Shifting fortunes in wealth management

Wealth management, an industry long accustomed to steady growth and healthy profits, is now facing significant headwinds — and opportunities. How traditional banks and private money management firms respond to these new realities will determine whether they can stay relevant to their clients and sustain historical growth and profitability.

Though definitions and numbers vary, the Canadian high-net-worth or HNW market (typically defined as households with $1M+ in investible assets) consists of the top 4% to 5% of households, which collectively hold roughly $3.4 trillion in assets.  The Big 6 banks love managing HNW assets due to their healthy revenues (fees average 0.35% of a client’s money according to McKinsey).  Furthermore, the client’s assets do not have to be backstopped by large amounts of regulatory capital plus these assets are balance sheet positive — rich people deposit more money into banks than they borrow from them.   Given today’s financial industry challenges (i.e., capital markets profits are down, implementing new regulations like Basel 3 is expensive), it is no wonder many bankers now consider wealth management a key driver of growth and profits.

This once cushy business, however, is quickly finding itself caught in a vise of declining fees and increasing costs. For example, ongoing economic uncertainty continues to put pressure on fees and is triggering a shift away from complex (and high-margin) products like hedge funds to safe (but lower revenue) fixed-income assets.  Periodic financial scandals are reducing client trust in the industry and exposing breakdowns in compliance.  Growing client demands (particularly around technology, premium talent and product sophistication) are increasing service costs. Finally, increased regulatory requirements are boosting operating costs and business complexity.  Oded Orgil, managing director of Corporate Office Strategy at Manulife Financial, says, “Clients today have higher expectations for service and value.  They are more active in the management of their portfolios and are cognizant of a firm’s reputation, compliance record and risk management processes.”

At the same time, well-positioned companies can look forward to a promising medium-term market outlook.  The number of HNW households and the assets they hold are increasing (the recession notwithstanding), an aging population will be monetizing their equity from hard assets like homes and businesses to financial assets and; currently low-equity valuations have a solid upside.

Nimble wealth management companies can pursue a variety of strategies to leapfrog competition, improve their value propositions and sustain margins, including:

Bolster margins

Segment client’s better: Move beyond flat fee and service levels to a model where different clients are given different levels of services and fees.

Sell more to existing clients: A challenge for many companies, but driving higher cross-selling rates will improve revenues, lower client-acquisition costs and boost retention.

Optimize the back office: Look for efficiency gains and cost savings in back office operations like custody, accounting and record keeping.

Regain trust 

Reinforce the value proposition: Rich people have watched assets plunge along with everyone else’s and rightly question what they get for their money. Firms should invest in enhancing the client experience in order to drive measurable client satisfaction.  Target areas include staff training, client education, cross selling complementary services and client-supporting technology.

Improve transparency: It’s no longer acceptable for a client not to know their financial position at any given time.  Deploying advanced record keeping and online information delivery tools can provide clients with better visibility into their holdings, transactions and asset mix.

Foster simplicity: For the vast majority of clients, investing has never been a more complex and arcane activity.  Companies can foster trust by making the language and process of investing much more “user friendly”

Enhance the offering

Leverage global networks better: In many cases, the rich of 2012 live in multiple residences, travels extensively and have kids in disparate geographies.  To better serve these clients, wealth management companies should leverage their global retail network or establish strategic partnerships in key markets with symbiotic firms.

Become mobile enabled: The wealthy increasingly are performing daily activities including financial transactions through mobile computing devices such as a PC, smart phone or iPad.  Providers must keep pace by supporting their offerings through mobile channels.

Offer tailored solutions: Many clients are looking for bespoke, one-stop solutions that satisfy their unique investing needs.  This could include providing access to alternative assets like private equity investments in their portfolios and bringing in other complementary services like tax and estate planning.  Furthermore, wealth managers need to learn work better with emerging institutional-like structures like family offices.

Go for “smart” scale

Provider fragmentation, the need for scale and steadily increasing compliance and technology costs makes the fragmented HNW sector ripe for further consolidation. However, this strategy will only pay dividends only if the acquisition can be profitably integrated and the client sees value as part of a larger entity.  Otherwise, the firms run the risk of losing their top wealth and relationship managers, along with their best clients.

“The complexities of the investing world” says Orgil, “are unlikely to abate.  This ‘new-normal’ opens up new opportunities for the wealth manager to forge a better, more profitable relationship with their clients. The quicker firms understand this the more sought after and competitive they will become.”

For more information on our services and work, please visit the Quanta Consulting Inc. web site.


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