By Christopher Faille
The word “synergy” has developed a reputation as a business-management guru’s cliché, showing up on many a “buzzword bingo” card.
Unsurprisingly, then, when the framers of the 2011 World Wealth Report from the consulting firm Capgemini and Merrill Lynch Global Wealth Management employ a concept that seems a lot like “synergy,” a concept they call “enterprise value,” they are careful to assure us that synergy is not what they mean at all.
They define “enterprise value,” rather, as “the ability to leverage capabilities from across different business units in order to differentiate in meeting client needs.”
It Isn’t All About Alpha
Although the word “alpha” doesn’t appear in the report, part of what the Report means by this “differentiation in meeting client needs” is clearly that a portfolio adviser should not presume that alpha is what its clients, including its high-net-worth individual clients, really want. Nor should it presume the same of any other one-dimensional factor, with or without a Greek letter. The report is full of such phrases as “the breadth and complexity of client needs” and it expounds upon the imperative that advisers develop “a sophisticated understanding of their clients so as to deliver a viable strategy that resonates.”
Clients, the report suggests, aren’t keen on alpha at the moment. In 2006, as many as 10 percent of HNW investors’ financial assets were in alternative investments (defined broadly to include venture capital, private equity, commodities, foreign currency and derivatives, as well as hedge funds and structured products.) That seems a golden age of alpha pursuit in retrospect. That figure fell to 7 percent in the crisis year of 2008, and to just 5 percent in 2010.
“Advisers could soon need to discuss with HNW clients whether they are being overly conservative, especially as rising inflation eats into already low returns on certain asset classes,” the Report suggests. It seems that part of the responsibility of an adviser is to develop in overly timid clients a desire for alpha.
Three Institutional Settings
One theme of the Report is that asset management works best when it takes place within a broader organization, a full-spectrum Financial Services Institution (FSI) rather than an Independent Asset Management (IAM) player. Further, even the IAMs receive benefits from their institutional setting that are lost to the so-called “pure-play” firms that do nothing but give advice.
An FSI can give its jittery clients the benefits of capital preservation when times make that imperative, and can position them for something more aggressive when they, and the times, are ready for that.
The Report cites a poll in which advisers were asked: “Please rate to what extent you feel the following firm types are well positioned to meet new client demands.”
An impressive 84.4 percent of those asked said that FSIs are well positioned to meet the need of capital preservation. Only 61.3 percent said the same about IAMs. Even fewer, 59.1 percent, said the same about “pure-play wealth management firms” (PPFs).
The PPFs typically believe that their purity is a selling point, because it assures investors that there is no product-pushing hidden agenda in the advice they give. In accordance with that model, 73.7 percent of the Advisors polled said that the PPFs are well-positioned to give independent investment advice. Still, that is barely better than neck-and-neck with the FSIs, of whom 73.2 percent of advisers say the same.
But the Report indicates that it is the FSF that has a leg up, with its ability to offer “unique investment opportunities through the investment bank” and “preferred financing for entrepreneurs.” All this involves seeking “true” Enterprise Value, rather than “basic synergy seeking,” which the framers of this report see as mainly about cutting overhead costs.
The availability of “preferred financing for entrepreneurs” is obviously only relevant to a subset of HWNIs – those who happen to be entrepreneurs. Still, if they can get their financing needs met this will create the desirable “sticky” element in their relationship with the same FSF that manages their portfolio.
This is not only an opportunity, though: it is a challenge. Clients in that situation rate the importance of the preferred financing a good deal higher than they rate their level of satisfaction at the extent to which their FSFs thus far provide it.
The report takes an optimistic, though a guarded, view of what it calls “Key Market and Other Drivers of Wealth.” Equities, along with debt markets and commodities, rose in value in 2010, “though not at the exuberant pace of 2009’s bounce-back.”
The Dow Jones Credit Suisse Hedge Fund Index ended 2010 above the level at which it had ended 2007, and the volatility of hedge fund results declined in 2010. On the other hand, the Report cautions, “oversight of the industry has increased and any negative publicity or changes in regulations could undermine investor confidence.”