Market volatility, increased regulatory scrutiny and fierce competition - not to mention an increasingly demanding client base - are all conspiring to create an environment where clinging to outmoded operating models is simply not an option, senior executives warned at the latest Breakfast Briefing event in London sponsored by SEI.

Speaking at the prestigious Carlton Club in St James’s, Tom Slocock, managing director and chief executive of Deutsche Bank’s UK Private Wealth Management division, told attendees that although there is a clear need for many firms to tweak their operating models in light of prevailing conditions, actually implementing change is another matter. “Wealth management as an industry has struggled to deliver effective change,” he warned.

“This will not be a quiet period,” said Slocock, voicing what must be on the lips of most of the industry. Market gyrations and the ratcheting up of regulatory pressures aside, he noted that clients are asking more of their wealth managers than ever. “The information gap has closed completely and the knowledge gap is closing fast,” he said, adding that “differentiation in the mind of the client is difficult” in light of the number of firms vying for their business.

Given the theme of the briefing, Leveraging Alternative Business Models To Ramp Up ROI, cost-control was high on the agenda, as was the need for firms to pay greater attention to the actual bottom line.

AuM versus the bottom line

The panelists were united in their belief that broadly within the industry too much attention is given over to revenue growth and attracting new money rather than profitability: in the words of Ligia Torres, UK regional chief executive at BNP Paribas Wealth Management, “assets under management size is not meaningful unless you can make money.” Slocock echoed this point, saying that “many people chase incremental revenue without paying enough attention to profitability” – a sentiment which chimes with recent figures from Scorpio Partnership suggesting that the average cost-income ratio across the industry runs to a surprisingly high 80 per cent.

The bad news with regards maximising profitability, according to David Simpson, senior business development director at SEI, is that recent lean years mean that cost-cutting has been underway for some time and that further reductions are likely to be more painful. “Cutting costs around the edges just will not suffice,” he said, pointing out that instead firms are going to have to really focus on how capital is deployed in order to keep costs down. Ian Woodhouse, director of PwC’s EMEA private banking and wealth management team, seconded this point, noting that “easy cost-reductions have already been exhausted… the emphasis needs to be more towards structural cost reductions.”

One approach to cost-cutting being taken by more and more firms is to leverage outsourcing in order to focus on core competencies, Simpson said. Outsourcing has historically been thought of as a “necessary evil”, but according to him preconceptions are changing and outsourcing is being seen as a “strategic investment which can enhance your business model if done in the right way.”

“Outsourcing can be an effective way to manage risk, control costs and actually improve service quality,” he said.

The outsourcing of platform capabilities – at least in the mid-tier - was singled out by Alison Malton, chief operating officer at FF&P Wealth Planning, as an “increasingly dominant” model as firms strive to drive down their cost bases. “Going forward, I don’t think the economics will stack up for mid-size firms to have their own in-house platform,” she said. In the UK, the rise of IFA-owned Nucleus is a case in point here, the platform having garnered close to 100 member firms already.

You can please some of the people some of the time…

The outsourcing of platform capabilities may be on the rise, but this – and any other significant changes to operating models – can constitute a difficult process, the panel members conceded. Firms need to employ “brutal honesty”, said Slocock, going on to say that “you need to be honest and self-aware to know what you are, what you can be and what you are not.” This sentiment was echoed by Torres, who said “you need to find a means to differentiation… you need to decide what you want to be, what you’re good at and where you can become an expert.”

The fact that firms need to make an honest appraisal of what their “unique selling point” is was a recurrent theme during the discussion, with both panelists and attendees agreeing that wealth management houses will all have to react differently to today’s pressures. In the words of Slocock, “there is no single or right answer… every firm has its own client base.” Wealth management in fact might be thought of as a special case with financial services in terms of its inter-sector diversity, Woodhouse pointed out. “Unlike retail or investment banks, if we went round to private banks everyone would be different in terms of business model,” he said.

Since tailor-made servicing is arguably the very lifeblood of private wealth management, one may have been surprised to hear the panellists sound a note of caution on the perils of being overly client-centric. While the client has to of course be at the centre of the proposition, “the client cannot be king and decide everything”, said Torres. She suggested as did several of the other panellists, that it is relevancy rather than slavishly bespoking services which is key. “Firms need to understand the problems clients have and provide the right solution,” she said.

Discipline is key

The resounding message conveyed during the discussion was that discipline is key, not only in cost-control but also discipline as to the client segment being targeted (or, crucially, not targeted). A relentless hunt for new money may not actually be the way forward; in the words of Torres, firms have to ask themselves “what do you prefer, a good bottom line or lots of assets?”

So it is profitability rather than surging assets under management figures which is now more than ever the order of the day – and the potentiality for profitability is certainly there, if perhaps it is as not fully exploited as it may be. For those firms nimble enough to effectively navigate the seismic changes rocking the industry globally and embrace change, the future will be bright. As Malton concluded: “wealth management is still fundamentally an attractive business to be in…it’s about working at how you can make your own business profitable.”