Regulations are imposed on all wealth managers if some of them do not properly take care of the interest of their clients. This is what Paul Resnik, Board Member of Planplus Global from Toronto, repeatedly told the audience of our symposium: “the (IT) Future of Wealth Management” on the 19th of November 2018 in Amsterdam. Paul is right; European wealth managers deserved MiFID II, but MiFID II is not necessarily bad. MiFID is a perfect foundation for a Customer Relationship strategy.  

The main problem is that the average (Dutch) Wealth manager likes to invest in and research financial markets. We often see people with an economical or econometric background in this profession.  Numbers on stock exchanges are sometimes more interesting than clients. The Dutch Financial Markets Authority, the AFM, concludes that the completeness of the client profile is often lacking and can be improved. The goals of the client and his financial position in particular are often insufficiently investigated (both quantitatively and qualitatively) by the advisor and the results are incomplete and lack depth.” (Source: “De klant in beeld, aanbevelingen voor een zorgvuldig beleggingsadvies en vermogensbeheer” from the AFM. Viewed on 21 December 2016).

The next problem is that the expected return on investment is important to compete with other wealth managers and to board a new client. The higher the ROI, the better, according to the client and there can of course not by any risks involved.  Wealth managers also face the risk of transferring a part of their own risk appetite, which is normally higher than their clients, to the client. FinaMetrica research is pretty clear on that subject: it happens.

Unlike other branches, Wealth Management is very dependent on the results of the financial markets when it comes to client satisfaction. Everybody is happy and life is good in a bull market. However, the problem is that the next financial crisis is sure to come and most people cannot properly predict this. Client portfolio values will fall and some clients will panic.Graphic of emotional state clients of wealth managers

The picture above shows the possible emotional states of humans and how they will cycle depending on results. The slide is from a presentation given by Greg Davies from OXFORDRisk on the 28th of February 2018 at the Trends Investment  Summit in Brussel.

As shown on the slide, the emotional crisis starts with falling portfolio values. The first stage is Denial, and the client will sell his stock once he reaches the Capitulation stage.

Some clients who go through this cycle will sell, lose money, and start looking for the responsible person ­‑ often the wealth manager. Lawsuits are the result. Some wealth managers will lose law suits and the financial authority will respond with new regulations and laws. This is what is happenig right now and a reason why we got the MiFID II.

To get out of this cycle, we need to perfectly match the needs, risk tolerance, risk capacity and the behavioural attitudes of a client with the proposed portfolio.  That is a purpose of MiFID II and looks as follows:

Relation between clients advisers and investments

MiFID II concerns the suitability of the proposed solution for the client and dictates a custom solution for each client. MiFID II now becomes a driving force for good Customer Relationship Management (CRM).

CRM is an enterprise strategy for developing complete knowledge about customer behaviour and preferences to encourage customers to continually enhance their business relationship with the company with mutual benefits. CRM is about Knowing Your Customer, as is MiFID II KYC. The behavioural aspects in CRM as well as the customer knowledge increase due to the Internet of Things and marketing automation.

MiFID II is a chance to improve the client relationship, not a threat. MiFID II is actually CRM and the future for wealth management is a holistic customer approach and client-customised and client-optimised solution. The best way to avoid lawsuits is to study the behaviour of a client and make sure that they do not get uncomfortable with the value of their portfolio in a financial crisis and do the wrong things.

About the author: I am not a wealth manager at all; I am a CRM guy from the Netherlands. We started building our own CRM software in 1987. This product is called SCOPE and well known in the Netherlands.

In 2016, we started to build Cloud-based KYC software for financial services like wealth management. This was an interesting journey which resulted in the SCOPE KYC Cloud Portal which is currently being used by a number of wealth managers in the Netherlands.

I have had the privilege to spend time with people like Paul Resnik and Greg Davies and talked with them about this subject. What started for me as a simple questionnaire that was part of a law (MiFID II), ended as an opportunity for better CRM implementation for Wealth Management, which is great because CRM and how organisations handle their clients is my passion.

I welcome any questions by e-mail (f.vanthoff@scope.nl) or over LinkedIn. More information about our SCOPE KYC Cloud platform can be found on our website: www.scope.nl