Client experience key to rebuilding wealth management profit

02 August 2017 6 min. read

Wealth managers continue to see their pre-tax profits erode as revenues decline further, however a new report highlights that many wealth managers have finally managed to stem the bleeding. Cost reductions, as well as looking to implement digital technology, improve cost efficiency, customer journeys, and create genuine value, may be key to industry players staying afloat.

Global wealth has continued to pickup, largely due to large gains in equities in North America and the creation of new wealth across the Asia-Pacific region. In total, global private wealth in the hands of wealthy households has increased to more than $166 trillion.

Global wealth managers are, however, facing increased pressure as a period of relatively lacklustre growth since the financial crisis saw investors, and regulators, become increasingly critical of the industry and its opaque fee structure. In the new ‘Global Wealth 2017: Transforming the Client Experience’ report, the Boston Consulting Group explores current conditions faced by the industry in light of the changed conditions. The report is based on a survey and interviews with 125 wealth managers across the globe.

The study shows a relative decline in revenues over average assets (RoA) over the past decade across most regions, as various factors came to influence wealth managers. Key factors include legislation to make the industry more transparent, and competitive; the rise of passive investment vehicles; government measures to repatriate offshore assets; and the rise of FinTechs and robo-investment.

Return on Assets Globally has gradually Declined

While RoA declined on average however, the research found that wealth managers in most regions have managed to stem the bleeding in terms of profits, by focusing on cost management. Costs over average assets and liabilities under management saw relative decline in various regions.

Profit basis points across the board meanwhile fell from 33 to 23, with Norther American and European onshore institutions the hardest hit, both witnessing respective drops of -14. Asia-Pacific institutions meanwhile saw a slight increase following massive cost reductions.

Despite cost reductions, pretax profit margins have fallen substantially over the past ten years

In terms of a breakdown of pre-tax profit margins, the impact of revenue drops was cited as the most impactful, followed by impact of cost increases, resulting in a change to pre-tax margin between 2007 and 2012 of 9.2 basis points. In the years to 2016 wealth managers have again seen a revenue drop, at 6.1 points, although cost reduction efforts offset the losses at +4.7 – resulting in a total 22.4 basis points, a much smaller small 1.4 fall since 2012.

The biggest gains were noted in cost reductions in sales and front-office services, at -2.3 between 2012 and 2016, followed by central functions at -2. Asset product management saw a -1.4 drop, while operations and IT and legal & compliance saw slight increases in the period of 0.4 and 0.6 respectively.

Wealth managers are streamlining their approach

The increased difficulty of the operating environment has seen wealth managers streamline their respective approaches – with many such approaches still to bear possible fruit. For instance, in the areas of focus and front-office setup, respondents across most regions are above 50% in terms of completion within the respective domain.

Digital development

Other areas, such as offering and operations continue to hold potential for the streamlining of approaches. The latter category includes focuses such as lean end-to-end process for fast and flawless delivery and digital readiness. In terms of mindset, a mixed result is identified, with North American banks out ahead while European offshore institutions lag behind.

The research notes that various players are increasingly focused on improving customer experiences, aside from seeking to reduce costs through the deployment of digital solutions. According to BCG wealth managers are increasingly able to streamline the customer journey by creating a seamless front- middle- and back-office integrated experience – which the firm calls Client Journeys 2.0.

Client Journeys 2.0

The Client Journeys 2.0 involves a broad focus driving the client experience while integrating processes and applications to drive efficiencies. 2.0 implies, according to the firm, superior client experiences delivery with front-to-back perspectives. This is in difference to Client Journey 1.0, which is more supportive to clients navigating through wealth manager’s channels.

According to the firm’s benchmark study, various wealth managers are considering technology in their wider development towards Customer Journeys 2.0, such as big data and smart analytics, and service-oriented architecture and APIs.

New technology priorities

Daniel Kessler, a BCG Partner and co-author of the report concluded, “To create client journeys 2.0, all processes, channels, and interaction points must be designed and implemented to deliver a superior client experience, largely through the use of digital technology. At the same time, the use of digital in these journeys fosters process efficiency and robustness and reduces operational risk, offering a redefined client experience that is more intuitive, integrated, and individualised.