World Wealth Report 2012 Spotlight

7/29/2019 World Wealth Report 2012 Spotlight

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World Wealth Report

2012

Excerptfromthe2012WorldWealthReport

WealthManagementFirmsLooktoScalable

BusinessModelstoDriveProfitableGrowthand

BolsterClient-AdvisorRelationships


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2012 WORLD WEALTH REPORT26

14 See Wod Weth repot 2011 Spotight, Weth Mngement fims Cn leege Entepise vue to Bette addess HNWIs Compex Post-Cisis Needs

ELEvAtED CoSt-to-INCoMERAtIo toPS LISt oF

FUNDAMENtAL CHALLENGESto WEALtH MANAGEMENtBUSINESS MoDELS toDAy

Wealth manaement is an inherently attractivebusiness, larely because it is a stable enerator of

cash, and requires relatively little capital. Its clientand asset bases also seem to expand naturally andcontinually, iven risin levels of lobal prosperity.For some firms, wealth manaement can also be animportant door-opener to other business lines(such as investment bankin14). And the client poolis seen as relatively resilient, because HNWIs havedeeper pockets and access to more sophisticatedand timely advice than the averae investor, sothey are theoretically armed better to ride outmarket f luctuations.

That said, these favorable dynamics have yet to fullydeliver the benefits many firms have envisaed. Forexample, while capital requirements are relatively lowin wealth manaement, the recent returns on equityare also lowestimated to be in the sinle diitslobally. Also, firms have found it harder thanexpected to achieve and leverae scale in theiroperations, as evidenced in recent years by thepull-out of lare firms from sub-scale operations,especially in emerin markets.

These setbacks are also a ref lection, thouh, of the

challenin operatin conditions. Widespread andsinificant chanes are under way in the wealthmanaement industry. These shifts include thepost-crisis tendency of investors to opt for productsthat minimize risk and preserve capital, and thepersistent weakness in economic rowth in maturemarkets. Slow rowth has kept interest rates low inmany markets as overnments seek to offset theeffects of the lobal slowdown. Reulation has alsobecome more strinent, makin risk manaement

While wealh managemen has fundamenal

srenghs as a business, css hae risen faser

han he grwh in reenues in recen ears, so

the imperative for wealth management firms now is

to chart a course to profitable AuM growth, while

bolstering the client-advisor relationships that are the

lynchpin of their business.

Challenges her han css are als cnerging

reshape he wealh managemen indusr.Firms have a degree of control over some of these

developments, such as diminished client and advisor

loyalty, but less control over more systemic and

structural trends, including the post-crisis backlash

against the financial services industry, rising

competition, greater regulatory scrutiny, heightened

market volatility, and increasing diversity in the

worlds HNWI population.

Man firms will need rehink heir business

mdels deal effeciel wih he new indusr

landscape, and ercme cnsrains impsed

b preius decisins and assumpins. In theprocess, firms will need to re-focus on core

competencies, shore up client trust, bolster client-

advisor relationships, improve client-segmentation

models, and analyze new market opportunities

through the prism of changed external realties. This

will also require senior management to be focused

and proactive, yet flexible, in steering the firms

re-orientation, which is likely to include numerous

other imperatives, from executing digital-technology

strategies to managing an ageing advisor workforce.

Firms ha can idenif, leerage, and embed

scalabili leers in heir business mdels will be

better able to drive client AuM growth at relatively

lower cost, while maintaining high levels of client

satisfaction. Different firms will prioritize different

scalability levers, depending on factors such as core

competencies and overall business strategy, but

critical for most will be levers around client

segmentation and true scalability-driven

acquisitions.

Spotlight

Wealth Manaement Firms Look to Scalable BusinessModels to Drive Profitable AuM growth and BolsterClient-Advisor Relationships


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272012 WORLD WEALTH REPORT

SPotlIGHt 2012

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the Scp i P ne ship Pi e Bnking Bench mk, 2009 nd 2 01116 See Wd Weh rep 2011 Spigh, Weh Mngemen fims Cn leege Enepise vue Bee addess HNWIs Cmpex Ps-Cisis Needs

even more complex, and potentially jeopardizin thefuture of certain revenue streams for some financialservices firms.

As these forces coalesce, many wealth manaementbusiness models are bucklin under the pressure, unable

to adapt quickly or effectively enouh to position firmsfor sustained success.

