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By M. Isi Eromosele
The global wealth management industry is in the midst of a
series of dramatic changes, resulting from the recent global financial crisis
as well as long-term trends in the industry. Full-service firms have been
losing share of advisors and assets to independent and self-directed channels, a
trend that preceded the financial crisis and has accelerated.
The global financial crisis has created new challenges for
the industry: Client satisfaction has approached historic lows and client focus
on transparency and lower-risk/return products has resulted in lower revenue
yield. In addition, consolidation of banks and brokerages has led to the
challenge of creating a truly integrated experience and realizing the potential
economic rewards.
Going forward, the industry must focus on three key
strategic challenges:
- How
can advisors and firms regain client trust?
- What
is the role of the advisor in a world of integrated financial institutions?
- How can wealth management operating models deliver specialization and scale to enable competitive advantage and profitable growth?
Answering these questions will be crucial to positioning
evolving wealth management firms for a new phase of growth and profitability.
Recent trends have posed important challenges to firms in
the global Wealth Management marketplace.
Client Behavior
- Asset
allocation has shifted toward safer products, and demand for transparency
has increased
- Post-crisis, client satisfaction levels are at an all-time low
The global downturn has engendered more pragmatic client
behavior. Assets are being shifted away from equities and alternatives. Increasingly,
clients are showing preference for safer, more transparent products such as
fixed income and cash related products.
Client satisfaction levels have decreased dramatically
during the global financial crisis
as investment performance decreased. Driven by this decline,
clients have exhibited decreased loyalty to their advisors and firms, fueling
the migration trend. Advisors are facing challenges in how to best address
client dissatisfaction.
Wealth management firms are responding by adopting a more
client-focused perspective.
Advisor Movement
- Advisor
migration toward independent channels continues
- Advisors are increasingly making trade-offs between compensation and services received (issue resolution, portfolio management tools)
The U.S.
The U.S. Wealth Management Market is served by multiple
providers with distinct formats but overlapping value propositions.
The shift of advisors from full service to independent
models is expected to continue.
Driven by the desire for independence and higher payouts, financial
advisors have been migrating from full investment houses to more independent
firms. The hybrid channel has benefited from this trend, as breakaway advisors typically
have a mix of commission and fee businesses.
Independent segments should continue to benefit from
investor and advisor preference for independence. Independents, RIAs and hybrid
advisors have increased share and
now account for about 45% of assets combined.
Increasingly, advisors are choosing a sales format based on
tradeoff between compensation, flexibility and risk.
Private Bank Model Characteristics
- Inherited
book
- Advisor
not responsible for overhead or team costs
- Broad
product set and team of experts
- HNW / ultra HNW
Independent Model Characteristics
- Creates
a brand and market presence
- Self-sourced
client base
- Responsible for all overhead and business risks
Pressure on Profitability
- Changes in asset levels and pricing, along with increasing regulatory oversight, are putting pressure on wealth managers’ profitability
Profitability will remain under pressure and firms would
need to continue managing costs tightly.
Pricing
- Greater
price sensitivity in low return environment
- Pressure on management fees
Assets
- Lower
asset values have decreased earnings
- Preference for simple, less risky, and transparent products
Simplicity and transparency reduce clients’ willingness to delegate
wealth management (fewer discretionary mandates)
Holistic Advice
Offering integrated advisory services (e.g., insurance, financial
planning, risk management) with higher margins
Customized Offerings
- Can be
addressed via modular product architecture
- Complex products will return, but with lower margins
Implications For Business Models
- As a
response to shifts in the market and profit pressure, firms are adapting their
business models
- New
formats in the independent space have emerged to offer new value propositions
for firms and advisors
- New
players have entered the market and are attracting breakaway advisors
- Consolidation
is driving scale in bank brokerage and resulting in integrated institutions
- Team
coverage models dominate the ultra HNW space
- Innovations
have emerged in the online space
Wealth Creation: The “Private Investment Banking” Model
- Broad
range of private banking, commercial banking and investment banking
capabilities
- Team-based,
multidisciplinary sales and service coverage model
- Referral protocols to access products within a diversified financial services firm
The wealth management industry is undergoing a number of
changes, from new client behaviors and shifts in sources of profitability to
new sales formats and emerging business models.
Wealth management firms can take advantage of these changes.
To capture continued growth prospects, they will need to:
- Focus
on client experience
- Revisit
market segmentation and refine their customer value proposition by segment
- Upgrade
or build new capabilities (e.g., product solutions, advice, client
knowledge management) to deliver customer value
M. Isi Eromosele is
the President | Chief Executive Officer | Executive Creative Director of Oseme
Group - Oseme Creative | Oseme Consulting | Oseme Finance
Copyright Control ©
2012 Oseme Group
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