The challenge of effective client reporting - 05.12.2006
WealthBriefing, Alison Malton, Managing Director, ComPeer Limited
A recent poll on WealthBriefing showed that around a third of wealth professionals do not feel that their current client reporting meets their clients’ needs. The regular report often forms the basis of the main review meeting with a client during the year and may be the only formal communication. It is perhaps surprising that so many think that it fails to do the job.
Our experience at ComPeer in researching the industry, suggests that there is a disconnect between the client experience that firms are seeking to deliver and the reality of back office systems and reporting capabilities. How has this come about and what can be done?
Significant investment
Some recent research we completed amongst a group of leading private client discretionary managers in the UK indicated that client reporting remains the most likely area for future investment in IT. However it has also been the recipient of considerable past investment.
Much of the investment to date has focused on improving the look and feel of reports and automating processes to include commentary and performance information. Cash statements, valuations and performance reports are now in common branding with some colour and graphs. Reports may be reviewed internally in pdf format rather than paper versions, with work flow control around the production and review process. Few firms however have really stepped back and revisited the whole approach to client reporting based both on what level of communication clients want to receive and the technology options for delivering information.
What clients want?
Firms have updated their client propositions and adapted to meet the needs of a more demanding client base. However this has rarely flowed all the way through to client reporting. What are the implications of including instruments with limited liquidity or infrequent pricing into regular performance statistics? How do you value hold to maturity capital protected products? How do you handle hedge funds and other alternatives from an asset allocation perspective? What information is required by the trustees of a SIPP or the SIPP member compared to say an individual income portfolio? The answer may well vary depending on the purpose of the report.
A follow up poll on WealthBriefing asked “what is the main purpose of the client report?” 53% of respondents answered that it was to explain past performance. Is that really the most important aspect for the client? Would a client not be more interested in looking forwards and understanding whether they are still on track to meet their longer term life goals or financial needs.
If past performance is the most important aspect, then we would expect to see significantly more performance analysis in reporting packs. Most firms produce a time weighted total return for the whole portfolio with little analysis as to the source of the performance. A time weighted return also does not reflect the clients’ actual cash experience – an answer to the question how much more money do I have today than I did last quarter and why.
Firms have moved their investment proposition towards more of an absolute or risk adjusted return but, certainly in the UK, no firms incorporate risk into their core reporting. It can be argued that it is too complex but increasingly complex risk questionnaires and tools are used as part of the client take on process so it should be possible to incorporate this type of analysis into regular portfolio reviews.
There seems little drive from within the industry to move towards GIPS composite reporting, with the majority for firms arguing that portfolios are too individually tailored to make composites meaningful. It is however virtually impossible for a private client to assess the relative performance of their manager against an alternative provider. A more standardised approach to performance reporting may indeed assist in re-building the trust between private clients and the financial services industry and we may see increased regulatory pressure in this direction post MiFID.
In the meantime, the approach to client reporting plays a vital role in giving the client the trust and confidence that their money is being looked after in line with their individual expectations. And that inevitably means more tailoring of the level of reporting to meet individual needs.
The reality of what can be produced
In contrast to the demand from clients for more personalised service, the trend has been towards more automated and standardised reporting. Individual commentaries by portfolio managers have increasingly been replaced by standard market outlook and fund fact sheets. There are now only a few firms who still write to clients after each transaction in the portfolio, explaining the rationale for the trade.
This drive for standardisation has been to free up front office time and reduce the cost of production. It has all been about streamlining the existing reporting process – cramming an increasingly complex service offering for an increasingly wide group of clients into a standard, paper based quarterly reporting pack.
Firms could learn from competitors in retail broking. As a retail client of any number of online brokers, I would have access over the internet to daily valuations, performance information and the ability to drill into detailed fact sheets or analyst research notes on any positions. In some cases the individual client can format their own home page, individually tailoring the reporting to their own preferences. This level of service is significantly superior to that offered by many firms targeting individuals with much higher levels of wealth. And it has also allowed firms to radically overhaul their cost bases, taking out significant paper based processes.
Few private wealth managers have embraced the internet in such a radical way. There has been a seeming reluctance amongst private banks and particularly discretionary managers, to allow clients access to portfolio details outside the formal reporting periods. But it is only by harnessing such technology, either for the client to have direct access or for use in review meetings, that client reporting can be truly tailored to the needs and preferences of individuals.