The issue of profitable AuM rowth is a critical case inpoint. Industry estimates suest that while total AuMhas rown since 2008 (after a sinificant decline thatyear), the costs associated with manain those assetshave risen faster than the rowth in income. The cost-to-income ratio of the lobal wealth manaement industrystood at 79.8% in 2010, up from 63.7% in 200715 (seeFiure 15), reflectin a consistently risin cost trend.And that trend is clearly exacerbated by the inability of

firms to enerate sinificant fees when interest rates arelow and investors are favorin capital-preservationproducts. To improve overall profitability, then, firmsneed to find new and sustainable ways to control andreduce their costs while rowin AuM.

gains in total AuM at some firms also reflect anotherindustry trendbrinin brokerae and insurancebusinesses under the wealth manaement brand umbrella.These strateies aim to provide a more comprehensiveand holistic proposition for clients, but have pooled AuM

without necessari ly rationalizin the underlyin costs.Similarly, private bankin now offers many mainstreamretail bankin products, such as time deposits, whichboost industry AuM but rarely enerate much marin.

And even as profit marins are bein eroded, risin levels

of advisor remuneration make it expensive to acquire andretain successful advisors (who, of course, are key tobrinin in and manain clients and assets). Other costsare also hih, with expensive real estate locations, andhih technoloy and reulatory compliance costs alltakin their toll on the bottom line.

While many firms face risin cost-to-income ratios, theymust also manae numerous other forces at play. Forinstance, both client trust and advisor loyalty have beenundermined by the financial crisis and its effects. HNWIsfaith in advisors and firms is slowly bein restored,16 but

trust and confidence in reulatory bodies and institutionsremains shaken, especially as politicians and overnmentsprevaricate over tax and other market-related policies.And client trust in advisors and firms remains fraile,as it depends so heavily on investment performanceand performance is far from assured in the currentlychallenin and volatile macroeconomic and marketconditions. Advisors could also be in daner of defectinin current conditions iven there is hih demand forsuccessful advisors.

FIgURE 15. Assets under Management (AuM) and Cost-to-Income (C:I) Ratio, 2007 2010

0

5

10

15

20

2010200920082007

63.7

76.879.0 79.8

Growth in

AuM 20092010 11.0%

Increase in

C:I Ratio 20092010

(in percentage points)

0.8

Assets under

Management(US$ Trillion)

Cost-to-Income

Ratio (%)

17.4

14.815.4

17.1

Cost-to-Income RatioAuM

0

20

40

60

80

Suce: Cpgemini anysis, 2012; the Scpi Pneship Pie Bnking Benchmk, 2009 nd 2011


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17

See Wod Weth repot 2011 Spotight, Weth Mngement fims Cn leege Entepise vue to Bette addess HNWIs Compex Post-Cisis Needs

The good news is that firms have some degree of controlover how they address AuM, client, and advisor issues.More diff icult to tackle are the systemic and structuraltransformational trends in the wealth managementlandscape, especially in the post-crisis years.

First of all, wealth management firms are operatingamid a widespread public backlash against the entirefinancial services industry. The loudest criticism centerson taxpayer-funded bailouts, and industry practices suchas perceived conflicts of interest and executive bonuses.Still, all firms have to work harder to drive client andadvisor loyalty amid perceptions that the financialindustry puts profits before clients.

This backlash has been coupled with greater regulatoryoversight and scrutiny. The aim of regulators has been toreduce systemic risk, and protect individual investors.

The result for firms, however, has been higher costsinthe form of both increased compliance and indirecteconomic effects. For example, some regulatory measureshave affected funding costs, and some are even targetingbusiness models. The U.K.s Retail Distribution Review,for one, is designed to improve transparency and reducefees, but essentially shifts the industry income structurefrom a primarily commission-based approach to a morefee-based approach.

At the same time, the markets themselves have beenhighly volatile since the f inancial crisis, and uncertaineconomic and political conditions have complicatedinvestor strategies even more. With heightened volatilityeven in traditional safe-haven investments such as gold,and a high level of correlation between asset classes, it hasbecome especially difficult since the crisis for wealthmanagement firms to develop effective diversificationstrategies, and provide appropriate holistic wealthmanagement advice to HNW clients.

Even before the financial crisis, however, financialmarkets had started to display far shorter cycles than had

been typical before the year 2000 (see Figure 16). Thissuggests wealth management firms must be ableas therule, and not the exceptionto guide their clientssuccessfully through more periods of higher volatility, andshort, unpredictable bull and bear cycles. This could be aparticular challenge for firms that have built businessmodels directly tied to market performance (especially incommission-based systems). These models assumeup-cycles will occur consistently, thus providing firmswith an extended period in which to accumulate the trust

of HNW clients, along with greater incomes, when timesare good. Firms now need to adjust to a new normal inwhich they must find ways to add value to the clientrelationship even when market conditions are persistentlydifficult.

