A new paper from the Boston Consulting Group warns that Covid-19 is a ‘wake-up call’ for the wealth management industry, reports Arun Kakar
The coronavirus pandemic is a ‘wake-up call’ for the wealth management industry, and many wealth managers are ‘unprepared’ to weather the storm, according to a new paper from the Boston Consulting Group.
While the firm notes that it is ‘impossible’ to assess the impact for the pandemic, it says that wealthy individuals will hold between 35-40 per cent of their assets in equity and related instruments and that the wealth of clients has primarily been affected by stock markets. The S&P, for example, lost more than 30 per cent of its value in a single month and volatility levels are at a level that has not been seen since the financial crisis 12 years ago.
Despite this crisis coming at the end of a record ten-year bull run, the firm says that wealth managers’ profits in absolute terms are still some way behind pre-crisis levels. In 2018, the industry’s cost-income ratio was 77 per cent, some 17 per cent higher than 2007. This means that the average firm has a reduced ability to absorb shocks.
‘As wealth managers are operating with smaller margins than before the global financial crisis, they are in a worse position to absorb revenue declines through falling stock markets,’ Anna Zakrzewski, a managing partner at the firm and co-author of the paper tells Spear’s. ‘Wealth managers have also moved away from a brokerage model with mainly commission income to asset-based fees, so if the asset base decreases, their revenues are hurt.’
In order to manage these sinking revenues, firms have cut costs and introduced ‘efficiency measures’, leaving less room for structural cost reductions Zakrzewski explains. This is exacerbated by a large part of their offering being ‘commoditised’: the value of what clients are willing to pay for is much harder for wealth managers to deliver.
‘Their operating models are complex and rigid; some digitization efforts have started, however a lot has gone into the front/client interfaces and little across the rest of the whole value chain in order to make the models and processes more scalable and efficient,’ Zakrzewski tells Spear’s.
Several wealth managers have also failed to invest enough in ‘future proofing’ their business model, particularly with regard to aspects of their practice such as digitalisation, she adds.
‘Many are currently in the middle of the transformation digital journey, and will need to accelerate to come out stronger in the mid to longer term.’
Indeed, the firm warns that if markets fail to recover with speed, ‘major revenue shortfalls’ are on the horizon. For instance, the industry profit pool was reduced by 44 per cent from 2007-09 – things are looking similarly bleak in recent times for short-term profitability.
It might sound like a damning assessment of the state of the industry, but the firm claims that this current situation provides wealth managers with a ‘once in a decade’ opportunity to offer ‘genuine differentiation’ and strengthen their trust with clients.
According to Zakrzewski, wealth managers can be ‘even closer by the client’s side’ and the crisis will accelerate a change in the role of relationship managers too. Technology, data and advance planning can be leveraged by firms to develop what the paper calls an ‘institutionalised, systematic and scalable response’.
‘Frequent and tailored communication is key to strengthening relationships and building trust,’ says Zakrzewski. ‘At the same time, timeliness and speed is of the essence. Markets shift so fast that not being able to respond immediately will be perceived as not meeting client expectations to take care of a portfolio 24/7.’
The paper offers a number of recommendations, including the need for wealth managers to work towards a ‘truly hybrid’ model, in which a large part of client contact and services are conducted digitally.
‘Advisers and digital tools will work hand-in-hand to offer the client a seamless, highly convenient and fully tailored experience,’ Zakrzewski says. ‘Human biases and weaknesses will be largely mitigated by technology, while strong human bonds between clients and advisers will remain.’
Social distancing measures are forcing both clients and advisers to use virtual communications, and Zakrzewski predicts that many of these changes will stay in place. Much like other industries, working remotely is set to become normalised. Digital channels, previously seen as a threat, are now the only way that clients and advisers can stay in touch. Post pandemic, Zakrzewski believes that ‘old interaction models’ will be a thing of the past. This moment could prove to be an inflection point for the industry-at-large.
‘Any crisis will separate the wheat from the chaff. Wealth managers can use this opportunity to differentiate in the way they support their clients in weathering the crisis,’ says Zakrzewski. ‘We are talking about real moments of truth here.’