Last year's stock and bond losses ate away from wealth management firms' profits worldwide, presenting ample reasons for rethinking the business, according to Boston Consulting Group.
While the securities have regained some of that lost value during the first half of this year, the
In response, Boston's report offered financial advisors and other wealth management executives eight potential ideas to increase revenue or cut costs. The firm's suggestions are summarized below.
"Although profit margins have been eroding for years, players could generally count on seemingly ever-growing financial markets and subsequent rising client business volumes — a measure that includes not only [assets under management] but also loans," the report said. "But the rare combination of declining bond markets (owing to rising interest rates) and declining equity markets in 2022 has had a sizable impact on wealth managers' performance."
[SCROLL DOWN TO SEE BOSTON'S EIGHT RECOMMENDATIONS]
The key numbers from the report displaying worldwide wealth trends include:
- Global financial wealth will come back up in 2023 by an estimated 5% to $267 trillion.
- Despite the downturn, "cross-border wealth" climbed by 5% in 2022 to $12 trillion.
- Client business volumes tumbled by 13% in North America in 2022.
- Pretax profit margins in North America fell by 3.1 basis points in 2022.
Registered investment advisory firms that work with operations expert Cameo Roberson's firm,
Results from overhauling a firm's procedures — an aspect of one of Boston's strategies in light of the downturn last year — can pay off more quickly as well for the smaller firms. One of Roberson's clients made three times his investment back in one new client relationship after reviewing the steps involved with account onboarding and moving the entire process into the firm's customer relationship management software, Roberson said.
"What's most top of mind for the firms I work with is how to grow their client base (increase revenue) and making sure they have enough capacity to do so," she said. "There's often less human capital to go around at smaller firms, so leaders must think strategically around what growth looks like and what resources will they need to support it. The cost piece may be locked a bit, as it's often tied to large cost centers like staff/salaries, technology and other fixed administrative costs. Firms can begin to mitigate this with a multipronged marketing plan that generates consistent and qualified leads that increase revenue."
About 70% to 75% of advisory firms' expenses stem from payroll and other human capital costs, which means that the staff's compensation is the largest detractor from the bottom line, according to Shauna Mace,
Organic growth, rather than the more capital-heavy M&A and advisor recruiting means of expansion, has been "really tough for a lot of firms," she noted in an interview. They could also find areas to cut their expenses by giving their custodial and key vendor relationships a fresh review for potential changes and harness more growth in the future by establishing specific goals and tying them to compensation, Mace said.
"If you are able to grow consistently regardless of the market, generally you should be OK," she said. "Most advisors will generally need to grow by 4% to 6% each year just to cover distributions and lost clients. … You're going to at least have to grow by around 5%. A lot of firms aren't even doing that. You really want to be like, 'How do we grow at a 10%-plus rate?'"
Scroll down the slideshow to see Boston Consulting Group's ideas for wealth management firms seeking to ramp up revenue while reducing costs. For a look at the latest numbers tracking the number and size of registered investment advisory firms in the U.S.,
Note: The below potential growth and cost savings levers apply to wealth management firms worldwide, not just those in the U.S. The ideas and quotes come from Boston Consulting Group's report last month, "
