The effects of an ageing population and slow stock market growth will be the two most important factors driving the success or failure of Eu...

The effects of an ageing population and slow stock market growth will be the two most important factors driving the success or failure of European wealth managers over the next five years, according to a report from Mercer Oliver Wyman, a financial services consultancy. The report, Wealth Management: Strategies for Success, was based on research conducted among 50 wealth managers serving all the main European countries and with clients that have assets to invest of €300,000 ($395,678) or more. The report found that wealth managers are overestimating potential for growth in the market. MOW predicts that the European wealth management market will grow by an average of 7 per cent a year during the next 5 years, yet wealth managers continue to believe that 10-15 per cent growth can be achieved. Market growth will be hampered by population demographics and low economic growth. The ageing population is likely to increase its allocation to safer but lower margin investments, such as fixed income, which will lower traditional wealth management revenues for everyone but a few players who can offer structured derivatives. Another key issue facing wealth managers is the need for greater focus on Customer Relationship Management. According to the report, wealth managers expect 30 per cent of new assets over the next five years to come from existing clients, a number which jumps to 55 per cent if clients of a parent bank are included. Despite this, only one third of those polled has made any significant investment in CRM to understand their clients' needs and maximise the value of existing clients. What's more, most wealth managers conservatively estimate up to 20 per cent of their client base to be unprofitable, yet have few strategies to tackle this. ”Access to high quality, trusted advice remains the most significant unmet need amongst wealthy clients, with face-to-face advice remaining the preferred channel for 75-90 per cent of European clients,” said Mike Harding, managing director of MOW in London. He added: “In an industry that is driven by client relationships, wealth managers need to do more to understand the gaps between what they currently offer and what their customers will pay for.” The lack of CRM expertise is illustrated in some 50 per cent of managers having no regular and systematic approach to measuring the effectiveness of marketing and other campaigns, according to MOW. And less than 15 per cent of wealth managers apply rigorous financial evaluation to the effect of their marketing campaign on clients. According to Mercer Oliver Wyman, successful wealth managers will better align their business model with their clients' needs by:

• Employing quantitative tools to understand the utility and value of the proposition to clients
• Selectively introducing new products to the range while managing down overall complexity
• Continuing to invest in the face-to-face advisory process while supporting advisors with better tools to ensure consistency and suitability for purpose
• Understanding the contribution that the brand makes to economics

The report also looks at attitudes towards outsourcing. It reveals that outsourcing is widespread, with almost 60 per cent of wealth managers outsourcing some activity and 30 per cent outsourcing a substantial amount. There is also a growing trend towards partnerships with product providers or administrators, which allow managers to focus on their core offering. Over time, as more outsource providers emerge, wealth managers are expected to specialise more on advisory and other value-add services as a means to acquire and maintain customers. Services such as product manufacture, as well as client and fund administration will be outsourced. The report concludes that the main “winners” over the coming years will be: Private banks that are part of larger banks, reflecting the importance of retail feeder channels and scale; Independent financial advisors who naturally focus on the advice element and tend already to have virtual business models. It also predicted that weaker performers are likely to include : Retail banks, who have less of a compelling offer to this market segment; Insurance companies; and Stockbrokers, reflecting equity market uncertainty in 2004 and drops in client demand for pure brokerage.