The challenges just described show how the convergenceof shifts in the economic and business environment areaffecting the fundamental economics of wealthmanagement. But these are not the only changesaffecting individual firms and the industry as a whole.

For one thing, corporate structure and brand reputationcan help or hinder any wealth management businesstoday. For instance, scandals or financial losses incurredby any part of an integrated financial services f irm canreflect badly on the reputation of a wealth managementbusiness. In an integrated firm, senior management may

also become distracted from the wealth-managementbusiness by problems in other areas of the firm.

Parental structure can also influence the types ofproducts a wealth management firm makes available toits clients. For example, a wealth management firm withinvestment bank ownership might favor moreinstitutional products (the parents specialty). A retailbank legacy might produce a greater focus on productslinked to the parents retail banking offerings.

The wealth management industry as a whole is alsofacing both consolidation and new competition, asplayers jockey to capture relatively dependable, fee-basedrevenue streams. These revenues offer a critical boost topre-tax margins, which have been declining gradually forthe past few years, though they have been more resilientand dependable in wealth management than in activitiessuch as investment banking.17 Each player also needsenough AuM to operate profitably, and it can beespecially difficult for new entrants to accumulateadequate AuM when they are often battling largeand established incumbents, and less-than-friendly

regulatory environments.

In emerging markets, it is especially critical for firms tomake a reliable assessment of how much AuM is reallytargetable, given the stiff competition, and the fact thatmany of the assets are in illiquid or unmanaged pools.And increasing wallet share creates yet anotherimperative for firms: understanding the cultural andbehavioral specifics of each market in which they operate.


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The worlds population of HNWIs is increasinlydiverse, and firms can no loner hope to simply take abusiness model that works in one market and replicateit in another. Rather, firms have to make deliberateadjustments to their business models to achievesustained success in multiple locations. This meanschoosin which processes, products, and services tostandardize across the firm, and which aredifferentiators that need to be customized to individualmarket requirementseven if it increases operationalcosts and complexity.

FIRMS NEED to FIND RELEvANt

WAyS to MoDERNIzE LEGACyBUSINESS MoDELS

Todays wealth manaement business models ref lectstrateic decisions of the past, operational decisions ofthe present, and the onoin evolution in markets.The net effect, thouh, is that many firms have littleflexibility to adapt to chanin business conditionsquickly or effectively enouh. Next-eneration businessmodels will need to overcome that weakness.

Firms May Need to Rethink Prior

Strategic DecisionsIn lookin for ways to improve future performance, manyfirms will need to look first at how to undo the impact ofprior strateic decisions. Those effects include:

Diluted brand proposition. Many firms, pursuinambitious rowth tarets, moved away from corecompetencies in the recent past, and ended up dilutinservice levels and brand value. Ironically, this is aproblem firms have faced many times over the last fewdecades as they have souht to adapt to chaninmarket conditions. So yet aain, they will now need to

re-focus on core competencies to drive clientsatisfaction, and must consider other approaches, suchas adoptin an open architecture, to provide clients withaccess to non-core services.

Fragile client trust. Many firms focused excessively oninvestment performance in the past, without tihteninrisk manaement practices, especially in the ebullientpre-crisis years. As the financial crisis unfolded, itquickly became clear this stratey had contributed tothe contaion in markets, compoundin losses for

FIgURE 16. History of Bull and Bear Markets in the U.S., 1930 2012

0

4,000

8,000

12,000

16,000

Dow

Jones

Industrial

Average

(number)

20101930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Bear Market 20 Years Bull Market 17 Years Bear Market 16 Years Bul l Market 18 Years

Bear

Market4 Years

Bull

Market4 Years

Shortenedboom/bust

cycles

Surce: Cpgemini anysis, 2012; Yh finnce, 2012


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18

for the purposes o our anal ysis, we separate the HNWI segment into three discrete wealth bands: those with US$1 million to US$5 million in investable assets (so-called millionaires nextdoor); those with US$5 million to US$30 million (so-called mid-tier millionaires) and those with US$30 million or more (Ultra-HNWIs)

clients, confounding regulators, and causing the widelypublicized demise of counterparties and firms. Thefallout weakened client trust, and reduced thecommitment (and wallet share) of clients. If firms are togrow the AuM of existing clients, and attract clientreferrals, they will need to work on reinforcing client

trust and making it less vulnerable to market cycles.This will also bolster the ability of f irms to attract netnew money, which is critical to growing revenues whilekeeping costs low.

