The global wealth management business has climbed to record highs, but pricing continues to be an Achilles ’ heel for the industry, according to a widely anticipated new study from The Boston Consulting Group released yesterday.
Fueled by growth in nearly every region, global wealth measured by assets under management increased by $9 trillion last year, an eight percent gain, to reach a record of $121.8 trillion. That’s $20 trillion above where it stood two years ago at the bottom of the financial crisis.
Wealth management assets in North America grew by $3.6 trillion, the largest cumulative monetary gain of any regional wealth market. Its growth rate was 10.2 percent, second only to the Asia-Pacific region (excluding Japan), which grew at a 17.1 percent rate. But North America remained the world’s richest region with $38.2 trillion in assets, or nearly one-third of global wealth.
The report, “Shaping a New Tomorrow: How to Capitalize on the Momentum of Change,” credited the strong performance of the financial markets for the lion’s share of the industry’s growth. “During the crisis, cash was king,” said Monish Kumar, a BCG partner and a co-author of the report. “Since then, clients have been steering their assets back into riskier investments.”
While a sustained recovery of global wealth “bodes well” for wealth management’s future, “the positive signs should not be misread as a return to normal,” Kumar said. “A number of disruptive forces, including increased regulatory oversight and changes in client behavior, are rewriting the rules of the game – both literally and figuratively.”
The report surveyed 120 firms worldwide and found the average pre-tax profit margin of wealth managers increased by four basis points to 23 basis points in 2010. However, gross margins remained lower than they were before the financial crisis in most regions, and cost-to-income ratios remained higher.
Pricing Under Fire
Industry pricing practices came in for sharp criticism in the report. Prices tends to be “too complicated for clients to understand, while pricing models are still relatively unsophisticated and often not aligned with the wealth manager’s business strategy,” according to the report.
Deep and arbitrary price discounting was also singled out for criticism. Advisors who are given “substantial discretion” to use discounts “tend to provide excessive discounts in an effort to increase – or, as was the case during the financial crisis, protect – their asset bases, sometimes with little or no prodding from clients.”
Wealth managers “need more discipline” when it comes to discounting, said BCG senior partner and North American specialist, Bruce Holley, who was also a co-author of the report. Clients are actually willing to pay more for certain services, Holley maintained. “Wealth managers should listen to clients and find out what they are willing to pay for,” he added.
However, many clients are becoming more price sensitive and prices are becoming more transparent, factors that competitors are using to gain market share, according to the report. Wealth managers may need to downgrade service for low-revenue client segments, or impose minimum fees to make the low-revenue segments profitable, the study suggested. What’s more, price differences among client segments must be matched by “equally clear differences in service levels.”
To help customize the pricing model, wealth managers should consider such variables as flat fees, minimum fees, performance fees and contingent fees, and set separate prices for services such as financial planning, tax reporting and extended portfolio analysis, the study stated.
Executives Support Report
Wealth management executives supported the report’s findings.
Aspiriant chairman and director of new business lines Tim Kochis said the BCG report is
“Right on in describing a new client sensitivity landscape; more demand for transparency and more demand to link fees to perceived service and performance.”
California-based Aspiriant, Kochis said, tries to “differentiate fees based on differences in service needs and demands by charging separate fees for planning work in addition to a basis points charge for portfolio management work. This is done either on an hourly fee or project basis or, increasingly commonly, through a periodically renegotiated annual retainer.”
Paul Tramontano, chief executive of New York-based Constellation Wealth Advisors, said there is too often a “purposeful opaqueness” to wealth management fee structures. Constellation, he said, deliberately imposed a flat, percentage-basis fee for clients with assets over $10 million, while clients with less assets are charged on a sliding scale to reflect the amount of work involved.