With collectively managed assets decreasing in italy, fund managers must address the concerns and needs of wary italian investors
There have been many debates and discussions regarding the prospects for the wealth management and asset management industry in Italy. Despite the fact that the financial assets of high net worth individuals (those having more than $1m in assets) increased by $3,300bn between 2000 and 2002 (source: Credit Suisse Asset Management (CSAM) and World Wealth Report 2003 and 2004), total assets in the hands of asset managers declined by $3,700bn (source: CSAM and Cerulli Associates).
In 2003 and the first half of 2004, collectively managed assets increased on a global basis, primarily because of the price effect but also because of the inflow of new funds. The Italian market, however, was the only one to record heavy outflows in the first half of 2004 (source: Cerulli Global Edition, September 2004).
It is obvious that there is still a deep sense of uneasiness on the part of Italian clients. It is therefore essential to restore the client's trust by concentrating on their real needs and on the best solution to meet those needs.
Analysis of the demand
A historical analysis of the industry is helpful to understanding the current problem. Merrill Lynch and Ernst & Young summarises some of the characteristics of wealthy clients from 1960 to the present day.
In the 1960s, the main source of wealth was inheritance. These clients did not have much propensity for risk, they wanted products designed to conserve wealth and delegated the management of that wealth entirely to asset managers.
In the 1990s, a new type of investor appeared in the market, one who had accumulated wealth and wanted to increase it. In general, these investors were better informed and willing to accept a greater level of risk.
During the bubble at the end of the decade, wealth could be accumulated very quickly. Clients were impatient with their advisers and preferred 'do-it-yourself' management of their own assets. The industry saw astounding instances of investments concentrated in single stocks, with investors even willing to risk half their entire fortune.
Once the bubble burst, however, the attitude of investor's changed. Asset diversification became popular, so new forms of alternative investment were developed.
In 2003, with the return of favourable markets but with awareness of the social security and pension gap in the US and UK, clients once again began to take risks, but these were calculated and investors continued to be highly involved in the management of their own wealth.
In this context, managers who can offer a structured approach to risk in combination with a good advisory structure have had the greatest success with private clients.
The supply perspective
A study in 2003 by the Swiss Banking Institute (CSAM and The International Banking Study, Swiss Banking Institute, Zurich University) helps to understand the evolution of private banks at the global level in 12 years from 1990 to 2002.
This study, based on an analysis of a number of indicators including asset growth, profitability, investment fund performance and financial strength for around 100 banks, yields several observations.
First, it demonstrates there are no obvious correlations between size and economies of scale, nor between performance and asset flows. The study also demonstrates that US and French banks are showing improvement, whereas Swiss banks were losing ground.
From this we can conclude that the banks are seeing greater onshore growth, and that those tied to their country of origin will be limited in future growth if they are not able to diversify their financial centres. The banks that have suffered from the lack of a domestic market of their own in the last few years but that have always operated offshore have a cultural advantage that should be exploited in the future.
So what do firms need to do? And what do asset/wealth management firms need to keep in mind?
First of all, clients need services of a high quality and at a reasonable cost. On the advisory side, where we have seen that synergetic effects are not that effective, firms must fully exploit new technologies in order to increase advisers' expertise in both financial and fiscal areas. They must achieve a wise balance between external production, which is generally more efficient and less profitable, and internal production so as not to weaken the corporate culture of the structure. They must also concentrate on cultivating a lasting relationship that will build client loyalty for successive generations.
In the area of management, firms must invest in performance research - both absolute performance and relative performance measured against the competition. They must also deal with increasing regulatory pressure and shareholder activism. The synergetic effects that are much more obvious on the management side than on the advisory side must also be exploited to the greatest extent possible.
Opportunities and risks
Looking at the market as a whole, the growth of the financial industry and investing and saving culture is an opportunity, provided that one focuses effectively on transparency. It is possible to continue to invent new products and face new frontiers. But this must be supported by reforms that will help the market, such as reforms of pension funds and supervisory authorities.
Other opportunities are likely to be generated not only through more open architectures but also through the opening of new markets such as Eastern Europe and Asia, and through European financial integration.
We continue to read materials that do not always support transparency: the marketing of past performance as well as products that do not give clients flexible options, 'opaque' products. People concentrate more on results than on goals and on the processes for achieving them.
In order to regain our clients' trust, the following factors are essential:
• Generating a repetitive process of positive experiences for clients.
• Knowing one's own client very well;
• Not putting profit before the client relationship;
• Acting with transparency and honesty, using clear, workable and reproducible processes.
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