The vast majority of Europe’s wealth management sector expects a structural upheaval to the sector with big firms snaffling up smaller players in a consolidation drive, while regulatory and client pressures create the chance for firms to be more distinct, a survey shows.
The vast majority of Europe’s wealth management sector expects a
structural upheaval to the sector with big firms snaffling up
smaller players in a consolidation drive, while regulatory and
client pressures create the chance for firms to be more distinct,
a survey shows.
The findings came from a survey, by JP Morgan Asset Management and Oliver Wyman, called The future of European wealth management: Imperatives for Success. It outlines trends and attempts to show who will be the winners and losers.
Among the findings from in person interviews with CEOs and senior executives from 23 wealth managers across Europe, as well as an online survey of an additional 136 industry professionals were that 90 per cent of senior executives expect consolidation at a time when half of all European wealth is expected to change hands.
Some 85 per cent expect that larger players will acquire smaller players and 73 per cent expect some form of consolidation, the survey shows. Meanwhile, the next generation of clients is emerging as wealth is created in new industries and a peak transition of wealth to a younger generation occurs over the next 20-30 years. Given that Europe is home to an estimated €18 trillion of financial assets, the scale of the challenge is clear.
The prediction of M&A activity takes place as the industry has seen some consolidation already, such as the recently completed purchase by ABN AMRO of the private banking operations in Germany of Credit Suisse, or Julius Baer's completed acquisition of the non-US arm of Bank of America's wealth business. But it is also often noted that predictions of a "wave of consolidation" have never quite come to pass and that the European sector remains highly fragmented.
This publication also asked Claude Kurzo, head of EMEA strategy and business development, JP Morgan Asset Management, about the report and some of its details.
Why was this report conducted - is it partly to help drive JPAM's business strategy in any specific markets and if so, which ones?
The report was conducted in order to provide European wealth managers with a peer perspective on the industry. As the European wealth management industry is undergoing fundamental change at an unprecedented pace, we wanted to assess the perspectives of a representative group of wealth managers in order to provide insights into key industry developments and the strategic imperatives required to master the challenges ahead.
A lot of consolidation is expected. For years, people have discussed this, but sometimes the outcomes don't match the M&A hype. Why is that?
Senior executives surveyed believe that consolidation will occur throughout the industry, and will be especially prevalent among smaller players. Higher fixed costs and declining revenue yields have increased the minimum scale required to achieve profitability. This may lead to smaller players merging or being acquired (73 per cent expect smaller players to merge with each other and 85 per cent of survey respondents expect large and medium-sized players to acquire smaller players).
In light of increasing regulation, wealth managers are also simplifying their business models, focusing their operations on core regions and client segments. As a result, large and medium-sized players will likely divest sub-scale businesses (73 per cent of survey respondents expect this to be the case), freeing up management and sales to focus on the regions and segments where they are best positioned.
In terms of what managers must learn, what specific lessons should they take from the rise of tech-driven platforms?
In terms of specific lessons, the most important takeaway for wealth managers is that they must embrace and fully leverage digital capabilities to successfully compete in a changing competitive landscape. In other words, it is critical for them to turn digital into a competitive advantage. For example, easy to use and high functionality platforms can help increase customer loyalty and drive trading activity. Technology can also harmonise the end-to-end user experience, ensuring that clients always have consistent access to the services and information they want across all channels. Technology also has a large role to play in increasing front-line productivity.
We expect the adoption of digital technology will:
-- Be a differentiating factor: Providing digital tools enhances the client experience and client loyalty, by improving information and product accessibility, lowering response times and minimising errors. To differentiate themselves, wealth managers can offer clients tools such as live online communication with advisors, live video chat, enhanced reporting for managed solutions, online tutorials and seminars, trade execution capabilities and simulation tools (e.g. to better understand risk). Some wealth managers are even considering how to create online social networks, such as communities of business owners. Historically, wealth managers have created these networks through in-person events, but technology can extend these relationships more widely.
