Creating A Winning Strategy for Wealth Management Firms
Contributed by Anand Chandramouli, Durgesh Patel, Dheeraj Toshniwal
New customers, technologies and regulations will test U.S. wealth management firms. The industry needs to make some fundamental changes to its business and operating models to achieve long-term competitive advantage.
The 450,000 financial advisors in the U.S. wealth management industry are facing a loss of trust, increased regulatory and client demands, shrinking assets and profitability and a ballooning cost base. To succeed, they must change their operating models and technologies.
Winds of change
- Demographics: The Generation X and millennial (Gen Y) population are making up a greater share of the wealth management market. They are more technology savvy and proactive with investment management, and demand greater transparency in wealth management, than previous generations. Successful advisors will reshape their client acquisition, advisory and engagement practices to meet their needs.
- Regulation: The historic practice of shielding assets from taxes through offshore banking is under intense scrutiny from revenue-hungry governments. UBS, for example, paid $780 million in fines and released account details of more than 4,000 U.S. clients to the Department of Justice, prompting 14,700 individuals to voluntarily disclose secret accounts to avoid possible prosecution. Invigorated by this success, we anticipate governments around the world to tighten the screws on tax evasion.
- Consolidation: Increasing regulatory costs, falling margins, increased customer demands and declining profitability is spurring consolidation that has shifted more than $3 trillion of client assets to the control of three major players. Profit margins continue shrinking as banks find it hard to sell complex but high-margin structured products. With profitability unlikely to return to pre-crisis levels soon, many small- and medium-sized private banks may look to reduce costs through mergers.
- Changing Client Preferences: The recent financial crisis has caused clients to avoid costly, illiquid products in favor of more traditional, transparent, liquidity-oriented products that offer steady if low returns. However, as interest rates remain near zero worldwide, yield-hungry, high-net worth individuals still have an interest in structured products in their quest for alpha. Now, though, they demand transparency and a level of service that was neglected during the credit boom.
Strategies to Bolster Long-Run Competitive Advantage
To win in this changed market, wealth managers must achieve four goals. First, they must bridge the trust deficit by serving clients in a transparent and cost-efficient manner. Second, they must rein in expenses by building a flexible, scalable business with a variable cost base. Third, they must strengthen their long-term competitive advantage based on a business model led by service excellence. Finally, they must maintain the highest possible reputation and integrity through a world-class compliance system.
Bridging the Trust Deficit
To achieve sustainable growth, successful wealth managers will opt for process innovation and
service excellence over product innovation. Like other retail businesses, the ability to identify and execute process innovation and service excellence will widen the competitive moat of wealth managers. We foresee the industry embracing the principles of Six Sigma and Lean to industrialize
wealth management services and create sustainable longer-term competitive advantage.
Rein in Expenses
Beyond the obvious labor arbitrage benefits, most wealth management firms seek strategic benefits by outsourcing non-core operations to free scarce internal resources for core business activities and to variabilize their cost structure. Third-party service providers are responding with applications and infrastructure services delivered with optimal cost-efficiency and operational flexibility. The automation of low-value tasks also helps reduce costs.
During the credit boom, wealth managers increased margins and growth through product innovation. However, this led to a vicious cycle of cost spikes driven by indiscriminate customization, heightened sales support and the need for complex support infrastructure. A focus on process and service excellence emphasizes simpler, faster, cheaper and better service delivery. It is best served by an “open architecture” platform that offers best-in-class products (both proprietary and third-party) to clients. Two areas of opportunity are improved client portals to meet the needs of younger customers, and enhanced internal collaboration tools to improve advisor productivity.
Maintain Reputation and Integrity
Governments and tax-hungry treasuries worldwide are cracking down on fraud, tax evasion and money laundering. To keep their reputations intact, successful wealth managers will engrain the compliance culture as part of their organizational DNA. Banks are investing in highly flexible yet fully integrated systems to bolster Know Your Customer (KYC) and Anti-Money Laundering (AML) programs. needs.
The Road Ahead
In a post-crisis world service excellence, cost reduction, and rebuilding trust are tall order, but not impossible. Learn more about adapting to this changed world in Key Elements of a Winning Wealth Management Strategy and about Cognizant's services for the Asset and Wealth Management industry.