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The wealth management value proposition needs reinventing

A staff reporter

13 February 2005

Wealth managers need to reappraise their core value proposition before embarking on another round of cost reductions, argues Michael Maslinski, director of Maslinski & Co, a strategic marketing consultancy to the wealth management sector. His article follows. A recent report in the London Evening Standard has argued that our investment banks need to reinvent themselves if they are to survive, rather than tinkering at the edges of cost structures while waiting for the next bull market. Very much the same arguments apply to many of our private banks and wealth managers, in that the cost of the services they deliver too frequently exceeds the value received by the client. This disparity was only sustainable in exceptionally buoyant market conditions, which are unlikely to return. With so much focus on cutting costs, which in many cases spiralled out of control during the boom years, insufficient attention is being paid by wealth managers to the other side of the equation: the added value which they deliver. In truth, cost and value are inextricably connected and you cannot tackle one without the other. Surveys point to need for fundamental reappraisal Indeed, the evidence of numerous independent surveys strongly suggests that wealth managers currently commit far too much resource to activities which are of little worth to their clients, while often failing to satisfy their core requirements. Sadly, such surveys have generally received only passing attention from wealth management institutions — the only external survey which has been consistently well received is not a survey of clients or introducers, but the PwC survey of the private banks' own chief executives! There are, in fact, some powerful messages coming through from these surveys and some very consistent themes which private banks and wealth managers will ignore at their peril, unless they are able to produce contrary evidence from their own research. Low-cost IFAs more credible as wealth managers For example, most private banks invested heavily over the last decade in developing broadly based wealth management relationships with their clients, but even in the midst of the boom, this strategy apparently enjoyed limited credibility, largely because banks failed to deliver what they promised. Few clients were convinced by the efforts of private banks to position themselves as trusted advisors, rather than product salesmen. In other words, for many banks, the cost of constructing a broader advisory proposition is simply not delivering commensurate value to the client. The recent Tulip survey found that most HNWIs do not believe a single institution can be the source of broadly based, impartial wealth management advice. Still more disturbing, even those who do believe in wealth management are more likely to choose an independent financial adviser than a private bank This is very bad news indeed for private banks, which claim access to a vastly superior range of expertise, products and supporting infrastructure and have for years have looked down their noses at the IFA community. Private banks, it seems, must try to understand why so many clients prefer IFAs apparently against all the odds and to what extent the additional costs and infrastructure of the private bank create additional value? Cost of client reporting not translated into value One of their biggest operational costs is performance reporting, yet feedback from my own firm's research is that it delivers reams of information, which is largely unread by clients and largely fails to achieve its purpose. Superior quality communication is at the heart of the wealth management proposition and banks have invested substantial sums in systems, but few have invested in basic client research to understand what the clients actually want so, once again, the cost of the bank's investment is not being translated into value. Rising cost of client acquisition fuelled by loss of trust Even the cost of new business acquisition has substantially increased over the last few years, according to a survey by Market Dynamics. This may, in part, be explained by the findings of another recent survey from 'Click' in the US, which points to the fact that integrity is now easily the primary factor in choosing a wealth manager, displacing investment performance from the number-one spot. The implication that many wealth managers are not trusted by clients undermines the core value of the service they offer and it is hardly surprising that new business is costly to recruit. Unwinding the vicious circle The rebuilding of trust must now take centre stage, alongside cost cutting, service enhancement and extension of the product range. Delivering greater value at lower cost always sounds an impossible task, but it is a juggling act that has been achieved in other hard-pressed sectors by fundamentally re-examining the client proposition. It means unwinding a vicious circle, driven by excessive costs which, in turn, lead to over-pricing and excessive pressure on relationship managers to sell in-house products, while cutting too many corners in delivering the services the client really values. In other words, the cost base is driving a process which undermines the confidence and trust of the clients, thus making it more difficult to sell and driving up the cost of new business acquisition. The process of cutting costs generally falls into several distinct phases: cutting out surplus fat which has arisen in the good times improving operational efficiency reducing capacity to reflect reduced volumes cutting back peripheral services withdrawing or outsourcing unprofitable product/service lines fundamentally redesigning the business model (e.g., moving out of manufacture) Most private banks are well into this process, and many are on course to achieve efficiency savings of 25 per cent or more. However, few have yet to confront the central strategic problem which will have to be tackled sooner or later. Too many of their products are unprofitable, because the wish to expand their in-house product range has taken them into product areas in which they lack expertise and have no hope of acquiring critical mass. The cost of these operations has been borne by overpricing the fund management and banking services, which have themselves come under cost pressures as a result. A successful cost-cutting exercise will start by achieving a better understanding of what clients actually want, rather than what we have been trying to sell them, and which activities the client values to an extent which justifies the cost. It will also try to understand why so many clients prefer to buy wealth management from small boutiques and independent financial advisers, rather than large institutions. It will analyse the business model of such boutiques and in particular their cost base, relative to revenues. Larger institutions will only be able to compete in the long term if additional cost burdens are reflected in real value to the clients.