While the equity markets drove a healthy growth of 10 percent in client assets last year, U.S. and Canadian brokerages continued to have the most cost-intensive wealth management model, leading to relatively flat profit levels.
Boston Consulting Group’s 2014 Global Wealth study found that overall costs for brokerages worldwide rose 3.5 percent last year, with North American brokers leading the pack, largely because of the high compensation paid to advisors. The largest cost increases globally in 2013 were in legal, compliance and regulatory (32 percent), followed by asset and product management costs (30 percent).
“Basically, what we do see is that legal and compliance has been high across all regions. It’s one of the main cost burdens banks have seen. And you see the regulatory flows, not just in Europe and the U.S., and they are also hitting Asia for example,” says Anna Zakrzewski, a principle for BCG.
BCG’s study found that firms saw cost increases in every area except marketing and communications, where they declined 20 percent. But these costs only make up 2 percent of total costs currently.
These rising costs should signal a call to action, according to the BCG, which predicts markets will start to slow. To that end, the report also recommends advisors focus on their asset-gathering capabilities.
Last year, advisors’ ability to bring in net new assets fell behind. On average, global net new assets per advisor was $7.3 million, the average in North America came in at $3.6 million. Despite this, North American brokers, along with their European counterparts, posted the highest average revenue per advisors at $2.6 million, above the $1.7 million global average.
To strengthen their business, wealth managers should focus on newly created wealth, according BCG. For advisors looking to add millionaires to their books of business, the U.S. is still leading the pack with 7.1 million households out of 16.3 million globally in 2013.
“The key challenge in developed economies is how to make the most of a large existing asset base amid volatile growth patterns,” says Brent Beardsley, senior partner with BCG and co-author of the study.
Additionally, the U.S. generated the highest number of new millionaires, 1.1 million, last year. For those with more than $1 million in assets, BCG expects this segment to grow their wealth by 7.7 percent over the next five years, compared to the 3.8 percent growth expected from households with less than $1 million.
But Asia is on the rise as well, especially China, which saw the country’s number of millionaires grow from 1.5 million in 2012 to 2.4 million in 2013, surpassing Japan. Moreover, the Asia-Pacific region (excluding Japan) represented the fastest-growing wealth market, increasing 30.5 percent last year, compared to the global average growth of 14.6 percent.
According to the study, the Asia-Pacific market will surpass North America as the largest wealth manger in 2018, assuming constant consumption and saving rates. Asia Pacific is projected to generate $61 trillion by then, compared to North America’s projected $59 trillion in private wealth.