Diminished client-advisor interaction. In the past,many firms urged advisors to expand their client lists,assuming that more clients would mean more profits.In reality, when advisors focus aggressively onbringing in new clients, they invariably reduce thetime spent with existing clientspossibly to a pointwhere clients become dissatisf ied or mistrustful.Firms will need to discern and maintain the optimumlevel of client-advisor face time (an amount that willdiffer by client), especially as they seek to develop anintegrated channel strategy.

Inadequate focus by top management on key issues.At many f irms, a number of issues have detractedfrom the focus of top management on key businessissues. Some firms have been distracted from long-term strategy by short-term investment and othermetrics. Others have increasingly hired executivesfrom segments other than wealth management, wherethe key strategic issues may be very different. To chart

and pursue a course to sustainable growth, firms willneed a stable and experienced top management team,which understands the fundamental changes underway in the industry, and who can execute the kind ofoperating decisions needed to succeed in a margin-squeezed environment.

Vulnerabil ity to an ageing adv isor workforce. Whilethe average age of HNWIs is getting younger, thesame cannot be said of advisors. Older, successfuladvisors play a crucial role in maintaining andgrowing the existing client base, and grooming youngadvisors. However, if these tenured advisors favor

advisory methods (and technology) that do notresonate with younger HNWIs, important clientneeds could go unmet. Firms will therefore need tomap advisors to the appropriate category of clients toensure the relationships are well-matched, andperhaps develop a younger advisor workforce foryounger HNWIs to relate to.

Key Operating Practices, Including ClientSegmentation and Digital Strategies, May AlsoNeed to Be Refreshed

Certain legacy operating assumptions have also made ithard for firms to adapt to new market dynamics. A prime

example is how client segmentation has remained heavilybased on assetsfor instance classifying clients as massaffluent, wealthy, or ultra-wealthy, depending ontheir assets.18

Segmentation based purely on assets yields sub-optimalresults in both product positioning and client service, sofirms will need to be more sophisticated in theirapproaches, taking account of the growing number offactors that shape client aspirations and needsfrom age,gender, and location to risk appetite, source of wealth,product preferences, return expectations, and investmentobjectives.

Segmentation strategies will also need to take a morecomprehensive accounting of HNW assets, includingassets held at other institutions, to provide firms with amore thorough understanding of the overall needs oftheir clients. Without this kind of holistic view, firmscould inadvertently be under-serving high-potentialHNWIs. This is especially true for retail banking-wealthmanagement strategies, but applies equally to the wealthmanagement industry as a whole.

More-relevant segmentation approaches, in helping firms

to better understand client investment behavior andbiases, can help to improve client experience, optimizechannel marketing, service positioning and sales efforts,and rationalize costs.

Firms have also been slow to implement comprehensivedigital-transformation strategies, despite rising demandfrom both clients and advisors, who want more freedomto transact, interact, collaborate, and access informationin different ways.

Many firms could be more aggressively pursuing digitaladoption and transformation, but there are hurdles interms of initiating and executing such strategies, andmanaging their governance. Management inertia,security and privacy concerns, and the lack of a provenbusiness case can all stump digital transformation at theplanning stage. Execution can be undermined by a lack ofskills, IT complexity, and inadequate data/informationmanagement. Firms may also be unprepared to managethe impact on job responsibilities when activities areautomated and information is widely accessible.


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The overnance of diital transformation can also be aproblem if there is no real transformative vision, or thereis ineffective (or non-existent) coordination acrossoranizational boundaries, business units, functions,or processes.

Firms May Also Have to Re-Think LegacyAssumptions in Sizing New Opportunities

In todays operatin environment, wealth manaementfirms will also need to consider carefully whether totaret buzz markets, which are expected to be thedrivers of future HNWI rowth. If investable-wealthlevels prove to be less than expected, it wil l be diff icultfor multiple players to survive.

The experience of some firms in Asia-Pacific may offerimportant lessons learned. In an effort to arner more

AuM, and strenthen their industry positions, manywealth manaement firms have attempted to expand intokey Asia-Pacific markets in recent years, lured by rapideconomic rowth. However, levels of real investablewealth have often proved to be smaller than expected,and insufficient to sustain multiple lobal wealthmanaement firms, let alone to power rowth.

Some lobal players have already beun to sell offoperations in these smaller markets. Instead, they arefocusin on markets in which they can better utilizeoranizational capabilities so as to add more client and

shareholder value. These firms are essentially concedintheir attempts to build scalable business models wereincompatible with prevailin market conditions or theirown DNA. However, it is important to note that otherfirms may still be able to thrive in these markets (andperhaps acquire disposed assets) by leverain differentcompetencies and business models.

