Confessions of an ex-wealth adviser

Is your financial adviser working in your best interests, or simply chasing commission? Former wealth adviser Devanshi Bhatnagar shares some insider knowledge

PUBLISHED : Thursday, 27 June, 2013, 12:00am
UPDATED : Thursday, 22 May, 2014, 3:53pm

Wealth management is an honourable profession. If you serve your clients well you will likely establish a lifelong relationship with them. You can serve as their close adviser and that trust is gratifying.

I speak from first-hand experience having worked as a relationship manager and an investment adviser for prominent financial institutions in India, followed by extensive interaction with the wealth management industry in Hong Kong as a journalist covering private banking. Even though I have moved on from mainstream wealth management, I take pride in maintaining strong relationships with key clients whom I served as an adviser.

Sadly, for many wealth managers, this is not as straight forward as it sounds. The fiercely competitive world of wealth management creates intense pressure to generate sales, compelling advisers and relationship managers to push investments and generate commissions.

This is a high-cost industry involving grade A office space, large sales teams and lots of marketing. Many of these organisations' basic services are hard to distinguish from their competitors'. This means they rely heavily on their client relationships to generate sales.

The reality of this arrangement is that such staff, be they relationship managers at private banks or investment advisers at the big consumer banks, have to hit aggressive sales targets.

One has to wonder whether these incentive structures give rise to a conflict of interest.

Moreover, sales targets remain fixed. The result is there is always pressure to sell something - and the pressure to achieve monthly targets is intense.

A senior private banker with more than 15 years of experience describes the typical scene at a wealth management firm. "The first half of the month is spent discussing the private banking business and how it should be done. The second half of the month is spent chasing the revenue targets for the month. Products yielding maximum returns for the bank are short listed, the list of clients is scrutinised to identify the potential targets for these products and the relationship managers set off to chase the numbers-slash-clients."

Those who exceed sales targets are rewarded. An ex colleague at a boutique private bank in Hong Kong got selected as one of the top five relationship managers for 2012 and went on a five-day trip to Turkey.

But, most fundamentally, those who hit their targets get to keep their jobs.

Different products earn different profits for the bank. Based on my interviews with individuals who sell funds and other investment products to banks, bond funds typically generate 0.3 per cent to 0.4 per cent commission for the banks, equity funds earn about 1 per cent to 2 per cent, while a universal life insurance scheme can earn up to 10 per cent.

In my experience as a wealth manager, the sales team is quite aware of the level of commission earned on each instrument. The product providers, who are running on sales targets themselves, will also highlight the selling commission they pass on to the organisation when trying to persuade a bank to sell its instrument.

This numbers race runs all the way to the top. The performance of individuals is added up monthly, reflecting on the performance of the team head, which is reflected in the performance of the regional head, and so on.

"I always see the relationship managers at my bank being harassed by their boss," says a regional head of corporate communications at a global private bank. She says banks' high costs and steep revenue targets drive this pressure.

Worse, since all banks are in the same boat, changing jobs might not change things.

"I don't think that the interests of investment advisers are aligned with my interests," says Michelle Wong, an entrepreneur and mother of two. "They sell me product B when I need product A. The investment proposals are designed to benefit them, not me," she says of her experience dealing with a number of advisers. Her view is embraced by her husband, a banker himself. The couple now manage their investments themselves.

From my perspective, as someone who has both been in this industry and who has covered it as a journalist, the wealth management industry is at risk of being out of touch. Clients are seeking better quality advice and higher accountability from banks. Families in Asia are entering their second and third generation of wealth, and a younger, better educated customer base has emerged.

Also, post financial crisis, rules are tightening. Hong Kong regulators are tightening rules on the selling of financial intermediaries. Banks are now required to give detailed risk-assessment questionnaires to clients. They have to assess the suitability of an investment for a client. For example, an adviser cannot sell derivatives unless a client has a record of trading derivatives.

Banks also need to disclose their fees they earn on a product to the client for every transaction. These documents can be reviewed by regulators at any time, without prior notice.

Sensing the shifting winds, large fund management companies are offering training courses on sound wealth management principles aimed at investors and their advisers. There are also talks about an industry-led private banking association to be set up in the near future that will work towards establishing minimum standards for the industry.

Private banks are also making a push to sign clients to discretionary accounts, whereby banks charge a set fee (usually in the range of 1.5 per cent to 2 per cent of the assets under management). Although this concept is prevalent in Europe and the United States, it is not very popular in Asia.

Still, in spite of the challenges, it's hard to escape the idea that it's time the industry move on from a product-selling model.

Advisers accustomed to taking clients with them as they transfer jobs are said to be less inclined to promote discretionary accounts because of portability issues.

I'm heartened by the growing popularity of financial advisers who have stepped away from big companies to operate as independents freed from monthly sales targets.