Average revenue and profit margins declined for wealth managers between 2012 and 2015. But, BCG speculated, much of this was the result of a failure to identify the right “areas for action,” opportunities where wealth managers can regain their footing in the ever evolving global wealth management industry.
One of the major trends impacting the face of wealth management is tightening regulation, which has been driven by the need to “increase transparency in the products, prices and processes of wealth managers,” BCG said.
While high net worth (HNW) clients are the clear beneficiaries of stricter regulation, wealth managers face a less palatable prospect of reduced revenues and increased costs. The BCG gauged that legal and compliance costs have risen to a total of 4% of total operating expenses on average (double the average in 2012).
The main exponent of this transparency drive is the abolishment of inducement fees and commissions. In countries were such bans are already in place, inducements and commissions only make up 9% of total wealth manager revenue. In regions where such regulations have not yet been implemented, this is 21%.
So, what is a wealth manager to do about this? The BCG said “creating compelling advisory offerings targeted at self-directed clients” is a good place to start. The survey found that 46% of self-directed client assets currently receive no contractually defined advice. The BCG argued this is a potentially lucrative opportunity for banks that could raise levels of client satisfaction and trust.
Focus on the low-end
The large majority of respondents still provide relationship manager-centric services to their affluent clientele, individuals with ‘only’ between $250,000 and $1m in financial wealth.
Wealth managers, prefer to offload this group of clients, who hold 30% of global wealth and account for 6% of households. Some 58% of wealth manager respondents plan to decrease their share of affluent clients over the coming three years. Instead they want to focus on ultra-high net worth clients (UHNW). Two thirds of respondents want to increase their market share here.
BCG, however, believes wealth managers do themselves a disservice by all chasing the same bone. “In our view, this may be a missed opportunity, as gaining share among affluent clients is a relatively direct way to generate revenues through volume, using a standardised service model that is appropriate to clients whose investment needs are typically straightforward,” the firm explained.