SCALABILIty IS KEy AS WEALtH

MANAGEMENt BUSINESS MoDELS

EvoLvE, BUt HURDLES ExISt

given the challenes facin the wealth manaementindustry, many firms are now rapplin with how best toachieve revenue rowth from new markets or productswithout addin incremental resources and costsandwhile avoidin service deradation durin expansion.This type of scalability is likely to be the earmark ofnext-eneration business models, because it betterpositions firms to naviate the chanin landscapeprofitably, and offers more flexibility to manaewhatever is the next industry shift.

In fact, a well-defined scalable business model canreinforce a virtuous circle of brand buildin andexpansion, providin an important competitive ede towealth manaement firms as they identify and pursuerowth opportunities. But scalability offers benefits,and presents challenes, at different business levels.

For instance:

At the wealth management firm level:

Business agilitycan be enhanced by speedino-to-market strateies, facilitatin market entry/expansion, and ensurin reater responsiveness toother chanes in the market environment. This canserve as a competitive differentiator.

The profit equation is improved as fixed costs arekept in check while variable costs increase at a slowerpace than the value added (at least over the mediumterm once investment returns bein). In short, firmscan serve more clients, or the same number of clientsin more ways, at lower incremental cost. However, itis also a reality for most firms that costs have lonrown in lockstep with revenue and asset bases, andmany will strule to make substantive chanes tothat paradim.

Regulatory hurdles to expansion may be spottedsooner, al lowin firms to take proactive steps toensure compliance. But scalability may also exposefirms to reulatory risk. For instance, attempts tocentralize the desin of products, or standardize

products and processes across reions, mayinadvertently create non-compliance. Restorincompliance, or creatin reional-specific exceptionsto the rules, may ultimately be more costly than a lessscalable approach.

Client and employee engagementcan et a boostfrom scalability, which allows more clients andadvisors (and other stakeholders) to be closelyenaed in the f irms processes and culture, helpinto drive their enaement in the brand.

Scale economies are an obvious and much-toutedbenefit of scalability, but at least one routeacquisitionmay not always deliver hoped-fordividends. This is because scalabil ity is not aboutabsolute size, but about the ability to enerate returnsat a lower incremental cost. Too often, acquisitionsend up merin businesses that are notcomplementary, so process complexity actuallyincreases, and firms strule to rationalize in acost-effective way.


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At the distribution level:

Client satisfaction can certainly be improvedthrouh scalability, as systems and processes can bedeployed appropriately to maintain hih service levelsdurin expansion, even without additional resources.

Advisor satisfaction can also be improvedbystreamlinin processes and technoloy to optimizeadvisor time, while providin clearer direction on thefirms value proposition.

However, the underlying business proposition isinherently relationship-based and personalized, so itis difficult to standardize in any meaninful way. Infact, standardization attempts could directly counterthe increased demand by clients for customizedsolutions related to their specific requirements.

Ultimately, then, it will probably be difficult for wealthmanaement firms to achieve scalability across the entirewealth manaement value chain (as illustrated in Fiure17), but firms can stil l selectively scale up specificactivities related to acquirin, retainin, and servicinclientswhile employin other tools to improve theproposition in areas that cannot be easily scaled.

Client Acquisition and Profiling Epitomize theChallenges of Scalability

In eneral, scalability is much more diff icult to achieve inactivities related to client acquisition and profilin thanin advisory services or wealth manaement. The nature ofthe advisory relationship creates a sinificant challene inthese two activities, as it is diff icult to secure client trustin eneral, let alone on an accelerated basis.

Indeed, the trust required to acquire clients can only bebuilt throuh multiple interactions that prove to the clientthat the advisor understands their needs, and can developand execute a customized wealth manaement strateythat reflects their priorities. Many of these interactionstake place even before the HNW client has committed tothe advisor relationship, so the effort is very much alon-term commitment to loyalty from the perspective of

both the advisor and the client.

Technoloy can facilitate the means, speed, andfrequency of communications between advisor and client(and thus improve advisor productivity), but it cannotimprove the substance of those interactions, or otherwisereplace face time spent buildin client relationships.

FIgURE 17. Wealth Management Value Chain

Source: Cpgemini anlysis, 2012

Segment

clients based

on assets,

risk profile,

age, source

of wealth,

country, etc.

