Wealth managers' profitability slid an astounding 69% in 2001, battered by the shaky global markets, which cost investors more than $2.9 trillion, or 4.4% of the total value of global investment assets.
The numbers, reported by Boston Consulting Group, are based on research from more than 60 global wealth managers, including seven of the top 10. The providers have total assets under management of more than $3 trillion.
Surprisingly, wealth managers and private bankers did little in 2001 to address their costs and failed to focus sufficiently on their most valuable customers, according to the Boston-based firm. "After a year of widespread wealth destruction, wealth managers have been slow to respond to market conditions," warned Bruce M. Holley, one of the report's three authors.
Bank-based wealth managers, predominantly fee-based providers, weathered the economic storm better than their commission-based competitors, he said in an interview. "The fee-based model outperformed the commission-based model in terms of revenue. On average, you see about a 35% pre-tax margin for fee-based providers and a 1% margin for commission-based organizations.""
Europe's woes were even worse, where profits declined 34%, as survey participants witnessed revenue drop 14%. Surprisingly, profits in the Asia-Pacific region grew an impressive 15%, buoyed by some top performers, although Holley declined to name names.
Rigorous performance measurement and cost management were essential watchwords for participants this year. Another key issue was banks' renewed focus on targeted markets, ensuring that their service models really are aligned with their chosen clients. Banks also relearned a bottom-line requirement: Advice is king.
"Investors want it all," Holley said. "And wealthy clients are becoming even more demanding."
Not surprisingly, U.S. equity holdings slipped $550 billion in 2001, while money market holdings rose $440 billion [see related story, page 7]. "Nervous investors - particularly those with more moderate holdings - are becoming more conservative," the authors wrote. "Despite this increase in investor conservatism, alternative investments--particularly hedge funds--are growing and have a long-term role in the wealth management industry."
Meanwhile, average wealth management costs edged up slightly, or about 1% by best estimates, for North American and European providers, as expenses rose. Those costs included hikes in operations, up 2%; technology, up 1%; and marketing and other expenses, up 5%. The importance of cost management reigned as one of the report's most prominent themes, and Holley warned that investment firms need to invest in sufficient technology to track those costs.
The game among wealth managers has changed dramatically in the last few years. "Until 2-1/2 years ago, you could put a shingle out and get assets," Holley said. "There was a lot of wealth being created, so wealth was looking for investment advice. It was easy to win. You didn't really have to compete."