-- Increase sales force effectiveness: Digital tools also support sales force productivity by making information on products, clients and markets available at any time. Relationship managers can benefit from capabilities such as automatic market monitoring to trigger alerts when individual client positions are impacted. Additionally, mobile advisor tools allow relationship managers to access client portfolios and serve clients outside of the office. Another opportunity is to utilise big data to increase sales through more targeted segmentation and proposition design. Digital can also help provide a single, integrated account view for advisors and clients, enabling both parties to always have access to the same information.
-- Improve decision-making and reduce costs: To fully capture the benefits of digital, wealth managers should deliver on opportunities to increase efficiency, automate processes, ensure data consistency and provide more accurate and timely management information. Furthermore, the increased adoption of technology is enabling some clients to become self-directed for certain types of transactions, reducing cost to serve.
-- There are many challenges to embracing new technology, such as the significant investment required to deliver a seamless client experience. Additionally, the fast pace of change raises concerns that specific investments could be out of date by the time they are implemented. Despite these challenges, to remain competitive wealth managers must adopt a long-term strategic view and fully embrace digital.
Are there specific ideas on how to improve op. efficiency and productivity?
Our findings suggest that wealth managers need to boost front-line productivity and operational efficiency to address industry-wide cost increases and declining revenue yields. Survey respondents expect approximately 9 per cent growth in AuM per annum over the next five years (significantly higher than our projections of nearly 5 per cent pa), converting into 7 per cent growth per annum in both revenue and profitability. In order to capture this growth, 49 per cent of respondents are planning to hire front-line staff, and 32 per cent are expecting to hire product staff. Wealth managers will need to ensure that these new hires are given the tools and training that will maximise their productivity. This hiring comes at a time when 68 per cent of respondents also said that they are concerned or very concerned about costs. Wealth managers will simultaneously need to deliver operational and cost efficiencies.
Reflecting this, 34 per cent of respondents expect to reduce middle-office headcount and 45 per cent expect to reduce back-office headcount.
Based on our interviews, we have identified a number of ways that executives are planning to increase frontline productivity and operational effectiveness:
-- Client-facing activities: Leverage external research and product experts (potentially, provided by asset managers), promote use of digital channels and shift “satellite” portfolios to advisory mandates.
-- Research: Centralise the investment process, set up efficient, repeatable processes around the production “client-ready” investment packages and, again, leverage external research experts.
-- Administration and compliance: Increase the amount time relationship managers spend with clients by automating and outsourcing non-essential tasks, setting up execution desks for trades and transactions and embedding compliance members in teams to run due-diligence processes.
Do you have views on how wealth/asset managers can deepen and improve their relationships? What practical things should firms do?
A strong partnership between wealth managers and asset managers is crucial for success for both parties. Based on survey results, we expect wealth manager to pursue fewer, but more strategic relationships with third-party asset managers. Deepening these relationships will allow both parties to extract greater value. There are a number of ways in which asset managers can help investment managers upgrade their advisory and investment propositions, for example:
-- Portfolio construction: Wealth managers can work with asset managers to build portfolios that deliver specific outcomes, such as income for retirement
-- Capital markets expertise: Asset managers can provide proprietary research and capital markets insights to help wealth managers enhance their advisory process, making it “content rich”
-- Evaluating the product palette: Asset managers can help wealth managers understand where they are over/underweight in terms of product offering, based on their “house view” and what they see from other wealth managers.
-- Customised product development: For large opportunities, asset managers and wealth managers can jointly develop products, perhaps with an exclusive sales agreement for a pre-determined period.
-- Innovative structures: Asset managers can construct product structures for wealth managers that address or adapt to industry changes; for example, retrocession-free share classes and master-feeder capabilities.
-- Training and thought leadership: Asset managers can share expertise, for example, by helping to incorporate capital markets insights into relationship management, addressing regulatory requirements and supporting balance sheet management.