Gain trust

during initial

stages of

client-advisor

relationship

development

Identify

clients

holistic

wealth

management

needs

Use know-your-

client (KYC)

forms to gain

client approval

and ensure

regulatory

compliance

Develop

comprehensive

client profile

and integrated

wealth

management

plan

Identify

solutions,

services and

jurisdictions

aligned to

client needs

Tailor

solutions

and services

based on

client needs

Implement

integrated

wealth

management

plan

Monitor client

solutions and

investments

to stay

aligned with

initial profile

Maintain

relationship

and review

evolving client

needs

Markeing Back office It LegalInfrasrucureand Suppr

Financeand Accuns

Clien Prfiling Wealh ManagemenPrvisin f Advisry ServicesClien Acquisiin

Support Functions


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As a result, the role of technoloy-led scalabil ity in clientacquisition is likely to be focused most on standardizinadvisors non-core and administrative activities so as tominimize the amount of client-relationship time lost byadvisors, and speed their administrative response times.

Client profilin is another area in which scalability ischallenin, since the business proposition mustreconize a wide rane of investin behaviors and culturalpreferences to cater to different eoraphies. Thesedisparities defy standardization, makin it difficult forfirms to build packaed wealth manaement solutionsthat can be successfully leveraed lobally.

For example, HNWIs in developed economies in Europeand North America have enerally become moreconservative in current uncertain macroeconomicconditions. Capital preservation is a top priority for theseHNWIs, while those in Latin America and Asia-Pacificexcludin Japan are more likely to consider a relativelyhiher-risk investment if the potential rewards are hih.Tradition also helps to drive different cultural investinnorms, such that old (in the form of jewelry) has lonbeen an asset class of choice for many in Asia-Pacific,while Sharia products (which adhere to Islamic bankinprinciples) are critical in many Middle Eastern markets,and Art and other collectibles remain a popular assetclass amon European HNWIs.

given the need for customization and the desire for scale,wealth manaement firms will need to create an effectiveclient sementation model by identifyin the criticalelements for each market. Then they can customize theiroperatin practices to cater to various sements. In thisway, selective scalability, enabled by technoloy, cancreate value for both the firm and the client.

tHE WAy FoRWARD:

LEvERAGING tECHNoLoGy to

ACHIEvE SELECtIvE SCALABILIty

The hurdles to scalability are far lower in providinadvisory and wealth manaement services than in client

acquisition and profil in, so wealth manaement firmswil l et most value from leverain technoloy toachieve scalability in these areas of the value chain. Thebenefits of scalability in these areas larely relate toautomation, and the expanded reach of expertise. Somefirms may also have hihly developed asset manaementcapabilities that can be used as a foundation and lead-infor buildin scale.

On the advisory side, firms can be hihly effective bycreatin back-end teams, specialized in f inancialplannin, asset allocation, estate plannin, etc., to create

customized plans for clients, based on advisor input onthe clients profile, sement, aspirations, and so on.

Similarly, firms can leverae technoloy in executinwealth manaement activities, without usin any hih-value advisor time, once the clients interated wealthmanaement plan has been desined and areed.Straiht-throuh processin systems can provide promptnotification to clients of trade execution, position, andportfolio updates, etc., preservin advisor time forstrateic conversations.

Leadin firms are already experimentin withembeddin scalability into business models, usinprocess- and stratey-based levers, as well as advisor- andclient-based initiatives. The impact of technoloy-enabled solutions differs by lever, however, makin somemore critical to success than others.


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Multi-Dimensional Client SegmentationModels and Scalability-Driven Acquisition

Approaches Are the Most Critical of theProcess- and Strategy-Based Levers

Firms will need to focus on core competencies, granular

segmentation, and higher automation to drive scalability inwealth management, but most critical (see Figure 18) are:1) adopting an effective, multi-dimensional HNW clientsegmentation model based on criteria such as asset size,risk appetite, behaviors, and financial/investment needsand goals, and 2) a more nuanced approach to acquisitions.

The current asset-based approach to segmenting clientsyields sub-optimal results, because it does not take accountof key drivers of investing behavior, such as risk appetite,and financial aspirations. Using a more multi-dimensionalapproach, firms will be better positioned to customize their

offerings, pitch strategy, and provide touch-points,according to the clients segment. This is likely to generate ahigher return on effort, more productive use of advisortime, and higher relationship-conversion and client-acquisition ratespotentially at lower cost.

It will also be critical for firms to view keenly anyacquisitions designed to drive scale, since onlycomplementary acquisitions will actually deliver growthwhile containing incremental costs. It may also bepreferable for some firms to opt for acquiring anotherfirms wealth management team (a lift-out), rather than

undertaking a fu lly f ledged corporate acquisition.

