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Fiduciary is the New Black

Wealth Management
In The Post-crisis Age


by Christina P. O’Neill

Not too long ago, the events described in the next paragraph would have been unthinkable.
Warren Buffett said he didn’t see the housing bubble coming, he told the Financial Crisis Inquiry Commission at a June 2 hearing. Buffett had been subpoenaed — Warren Buffett! Subpoenaed!! — to appear before the panel investigating the causes of the financial crisis. The panel wanted his insight, and was willing to demand his presence in order to get it. At the hearing, Buffett defended bond-rating practices by Moody’s Corp., and opined that Moody’s had made the same mistake everyone else did — including himself.
The public firestorm that followed cast Buffett as aiding and abetting the worst practices of Wall Street, but it obscured how unusual a revelation this was for someone who has consistently made and maintained a fortune based on a combination of common sense, shrewd intuition, and sufficient resources to take advantage of any opportunity. If Buffett didn’t know what was coming, imagine how the average high-net-worth individual feels right now.

$1 million: Not what it used to be
Walter H. Zultowski, Ph.D., has been taking the investor-confidence pulse of high net worth individuals for 11 years in his role as senior advisor and creator of the Phoenix Wealth Survey,
now in its 11th year. The most recent survey reveals that high net worth individuals are seeing more potential risks to their money from a number of different angles. In both 2009 and 2010, a majority of high net worth responders report feeling less wealthy than they did the year before. Also, while lifestyle protection during retirement has always been a concern of survey respondents, last year they became increasingly concerned about running out of money, with concern about being able to pay for health care coming front and center in the
2010 survey.
Finally, 46 percent of respondents report that they expect to leave their heirs less money than originally planned. What Zultowski calls the “everyday millionaires” — people in their 50s and 60s who worked at a well-paying job for three or four decades and “caught a break or two” along the way — won’t be negatively affected, but their plans for their heirs will be.
Maryann Johnson, of the American Bankers Association, notes a “flight to advice” and more risk aversion, but, more importantly, a significant shift from benchmark investing — reaching a certain threshold based on a percentage return — to goals-based investing: enough to pay for the education of children and grandchildren, enough to take care of aging parents, enough to meet retirement needs and to donate to designated charities. It’s a concept of different buckets of assets that need to be replenished and redistributed as market and personal conditions change.

No place like home
The biggest challenge in today’s wealth management environment is finding “strong, secure investment opportunities in this low interest rate environment,” says Melinda Sartori, executive vice president, Chemung Canal Trust Co. and chairman of the Trust Division of the New York Banking Association. New York state banks have the unique challenge of competing for trust business with out-of-state trustees, such as Delaware, to avoid New York state taxes, she says. This also negatively impacts the state’s tax coffers.
But banks also have a big advantage — the ability to demonstrate that, as highly-regulated entities, they provide more protected investment opportunities for their clients, Sartori says.
“Our experience is that clients are comforted by knowing how safe their assets are with us,” she says. “In the current climate, investors know that the experiences suffered by those   who invested with non-banks are not likely to happen to those who invest in a bank environment. The previously held belief by many — that investment experts can be found in New York City, Chicago or other big cities — is clearly changing because clients are gravitating to the position where they prefer working with people they know and can interact
with locally.”
Investors are gravitating from high-risk hedge funds to bank trust departments in this risk-adverse atmosphere, she adds.
“As a result, banks are taking a more aggressive approach to marketing locally where their branches are, touting their local presence, conservative investment philosophy, and personal interaction with clients.”
Crisis-tempered clients are wary of investing in products they don’t understand, she says. “Today’s customers, more than in the past, want to clearly understand the details of the financial plan that is being proposed for them and they want to know their investment team, feel comfortable and confident in their team, and have easy and personal access to the team.”

