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Wealth managers need to make key changes in the way they do business to stay competitive, two major studies of the industry have concluded.
For example, wealth managers need to leverage “cross-enterprise capabilities” that may reside in other units of the firm, such as its corporate, private or investment bank, according to the annual World Wealth Report, released today by Merrill Lynch Global Wealth Management and Capgemini, an international consulting firm.
“High-net-worth clients want more and are expecting more,” John Thiel, head of U.S. Wealth Management and the Private Banking & Investment Group, Merrill Lynch Global Wealth Management said in an interview with Registered Rep.’s Wealth Management Letter. “They want to know what you learned from the financial crisis and what new ideas you have. And they’re looking for more access to specialized advice and for unique investment ideas.”
Wealth managers will also need “far greater operational efficiency and effectiveness” in areas such as shared services, outsourcing and new technologies to survive, according to PricewaterhouseCooper’s bi-annual global private banking and wealth management survey, released earlier this week.
“We are entering an age when only those who can genuinely deliver transformative change on a cost-effective basis will lead the industry,” said the report, “Anticipating a New Age in Wealth Management.”
The two highly anticipated reports, which followed last month’s Boston Consulting Group industry study, reached similar conclusions about the need for wealth managers to pay more attention to a younger generation of clients.
Wealthy Becoming Younger, More Female
Although high-net-worth individuals, defined by the Capgemini-Merrill Lynch report as those with $1 million or more in investable assets, are still overwhelmingly males over 45 years old, the study notes that the HNW population is increasingly becoming younger and populated by more women.
Consequently, firms need to meet the needs of this emerging demographic or lose assets under management, the report stated. Specifically, wealth managers need to recognize that younger clients prefer “real-time, digital media for communications and transactions” and FAs must provide them with more “transparency, efficiency, technology and convenience.”
According to Thiel, Merrill Lynch has already begun taking these findings to heart. “We’ve put a great deal of effort into sensitizing our advisors to the nuances and differences regarding younger clients and female clients,” he said. “And we want to make sure our advisor population reflects those changing demographics, so the clients and advisors can grow together.”
Indeed, the PwC survey found that only 17 percent of respondents to its survey of top executives from 275 firms worldwide (and a mere 11 percent in North America) currently have an established connection with their clients’ heirs. What’s more, the survey found that firms are losing an average of 50 percent of assets during intergenerational wealth transfers.
“It’s a major concern going forward,” said Steven Crosby, Americas leader for PwC’s private banking and wealth management leadership team. “Firms have to begin engaging the next generation of potential clients in a more meaningful way.”
Pressure on Margins
Both reports also pointed out that the fallout from the financial crisis has continued to put pressure on wealth management profitability. Citing increased costs from compensation (both recruiting and retention), and regulations (additional training, processing and technology) while investors remain heavily invested in conservative investments that generate limited fees, the Capgemini-Merrill Lynch report noted that wealth management margins “have been steadily eroding each year since 2006 and dropped 320 basis points in 2010.”
This development, the report stated, has put “added pressure on firms to demonstrate a value proposition for which high-net-worth clients are willing to pay.”
The PwC survey found that only 9 percent of wealth management firms “achieved both superior revenue growth and profitability performance,” while nearly three-quarters of firms surveyed had cost-income ratios over 60 percent.
“Margins are clearly constrained,” Crosby said, “and that is a trend we think will continue.” He cited lingering pressures facing wealth managers following the financial crisis such as less trusting, less loyal and more demanding clients. Crosby also pointed out that only 37 percent of chief executives surveyed believed their firms’ clients were highly satisfied and would recommend the firm to others.
Thiel and William Sullivan, global head of financial services market intelligence for Capgemini Financial Services, were more upbeat about wealth managers’ prospects.
Assets, Trust Rising
They cited findings from the World Wealth Report showing that global high-net-worth financial health grew nearly 10 percent to $42.7 trillion, surpassing the 2007 pre-crisis peak and that “98 percent of high-net-worth clients are believed to have trust and confidence in their wealth management advisors… [a] stark contrast to 2008, when nearly 50 percent of clients were losing trust in their advisors and firms.”
“The findings bode well for wealth management globally,” Thiel said, “and add up to a significant opportunity.”
The World Wealth Report’s emphasis on integrated services and pulling together firm-wide capabilities struck a chord with industry executives.
“These days it’s about convergence,” said Doug Regan, president of Northern Trust’s Wealth Management Group. “Our clients are spending a great deal of time, energy and money on outlining and quantifying risk: portfolio risk, market risk and enterprise risk. There is a premium placed on institutions that can leverage internal resources to solve client issues.”
The need to provide a more integrated set of capabilities is putting pressure on smaller firms who “typically lack the resources, management talent and experience to design and implement” that business model, said Steve Prostano, chief executive of Silver Bridge Advisors. Being able to deliver an “integrated set of services in the most flexible customized and responsive way,” as Silver Bridge strives to do, has now become “absolutely necessary,” Prostano said.