Wealth managers will find profits more elusive in 2010, and most are reconsidering their game plans accordingly, says a survey from the Corporate Executive Board, a Washington, D.C., management consultancy. High on the board’s list of recommendations: FAs should link what they charge a client to the effort spent on the account.

The board in September surveyed more than 100 wealth management firms among its clients, chiefly wirehouses and high-net-worth groups within banks. The survey found that the average firm expects profit margins this year to fall 75 percent below their 2007 peak. Even by conservative estimates, growth in investors’ wealth won’t reach 2007 levels until 2012, the board reckons.

(In a related story, in December, we published a story The Top Ten Mistakes Advisors Make in running their practices. And this article from 2007, Are You Charging Enough? also might be of interest in working out your pricing strategy.)

At the same time, managers’ profit margins are being tested by lower revenues and higher operating costs as advisors spend more time with clients who want more guidance. The survey says that 82 percent of firms maintained an average minimum asset threshold of $1 million or less for clients, even though they expanded their service offerings over time. “We have a 2009 cost structure supporting 2004 revenues. Our operating margins are in serious decline,” the report quotes a senior wealth manager as saying.

Sometimes advisors can grow their way out of the dilemma, but not always; the cost of acquiring new clients increases 53 percent during recession, the board says. “It takes a lot more selling to land a client,” says Wallace Blankenbaker, senior director and executive advisor of financial services at the Corporate Executive Board. “They’re more nervous about where they’re going to move their money to.”

Three-quarters of the firms that the board surveyed are rethinking their service models, a figure “that’s pretty telling in terms of how worried they were over the profit issue,” Blankenbaker says. However, it’s often easier for advisors to get investment decisions right than it is to navigate practice management techniques, the board says.

That’s starting to change: 55 percent of the firms surveyed said they have begun to align their advisors’ time and skills to the value that the client brings to the practice. Smaller investors are paired with junior advisors, leaving the more seasoned employees to look after the more profitable clients. Firms also need to look at other criteria in addition to assets under management when evaluating their client base, such as the investor’s profitability and potential for growth, the board adds.

The strategy can produce marked changes in the top line. The board says that focusing on high-value clients can potentially boost average revenue per client by 40 percent. “Unfortunately, you don’t have the bandwidth to treat every client the same,” Blankenbaker says.


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