the new millennium, many wealth managers have grown complacent and
often neglected the client with tactics like product pushing. Now
forces are aligning that could test the resilience of their
business models – and profitability.
The emerging pressures starting to stress the wealth industry
include a decline in asset prices, crises of confidence,
operational limitations that restrict growth and service delivery,
escalating costs and suppressed client profitability. All of these
have the potential to drag down margins, according to new research
from Deloitte.
Go deeper with GlobalData
Worryingly, its feedback from ultra-wealthy private clients
point to another major industry challenge – a significant portion
of the client base is disconnected from, and lacks trust in, wealth
management institutions. There is, in short, a “trust deficit,”
declares Russell Collins, co-leader of Deloitte’s EMEA Financial
Services Industry practice.
Its study, Reconnecting for Profit, analyses the high end of wealth
management provision in Europe. Individuals in the ultra- and
very-HNW segments represent $5.5 trillion of the financial assets
held by all HNW private clients in Europe, sectors expected to show
continued growth and a target of an increasing number of wealth
players.
Comprising 72,000 people in Europe, these high end clients
represent about 47 per cent of the financial assets held by all
private clients. And for private banking, the boom years have been
good. Total income among European market participants grew by an
average of 14.1 per cent and 5.8 per cent in 2005 and 2006
respectively and 2007 is looking like a bumper year. At the same
time, European financial institutions suffered a 17.1 per cent drop
in share prices in the year to March 2008, Deloitte
calculated.
Crucially, the elite group of ultra-HNW clients is likely to be the
most resilient to any downturn in asset prices and is therefore
important to sustained revenue and profitability, Deloitte
observes.
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By GlobalDataIn addition, this more sophisticated private client group “can act
as a lens through which the future of service provision can be
seen”, it notes. For example, demands made by these clients are
often a precursor of products and services demanded by the lower
end of the HNW client market. “Getting propositions right for this
client group may therefore pay dividends for a wider client
base.”
Deloitte admits that client satisfaction and trust are not
necessarily synonymous. Some private clients are happy enough with
their wealth management services. But this is usually due to an
acceptance that a trusted third party – usually an independent
financial advisor (IFA) or niche consultant – would be engaged to
‘manage the wealth managers’. In addition, clients may simply
accept that they are being ‘sold to’ and that the relationship
manager’s job is to bring them new products.
Value added
Notwithstanding this, distrustful private clients use their wealth
managers in ways that do not allow higher value services to be
sold, suppressing the profitability of their accounts.
Deloitte found that the clear trust deficit among these
highly-sophisticated investors manifests itself in three main
ways.
First, relationship managers (RMs) tend to be seen as ‘product
pushers’. Second, clients are often unsure if they are receiving
objective advice or best-in-class products. Third, many private
clients do not rate highly the investment expertise of their wealth
managers.
This lack of trust has a negative impact on wealth managers in that
it directly restricts profitability, Deloitte argues. High-end
private clients often retain key decision-making, exhibit ‘parts
buying’ behaviour and often appoint external advisors to manage
their wealth managers. Alternatively, they can simply avoid the
wealth management market as far as possible.
High value services
Lack of trust also represents a significant obstacle to growing
high-value services. Wealth managers are seeking to broaden their
revenue platforms with more discretionary mandates and advisory
fees by building businesses around the ‘trusted advisor’ model. So
a widening trust deficit and lack of connection with clients
restricts wealth managers’ ability to grow such revenue
streams.
Deloitte believes that, to reconnect with their high-end customer
base, wealth managers should re-align propositions so they are
driven by the factors most important to clients. It advances three
principles that typically influence the decisions of private
clients:
• Diversification: on average private clients place just over a
quarter of their wealth into the market, diversifying into a range
of wealth management products as a safeguard against losses
elsewhere. Clients also diversify by placing business with several
wealth management institutions – using the services of
approximately five wealth managers at any one time.
• Performance: many high-end private clients rate performance more
highly than quality of service and banking relationships,
expressing a need for more responsive wealth managers.
• Efficiency: private clients seek more efficient basic processes.
While banks continue to broaden their range of products and
services, their clients are more concerned that the existing
repertoire is executed effectively.
Core principles
Wealth managers should capture client insights based around these
core principles, Deloitte declares. From this base, they can then
identify client segments that enable them to tailor propositions
for each client group. Going beyond marketing strategy, this
segmentation approach may facilitate delivery against private
clients’ core needs.
It may also improve wealth managers’ ability to advance each client
up the value chain towards improved profitability as propositions
are tailored more closely to reflect the requirements of each
segment.
Deloitte makes a number of recommendations on these themes to
rebuild client confidence.
For example, wealth managers should undertake client insight
analysis, action necessary to underpin a successful transformation
of the proposition.
Segmentation strategy and client value management should be
implemented to form the basis of scalable, tailored propositions
and improved client profitability. Managers should retool for
efficiency and effectiveness – to bring simplified, robust basic
processes and more effective services to multi-banked, high-end
clients.
Seen as a key is the transformation of the service
delivery/distribution model in order to improve the clients’
perception of front office expertise and facilitate teamwork to
deliver the skills and experience of the organisation more
effectively. A more integrated capability should be built across
banking functions to bring a more coherent approach and accommodate
clients with interests that often span different divisions.
“Although many wealth managers are working towards some of these
goals, the most successful wealth management institutions are
likely to be those that take a co-ordinated and strategic approach
to all these steps, to achieve transformation,” Deloitte
contends.