Other scalability levers offer significant potential, notablyoptimizing processes by automating back-end operations.Several back-office activities, such as those involvingregulatory fil ings, client reporting, and managementinformation systems, are repetitive and can easily beautomated. This will help to optimize cost structures byreducing manpower expenses. Additional benefits includeeliminating human error and, most importantly, ensuringtimely regulatory compliance. However, it is also importantto make sure the outputs are truly standardized as

exceptions-handling is time-consuming and costly.

Other process- and strategy-based scalability levers alsohave potential, including a deliberate focus on markets/operations that can deliver scale for profitability. However,wealth management firms will need to conduct a thoroughcost-benefit assessment to identify the point at which thescale of different geographies and operations essentiallybecomes unprofitable. (This is likely to depend, in part,on the maturity of the prevailing financial system.)

Similarly, firms will need to focus on core business(maximizing the time, energy, and resources devoted toclient advisory services), and decide when the business issub-scale for certain activities. Firms will a lso need toidentify when and how to outsource discrete activities, suchas asset management, or repetitive processes that can be

more effectively and efficiently handled by a specialistvendor. For some firms, outsourcing will preserve expertresources for core activities, and help to drive costoptimization, though firms with the requisite expertise andAuM may be able to build scale by keeping assetmanagement activities in-house.

Implementing a well-functioning enterprise-wide customerrelationship management (CRM) system can also help toease the flow of information among stakeholders,facilitating quick and efficient decision-making andimproved service at the distribution level. However, it is

important for the business and technology teams to agreeon the usability and functionality of the CRM system atthe earliest (design) stage, to ensure the buy-in, success,and ultimate applicability of such initiatives.

Notably, while the client segmentation and acquisitionlevers are the most widely applicable and critical, each ofthese scalability initiatives has considerable potential todeliver benefits, especially if firms can combine them torationalize processes while improving customer experience.

Pooling Product Specialists and Creating AdvisorTeams May Be the Most Important Advisor-BasedScalability Levers

There are also several advisor-based initiatives available towealth management firms hoping to embed scalability intheir business models, but the highest priorities are likelyto be pooling product specialists and creating advisorteams (see Figure 19).

Pools of product specialists can be responsible formaintaining a knowledge base of various investmentproducts to suit the diverse needs of HNWIs across allclient segments. These teams become a central source ofknowledge for all advisors, and thus enhance advisoreffectiveness and client satisfaction. For the firm, theseteams provide another way to share expert resources moreefficiently (and cost-effectively). Advisors are moreproductive, as they have more time to concentrate on coreadvisory activities. Clients are kept happy, and may even bebetter served, as they have access (via their advisor) to awealth of specialized knowledge.


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352012 World WEAlTH rEporT

Figure 18. Process- and Strategy-Based Scalability Levers

Surce: Caemn Anayss, 2012

Figure 19. Advisor-Based Scalability Levers

Surce: Caemn Anayss, 2012

Spotlight 2012

Oth tam-basd modls can pll toth and lvaadvsos of dffn xpnc lvls. Most cntmodls assn HNW clnts a snl, xpncd advso

(oftn bcas HNW clnts dmand t), bt thsappoach pts a pmm on xpncd advsos, andmaks t had fo fms to tlz lss-xpncdadvsos. Th tam appoach can hlp fms to tlz andoom lss xpncd advsos, wthot ndmnnth qalty of svc to clnts.

A mo manal bt nvthlss possbl soc ofscalablty nvolvs tlzn pofssonal xpts (ovndos) to mplmnt a obst hn and tann plan

fo nw advsos. Ths appoach can hlp fms to bldth tchncal and soft sklls ndd to na ffctvlywth potntal HNW clnts. Ths tann cold alsoocc thoh mnton n th tam-basd nvonmnt,bt fms cold dc manpow xpnss f thy sotsd spcalsts and vndos to fnd and poply tannw (and lss xpnsv) hs.

