Corporate Executive Board

Economic Crisis Reveals "Overservice" in Wealth Management


Wealth managers have taken a large revenue hit during the economic downturn. Assets under management fell precipitously during the past year, and clients increasingly placed more of their remaining holdings in low-margin products. At the same time, operating costs increased, as clients demanded more advice and firms tried to counter poor portfolio performance with greater levels of service. As a result, Wealth managers project that 2010 profit margins could fall as much as 75% below their 2007 peak, according to the 2009 Wealth Segment Economics Survey, done by The VIP Forum.

In the past, firms had a steadily growing base of assets under management and could afford to serve clients across a broad range of wealth segments with the same services. However, the crisis starkly revealed the vulnerability of a service model that doesn't effectively align client value with actual cost-to-serve.

Recent research by The Corporate Executive Board's VIP Forum, an industry group comprised of wealth-management firms, identified that leading firms have begun to move away from a generic, expensive "one size fits all" model that perpetuates "overservice" towards a more carefully calibrated "give-get" service model. This research also points to the following best-practice strategies for helping wealth managers effectively implement a "give-get" model:

• Provide products and services for the low end of the high net worth market
Top institutions have begun to link clients' value and cost-to-serve through increased wealth management asset thresholds and cost-effective offerings for the lower end of the high-net-worth market (clients with $1 million-$3 million to invest). These offers utilize less costly delivery channels and a more disciplined approach to managing clients' service expectations to recover margins.

• Coach advisors to manage their books as small business ventures
With advisor time scarce and expensive, more and more firms are putting incentives in place to encourage advisors to consider both the current and potential value of clients when allocating their time.

• Instill economic discipline
To restore margins and win market share, wealth-management firms must right-size their service model by serving only those clients that can truly benefit from—and pay for—the full breadth and depth of the offerings they provide. Those that cannot will need to migrate to less complex, more cost-effective offerings. The firms that navigate this decomposition of wealth management will be better positioned to achieve a more stable, profitable business.

By following the "give-get" service model tactics outlined above, wealth managers have an opportunity to operate more efficiently and enhance the outlook for their 2010 profit margins.

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