Wealth Management by the Numbers

There are sound reasons why midsized and large banks want to stake a claim to the wealth management business. Wealth management is, overall, not capital-intensive, the cost of entry or expansion is low and much of the revenue is recurring with attractive margins. Such services are valuable for capturing and keeping the bank’s best customers – high-net-worth individuals who have many financial needs and therefore potentially high cross-sell ratios.

The service model can be deployed around a custom “storefront” consisting of securities sales, investment management, private banking and fiduciary services. And rather than build everything in house, banks have access to a wide array of wealth management services and products, with little or no start-up and product development costs.

It’s not all clear sailing, however. The U.S. market is contracting and getting more crowded with providers. As global ownership or distribution of wealth assets has shifted to strengthening regional markets, e.g. Asia, Central and South America, growth in U.S. wealth management markets has flattened out in response to the weak U.S. economy, low investment returns and the certainty of higher taxes. At the same time, non-bank providers have multiplied as more and more registered investment advisors (RIAs) set up shop and brokerage firms continue to staff up to serve “boomers” and their progeny.

So, while U.S. banks may be gaining wealth management assets, they’re doing it more slowly now and mostly by default, not strategy. Often lacking sufficient market research and quantifiable data, they sometimes become more focused on what they have to sell rather than what customers need and want, thus losing market share to RIAs. Sometimes they are held back by a lack of strategic and creative leadership, deferring instead to strategies that worked in different times.

How can your bank navigate through these challenges while building a profitable, sustainable wealth management line of business? By founding it on two key strategies: know your competition more intimately than you ever thought necessary, and understand fees and account profitability to the same intense degree.

Competitive Strengths

In a contracting and highly competitive market, it’s more essential than ever to know what you’re up against. Providers vary widely on issues that matter to high-net-worth customers. Some have superior products but their service might be lacking. Some make up in great service for products that may lack significant differentiation. Some have a model that enables them to underprice their competitors.

So the critical question is: where is your competitive advantage, or where can you improve to create one? While it’s unrealistic to lead in all areas, the market is too competitive for you to hope to succeed without one.

As you assess your relative competitive standing, the first challenge is to make your analysis unbiased. Start first with any information available from external studies, squelching any natural inclination to root for the home team. Accept any third-party criticisms as potentially constructive. Be sure to cast your net wide enough to take in all the components that might constitute a competitive advantage. Customers are notorious for having their own reasons for choosing providers, not what providers might expect; they are not obliged to be rational, but often make their decisions on emotional and seemingly arbitrary reasons. Dig deep to find those reasons.

Of course you’ll collect competitors’ marketing materials, fee schedules, and other data, and have your marketing and pricing people examine them carefully and comment, but don’t limit your assessment to products and pricing. What service platforms do competitors use and what can you learn about how those platforms satisfy customers? How do they onboard customers – an area that is often vulnerable to missteps? How do they communicate with customers?

Compare what you find to your own tools and practices. Where are you significantly outclassed – and can you catch up? Where are you already outperforming competitors and can you hold that advantage?

Remember, the point of this assessment is to learn in order to avoid competitive pitfalls so the value is often in the surprises revealed. It’s fair to say that if your competitive assessment doesn’t hold a surprise or two for you, you might have missed something important. Your competitors are, after all, competing against you, so it’s crucial that you remain as objective as possible, open to being surprised.

Expand your view of the competition with personal shops. Personal shops are especially revealing as they come as close as anything to reflecting what customers actually experience with you and your competitors. Be prepared to pursue any shortcomings they reveal, even when they are anecdotal.

Rationalizing Fees

In pricing their loan and deposit services, banks are accustomed to weighing the competing needs of their balance sheets, their customers’ pricing sensitivities and what “the market” permits. But when it comes to fees for trust, brokerage, and asset management services, a different mindset prevails. There, institutions often set prices at whatever level it takes to get assets in the front door.

That might be called an “easy way out” because it essentially makes the customer’s decision a pricing decision – a default decision. But it’s hardly sound business practice and often results in a scrambled mess of fees. Does your bank have that history? Do you have to extricate your pricing structure from that kind of decisioning?

If so, step one is to rationalize fees according to traditional factors: balance sheet needs, customer sensitivities and competitive pricing. Step two is to gain a thorough understanding of profitability at the account level. Which accounts are profitable, and which are not – and what accounts for the difference? What unintentional incentives have you put in place with a “default” pricing mechanism? Once you understand profitability at the account level, you have the information you need to make informed decisions about current and future pricing, products, work flow processing, account loads and technology and systems.

Technology advances offer significant opportunity to finesse your strategy and establish competitive capabilities. Technology can be used to leverage account service, work flow processing, and transaction time as well as improve customer service. It can also enable customers to take charge of certain types of transactions (cash transfers and bill paying) rather than go through a third party, creating convenience for the customer and lower administrative costs for the bank. Customers can also have access to certain research and investment tools, which enable them to “participate” meaningfully in the setting of investment and account strategy. Here again, many high-net-worth customers like the idea of being the “CEO” who can make informed decisions based on information from trusted advisors.

This fee and account profitability analysis takes time, as does implementing any changes indicated, but the time is well worth it. Consider the pitfalls it prevents: offending current customers with undesirable pricing changes, onboarding new customers at pricing levels that are unsustainably unprofitable and exposing your pricing model to competitors who can take advantage before you adjust.

Finally, once your wealth management unit is chugging along, never rest on your laurels. Keep your eye on your competition’s initiatives and keep modeling fees and account profitability in order to sustain a rapidly growing and healthy business.

Mr. Baker is managing partner of Atlanta-based Bank Solutions Group LLC. He can be reached at [email protected].