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Wealth Managers Come Out In Favor Of Principles, Not Regulation To Regain Clients' Trust

Harriet Davies, Editor - Family Wealth Report, March 28, 2012

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The financial services industry appears to have muddled itself out of the crisis, but how can the wealth management industry ensure it serves clients better than in the past?

The financial services industry appears to have muddled itself out of the crisis and the wealth management market is now being eyed by a host of different types of players as a source of revenue growth. But as competition stiffens, how can the industry as a whole ensure it serves clients better than in the past?

For the financial services sector as a whole, the government seems to have one idea: legislate – so far, most notably with Dodd-Frank. This of course irks the industry as it raises costs, and these are likely in at least some cases to be passed to the end-user. Already, there appears to be a shift underway at banks towards rationalization of client segments with a focus on “preferred clients” (such as at Bank of America’s Merrill Edge and JP Morgan’s Chase Private Client units), as the profitability of transaction-only banking has been hit.

New regulation has raised hackles over issues other than costs though. For example, writing in this publication last year, private wealth management industry veteran Charles Lowenhaupt, chairman and chief executive of Lowenhaupt Global Advisors, said the family office rules mandated by the Act impose limitations on family offices in the way they can provide for distant relatives, employees and others, and will tend to “institutionalize” investment management.

The objectives of the Act

“The objectives ascribed to the Act by its proponents in Congress and by the President include restoring public confidence in the financial system, preventing another financial crisis, and allowing any future asset bubble to be detected and deflated before another financial crisis ensues,” writes law firm Skadden, Arps, Slate, Meagher & Flom.

These are laudable intentions, no doubt, but financial crises have existed as long as financial markets – and the eradication of one may indeed require the destruction of the other. On the other hand, Dodd-Frank marks “a profound increase in regulation of the financial services industry… [and] endows regulators with wholly discretionary authority to write and interpret new rules,” remarks Skaden.

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