The pictures of queues of people attempting to withdraw their cash deposits from branches of Northern Rock during September should have provided the UK private client investment sector with a salutary lesson.
The financial wealth of UK citizens continues to increase. And although the UK private client investment management sector has experienced significant growth during the current decade, both in terms of assets under management and the number of active companies, a significant proportion of the UK’s rich and affluent continue to eschew the sector by holding much of their wealth in cash and near cash substitutes.
There is currently no definitive data on the proportion of financial wealth held outside the UK private client sector. But the Northern Rock saga has provided plenty of anecdotal evidence to suggest that private client investment managers have considerable scope for further growth, if only they could get their marketing and client acquisition acts together.
Take the size of the deposits held by Northern Rock customers, for example. In many instances, these amounted to six and seven figure sums, much more than enough to qualify for a private client investment management service at most UK providers.
So why are UK investors reluctant to commit their savings to the care of professional private client investment managers?
Personal preferences have an obvious influence. Research suggests that even very rich investors prefer to hold 10-15 per cent of their wealth in cash or near cash equivalents for prudential reasons.
Some investors prefer to manage their assets on a do-it-yourself basis and consciously eschew the services of professional wealth managers.
And, despite the buoyancy of global stock markets over the past five years, a significant proportion of investors continue to exhibit risk aversion when it comes to committing capital to stock market-related investments. Many investors lost heavily during the equity bear market of 2000 to 2003 despite the fact that they had discretionary accounts with private client investment managers. For them, cash provides a much more palatable alternative, (although they may take much greater care to diversify their deposit takers in the wake of the troubles experienced by Northern Rock).
For their part, private client investment managers have considerably improved the investment management services on offer, especially in terms of performance.
The advent of absolute return investment, coupled with the use of an extended range of assets classes that includes so-called alternatives such as commodities, hedge funds, property and structured products, as well as cash, bonds and equities, has made portfolios much more robust and better able to withstand, at least in theory, the vagaries of volatile financial markets.
The latest data from the ARC Private Indices shows that the ‘average’ UK private client should have posted a return for the year to date in excess of the risk-free rate, irrespective of the portfolio risk profile employed, a state of affairs that has persisted over the past three years. Indeed, according to the latest ARC data, all the indices, with the exception of the ARC Sterling Equity Risk PCI, all posted positive returns during the volatile third-quarter of 2007, when the problems associated with the banking sector threatened to have an impact on equity markets generally.
Improved performance is one thing. But communicating this to potential clients is something else. UK private client firms appear to be very reluctant to market their services to potential clients in general.
Marketing often appears to be the ‘withered arm’ of the typical UK-based private client investment manager. According to ComPeer, a London-based research and consultancy firm which focuses on the UK private client investment management and stockbroking sector, firms typically spend less than 2 per cent of revenues on marketing-related activities, a much lower proportion than is the case at other service-orientated sectors.
This is potentially very problematic because, like life insurance, private client investment management services tend to be ‘sold’ rather than bought. Or, to put it another way, when was the last time you saw a queue of aspirant clients waiting to open an account outside a private client investment management firm’s office?
The fact is that private client investment management firms are not very good at recruiting clients, especially so-called new money clients, who bear little relationship to the ‘traditional’ private investment client.
“Many private client managers find it difficult to market themselves directly to clients, possibly because in order to do so in an authentic and compelling way requires gaining insight into the client’s attitudes, values and beliefs and changing the marketing process to meet them,” says Zoe Couper, chief executive of Carte Blanche Communications, a London-based marketing consultancy that focuses on the private banking and private client sector. “This often seems like an insurmountable task for many, and so, as a consequence, often private client managers can end up appearing rather unapproachable and even irrelevant to a prospective client.”
This is a pity. UK private client firms now have a much more appealing service offer. But until they can communicate it better, prospective clients may continue to keep a substantial volume of their wealth in cash or outside the ambit of private client management firms.
thewealthnet.com is a specialist news service that focuses on private banking and private wealth management