Testing advisors
When markets first started going south, Zultowski says, some wealthy clients dropped their advisors, possibly due to the notion that if they were going to lose money, they could do it on their own. “Not only do people seem to be turning back to advisors,” he says, “they [probably] realized they couldn’t do better on their own. Advisors can’t be complacent and say it’s back to the good old days. Customers who have gone through turmoil are better educated, and will put advisors to the test more than they have been in the past.”
The demand from clients today will be for a more holistic financial picture. But will wealthy clients cooperate? “It varies by the level of wealth,” he says. Clients worth $20 million or more can be as reluctant to give all their information to one individual as they can to putting all their assets in one institution.
The ABA’s Maryann Johnson agrees. “Aggregate data is extremely important when working with the wealth client segment,” she says. “Decisions cannot be made in a vacuum, at the risk of significant tax consequences, for example, when providing advice or offering solutions. Tax-efficient investing demands that the advisor have all pieces of the relationship. The difficulty stems from wealthy clients’ unwillingness to bring all of their business to one organization for any number of reasons, and so it’s imperative that all the external advisors working with a wealthy client come together to discuss their role in the financial management of assets. Banks themselves work extremely hard to aggregate internal client data and have spent significant resources to create cutting-edge internal CRM systems, all the while implementing
privacy safeguards.”

In the client’s best interest
NYBA’s Sartori concurs, saying that the more products and services a client has with a particular bank, the less likely he or she is to go outside the institution. Therefore, a bank’s own client base is the best territory in which to prospect for wealth management clients.
“What a client has in checking or savings accounts is usually just the tip of the iceberg,” she says. Mining the current client data base provides the perfect opportunity to increase our financial relationship with the client, which certainly conveys to the client that we are interested in their overall financial picture and want to be of assistance.
The larger member banks in the ABA have taken a negative hit from the fallout of bad publicity about the financial crisis, Johnson says. “We have Wall Street banks among our members, and they are as dedicated and committed to serving their clients as are the smaller organizations,” she says, saying that the institutions at the crux of the crisis are not traditional banks. “Banks of all sizes have had to fight to regain their reputation as trusted business partners.”

Branding the
fiduciary function

A bank’s overall brand and reputation is more important to clients than its affiliation with third-party advisors, Sartori says. The local banker is the “brand” — not necessarily the particular investment products. Chemung Canal Trust Co. prefers to include advisors as key team members in handling a
client’s business.
Maryann Johnson makes a similar statement. Banks, she says, can win customers away from non-bank investment firms because of their ability to serve as fiduciaries, promoting the client’s and beneficiaries’ best interests, not any particular products.
“We talk with advisors who tell us they are working with clients who can’t sleep at night because they are down to their last $100 million in assets – so the worry about assets or how they will be applied in the future is relative,” she says. However,  as a result of the crisis, “clients’ views on savings, investing, borrowing and epecially risk, have forever changed.”  
At press time, federal regulatory reform was inching toward finalization but had not yet been signed by President Obama. It includes a measure in which the Securities and Exchange Commission is granted the authority to require broker-dealers to act with fiduciary responsibility toward their clients, rather than focusing on the trades alone.
 So, will this make for more competition in the fiduciary responsibility realm? “I’m not so much worried about competition for banks as I am about confusion for the consumer,” says Ron Wince, president and CEO of Guidon Performance Solutions LLC, a financial services consulting firm. The average investor steadily putting money into an IRA or 401k, had assumed a broker-dealer had his or her interest at heart, and found out the hard way that they didn’t, he says. Whatever the final form of the new regulation, he says, banks may benefit because their customer reach is wider than that of the average broker-dealer. “It might open channels for each to get into a different market.”
 “For broker-dealers who didn’t have fiduciary responsibility, they will have some complexity they didn’t have to deal with before,” Wince says. But for broker-dealers who had always acted as if they did have this responsibility, the effect will be minimal. “You will see some people who might have played in gray area will have to clean up their act,” he says. “The new law will bring in some regulatory scrutiny, and regulatory reporting, that will open up for litigation if you don’t act the right way.”s
Christina P. O’Neill is custom publications editor for The Warren Group, publisher of Banking
New York.

Posted on Tuesday, July 13, 2010 (Archive on Monday, October 11, 2010)
Posted by Scott  Contributed by Scott


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