to bad decisions,” Geczy says. “Investors can become myopic.”
Advisors also need to recognize that client portfolios extend beyond financial assets. A good wealth management advisor will look at human capital, potential for earnings in the future. “This is particularly important among young executives for whom the value of their labor may far outweigh their financial assets,” Horan says. A young Wall Street investment banker, with an income that is volatile and highly correlated with the market, might need a more conservative portfolio or other investments less tied to market cycles, such as commodities or other alternative assets.
Communication and Education
Wealth management advisors need excellent communications and teaching skills. It may be easy for an advisor to talk about wealth management with other experts who are similarly trained, but the challenge is to communicate complex decisions to clients who are very intelligent but may not have the same language or training. This requires the ability to educate clients about financial decision-making and also to elicit information about client preferences and needs.
In families, these discussions are even more complicated. “You need to be able to communicate with a group of people,” Horan says. “When you are dealing with wealthy families, you are dealing with multiple personalities, and this is quite different from teaching a class.” During the Wharton/CFA Institute, participants are videotaped, and work with professionals from the Wharton Communications Program to improve their skills.
“There is a technique to scratching beneath the surface to find out what those family dynamics are, who is the leader of the family, who can influence opinion, who has different motives,” Horan says. “The wealthy multigenerational family is trying to manage wealth across generations into perpetuity. In a certain sense, they are a business. In a different sense, their goal isn’t merely to maximize shareholder wealth.”
Overall, advisors need to understand the fundamentals and see the bigger picture. “The basic knitting of asset allocation and portfolio theory are highly applicable to today’s markets,” Geczy says. “But it is not just understanding theory and practice. It is communicating it. Education has high value.”
A Growth Opportunity
Despite the current economic challenges, fundamental trends are fueling the continued growth of the wealth management market. The largest intergenerational transfer of wealth in U.S. history is expected to see trillions of dollars change hands in the next decade. Globally, there has also been tremendous growth in high-net-worth individuals. A Cap Gemini survey found that the ranks of high-net-worth individuals (with more than $1 million in liquid assets) numbered 9.7 million in 2007 having grown 6 percent annually in recent years. While 60 percent of the high-net-worth individuals are in North America and Europe today, much of the growth is in Asia Pacific and even Central and South America.
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