Trends and Emerging Business Models In Global Wealth Management

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:

1. How can advisors and firms regain client trust?
2. What is the role of the advisor in a world of integrated financial institutions?
3. 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)
• Battle for HNW clients continues, resulting in expanding war for advisor talent

The U.S. Wealth Management Market

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

 Mandates

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

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