Gaining trust through innovation in wealth management

Gaining trust through innovation in wealth management

Wealth management is about trust and delivering on promises. Successful wealth management products and solutions focus on managing the trust bank accounts of their clients. Forecasting markets and constructing risk optimized portfolios is no longer the only area of innovation. Wealth managers need to focus on all components of the investment management value chain to (re-)gain trust. Innovation is about teamwork putting the client to the forefront and transforming ideas into innovative products in which the client trusts and this is willing to pay an above market fee.

Understanding the challenges currently faced by the wealth management industry, especially with respect to discretionary mandate products, requires getting a handle on their unique characteristics. In a discretionary mandate product or solution, the client entrusts his/her wealth to a wealth manager who promises to manage the wealth towards agreed upon targets, usually generate a positive return. The key characteristic of the offering is the word entrusts. Wealth management is about trust. A recent study by Deloitte Consulting has shown that the trust factor can be decomposed into the three dimensions i) reliability, ii) intimacy, and iii) credibility (Deloitte, 2008). These trust levels can modeled as a portfolio of trust bank accounts, similar to Stephen Covey’s emotional bank account concept (Covey, 2000). The goal of innovating in wealth management therefore must be focused on increasing the value of all of these trust bank accounts. Indeed, the balanced of the trust accounts is directly linked to the client’s willingness to pay and pay above market fees.

It is all about managing risk, isn’t it

At least since the publication of Markowitz’s seminal paper on portfolio selection in 1952 (Markowitz, 1952), the main focus in discretionary mandate products was on generating performance in a risk-return framework. Generating consistent performance matching the promises indeed allows increasing the reliability trust bank account. But the recent financial crisis has reminded us the hard way, that generating above risk free rate returns, requires taking risks. The core of any discretionary mandate must therefore be the decision to invest in certain risks and not others. The selection of risks taken should be such that the investment manager expects a majority of the risks not to materialize, that is, their risk-reward ratios or risk premium being positive. These decisions are called investment decisions. Correct investment decisions transform skills into deposits into one or more of the client’s trust bank accounts. On the other hand, incorrect investment decisions usually result in a (large) withdrawal from one or more of the trust bank accounts. And empty trust bank accounts very often lead to the cancelation of the discretionary mandate product. But there is more to trust than just investment decisions.

A visual framework for guiding innovation

Braden Kelley describes in his recent book on innovation (Kelley, 2010) how the customer journey can be used to structure the innovation process. This concept can be applied, in a broader context, to the so investment management value chain (Diderich, 2009). Consider the different stages involved in delivering a discretionary mandate to a client. They can be classified into three categories, that is, client intimacy (green), investment skills (red), and execution (blue) as shown in Figure 1.

Figure 1 - Investment Management Value Chain

Figure 1 – Investment Management Value Chain

Client intimacy

  • Identify and understand the client’s needs, risk capacity and tolerance (risk profile). A key focus is on building intimacy trust.
  • Structure the most appropriate discretionary mandate product and review/agree it with the client, that is, formulate the promise. Credibility trust plays a key role at this stage.
  • Report back to the client how his/her discretionary mandate product has been constructed and how it delivered on its promises. This stages allows to increase the reliability trust bank account.

Investment skills

  • Forecast markets, that is, where risk should be taken.
  • Construct a risk managed portfolio that implements the forecasts and meets the client’s needs and risk profile as agreed upon.


  • Implement the constructed portfolio using cash and/or derivative instruments by generating trades.
  • Execute the generated trades assuring best execution.

At each of these seven stages, it is possible to provide services that are perceived as added value by the client, that is, increase one or more of his/her trust bank accounts. As it is always possible that one or more of the made promises cannot be fulfilled, it is key to design any discretionary mandate product in such a way that it promises multiple added values, not only focusing on the most difficult one, market forecasting.

For example, in order to increase the intimacy trust bank account, at stage three of the investment management value chain, the discretionary mandate product could include a process that pro-actively reviews the client’s expectations and subsequently proposes changes to the mandate product structure.

Another area of innovation, focusing on technology, could be to offer a reporting platform which allows the client to directly customize his reporting using a flexible, but easy to use, web based application. The credibility trust account, though providing transparency, would be topped up.

And how are we going to do it?

Before starting any innovation project, it is mandatory to have an innovation vision and a strategy. Only so is it possible to focus and prioritize.

A key premise for success is free flow of information. Avoid at all cost the not invented here dilemma. Involve existing and potential clients early in the process. Keep in mind that the client is always right, only sometimes has a hard time to actually express his/her needs in a language that does allow manufacturing an appropriate discretionary mandate product.

Involve a cross functional team including passionate experts from different areas within the wealth management organization, to assure high quality ideas in sufficient quantity along the whole investment management value chain. Expertise and experience should dominate over seniority. The most common techniques for generating ideas that can be transformed into innovation through matching them with client needs are

  1. moderated brainstorming sessions,
  2. suggestion boxes, and
  3. targeted challenges.

To prioritize ideas, match them against the innovation strategy and rate them toward increasing the balance of one or more of the trust accounts. Bear in mind that any deposit in your trust accounts should be such that it will allow you to sell more and/or at a higher price.

Assure that any input provided is valued. Provide feedback on any idea, allowing a not now negative response. Allow for failure, but put all efforts in place to make failures happen as soon as possible. It is only through failing that an organization can learn.

Keep in mind that innovation is the transformation of ideas, into a solution valued above every existing alternative by the client. Thrive for the best and be client-focused.

Finally, innovation is about change. So make sure that your organization is ready for change before engaging on any innovation journey. Otherwise failure is pre-programmed.

Lessons learned

  • Discretionary wealth management is about trust. Trust factors can be classified in three categories, that is, reliability, intimacy, and credibility.
  • Although forecasting markets and taking risk is a key component of a discretionary mandate, it is not the only area of innovation. Clients demand more.
  • The investment management value chain concept brings structure into the innovation process.
  • Innovation management is teamwork and requires free flow of information. It results in changing the organization in being more customer focused.


Deloitte Consulting (2008). Reconnecting for Profit
Covey, Stephen (2004). The 7 habits of highly effective people, Free Press
Markowitz, Harray (1952). “Portfolio selection”, Journal of Finance 7(1)
Kelley, Braden (2010). Stoking your Innovation Bonfire, John Wiley & Sons
Diderich, Claude (2009). Positive Alpha Generation: Designing sound investment processes, John Wiley & Sons

  1. Comment by Claude Diderich on May 3rd, 2012 | Reply

    You may want to follow an interesting discussion on LinkedIn on the topic of trust related to this post.

  2. Comment by Claude Diderich on November 1st, 2011 | Reply

    Bruce Weatherill Executive Consulting in collaboration with IBM Services conducted a very interesting survey to investigate the central proposition of what constitutes trust, and how successful wealth managers have been in building trust with their high net worth clients. You may want to read a copy of the The Value of Trust Report. If you are interested in discussion how your oganization could increase its trust with its clients, and thus increase profitability, don’t hesitate to contact me.

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