The Management Factor
By Steve Klinkerman
It will take more than a stock market rally to revive all of the players in wealth management.
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The U.S. stock market upswing that began in the spring of 2003 brought hope to a lot of people in the wealth management business, and it's easy to see why. Between 1999 and 2002, global revenues in this business declined by 25.4%, or $120 billion, according to Boston Consulting Group, while North American players took a revenue hit of 30%, or $55 billion.
The prospect of recovering some of that lost ground is enticing. Unfortunately, it may not be safe to assume that a rising tide will lift all boats.
A Wall Street rebound is especially important to the many banking companies that made trophy acquisitions of investment management companies at the top of the market. Acquirers were eager for revenue diversification and presence in a business seemingly destined to flourish as Baby Boomers entered their peak earning and investment years. Not only did the market turn against them, but the business combinations themselves proved problematic.
Now, even as renewed hopes are being pinned on a market rally, evidence is surfacing that the quality of management, not strictly the direction of the market, often makes the difference in competition. In its annual survey and analysis of the wealth management business, for example, BCG found strong performers in all major global markets in the depressed year of 2002. Some North American commission-based players racked up pretax margins exceeding 20%; some fee-based players topped 40%. "Even in a devastating market, institutions can thrive," say the BCG authors.
Factors that have caused some players to lag the field in a bear market can also hold them back in a rally — things like ill-defined markets, misaligned capabilities and sub-par relationship management. That is why the banks that are relative newcomers to this business can't pin their fortunes solely on a strong market. To position themselves for long-term success, they need to go beyond the mechanics of absorbing their investment management acquisitions and focus on transforming their approach to the customer.
Recent work by BAI Research and Cambridge Group shows that the brand imagery of banks has a somewhat limited appeal to high-end customers for asset management services, raising the question of targeting. By now, the various competitors should have completed extensive studies showing the prime customer segments for their expanded offerings; identified differentiating factors in their operations and market positioning; and created product packages that capitalize on those insights. But it has been hard to keep such initiatives high on the priority list when the market was tanking and deposit relationships were taking center stage.
Then there is the question of whether the banks that have bulked up in the wealth management business have mastered the critical relationship dynamics. The interplay between corporations and commercial bankers is part of the cultural DNA of banks; the dynamic between relationship managers and investment clients needs to reach the same level if banks are to achieve top-flight results in wealth management. This is underscored by BCG findings that relationship managers at top-tier institutions generate over 50% more revenue than the average, plus they experience less than half of the client attrition sustained by other groups and do a great job of winning new business to boot.
To be sure, one encouragement for acquirers lies with the advantage to be had from efficiency. Boston Consulting Group found that top-tier performers in wealth management had noticeably leaner operating expense ratios in their front, middle and back offices. That's good news for the banks that have been able to successfully apply their knowledge about merger-driven consolidation to their investment management acquisitions.
There's a lot more to success in wealth management than controlling expenses, however, as likely will be further demonstrated when the stock market regains its form.
Mr. Klinkerman is editor-in-chief of Banking Strategies.