Lever Critical/Related Success Factors Criticality

Maximizing advisor eectiveness through sophisticated centralproduct specialist teams

Sm fw f nfrman and srn c-rdnanbeween advsrs and rduc eams

team caaby and mu-marke exer se

Creating advisor teams that include a healthy mix o experienceto cater to client needs while grooming new talent

An effecve menrn an w we-defned res snecessary ruy reare yun advsrs

Utilizing proessional expertise (or vendors) to implement arobust hiring and training plan or new advisors

Suan-based case sudes desned by successfuadvsrs can as be usefu fr rann urses

Very HighMediumNegligible HighLow


Adopting an eective HNW client segmentation modelbased on asset size, risk appetite, and fnancial/invest-ment needs

Frn-ffce semenan n servcn needs requres anaby drve servce devemen n back ffce

Srn daa manaemen caabes requred

Scalability-led ocus on acquisitions Acqusns may yed ncreased scaab y and reurnswen cmemenary

lf-us (acqurn a eam) can be benefca

Optimizing processes through automation o back-endoperations (such as regulatory flings, client reporting,and MIS)

Sandardzed uus are mran as andn excens canbe a me-cnsumn and csy acvy

Focusing on markets/operations with potential scale orproftability (and exiting other markets/operations)

Frms can k a cunres w deveed fnanca sysems frreave cs advanaes

Markes w cmemenary feaures are mran

Choosing open-architecture or managed-architectureplatorm or scalable growth (depending on frm DNA)

lare AUM sze s needed sur manaed-arcecure wereasse manaemen s dne n-use

Implement leading enterprise-wide customer relation-ship management systems (CRM)

Busness and ecny eams need aree n e usaby andfuncnay f e CRM sysem, and c-desn fr success andfuure reevance



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FIgURE 20. Client-Based Scalability Levers

Source: Cpgemini anlysis, 2012

Options Exist for Pulling Client-BasedScalability Levers

While client acquisition and profilin activities aredifficult to scale, there are certain client-based levers thatfirms can pull to increase the number of HNW clientsthey serve, at lower costs (see Fiure 20).

For example, virtual advisors and self-driven investmentportals can leverae evolvin Internet and mobilechannels, meetin demand from clients for reater choicein touch-points and diital interaction. Some leadinfirms have already started to use virtual advisorplatforms, either online or in branches, or throuhmultiple channels to overcome the shortae ofexperienced advisors. Virtual advisor platforms canenhance collaboration, improve client experience, andhelp firms to optimize costs and improve productivity.

Similarly, self-driven investment portals both improveclient experience and reduce costs. Client demand isstron for real-time insiht into portfolio balances andwealth. Some clients also prefer reater control overportfolio manaement, and Internet-based applicationscan provide a way for them to feel reater control overtheir assets, and avoid any sense that certain products arebein pushed on them. For firms, self-driven investmentportals can help to reduce staffin expenses and free upvaluable advisor time.

Importantly, thouh, several such levers arecomplementary and inter-dependent. For example, thesuccess of virtual advisors requires the firm to have asophisticated underlyin approach to sementation.Choosin and combinin levers for maximum effect willtherefore require firms to evaluate the efficacy of leversiven their own DNA and scalability strateies.

Whatever the Scalability Strategy, Strong Client-Advisor Relationships Stay Front and Center

Even as wealth manaement firms try to pursue selectivescalability in rowth, their focus remains firmly f ixed onestablishin and maintainin a robust client-advisorrelationship. Some examples:

One leading global wealth management firm optedfor selective growth, using advanced clientsegmentation. One leadin firm had successfuloperations in many reions, but was hopin to tap intothe future rowth potential of the Asia-Pacific HNWIpopulation and its wealth. Reconizin the vastdifferences in behavioral/cultural issues in differentmarkets, and their differin levels of wealth, the firmcharted a selective rowth stratey usin advancedclient-sementation techniques to decide which marketsto enter. The firm also opted to strenthen its presence

in emerin offshore bankin centers such as Sinapore(critical ateways to Asia-Pacific investments) toposition the firm better to meet the future needs ofclients and serve them profitably.

A leading financial serv ices firm in North Americabuilt a strong advisor workforce to penetrate thewealth management market. Wantin to establish amarket presence, the firm critically analyzed availabledata, and identified the importance of a loyal advisorforce to sustained firm profitability and client retention.The firm meticulously built its advisor base,understandin the lon-term nature of the process, and

despite a short-term hit to profitability.

One leading pure-play wealth management firmwanted to grow its business by luring successfuladvisors from other firms. The CEO of the firm (withmore than US$100 billion AuM) was adamant thatmany of the industrys top-notch advisors were


Increasing client satisfaction by creatingvirtual advisors to leverage evolving Internetand mobile channels

Cpbilities to crete the right connection with HNWIs (bsed ontheir preferences nd vlue) re crucil to ensure success of virtuldvisors

Implementing self-driven investment portals tocapture non-managed client assets

Portls with complete reserch, execution, nd reportingcpbilities cn help ttrct new clients



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SPotlIGHt 2012

dissatisfied because they lacked the freedom to makeindependent decisions. The firm therefore attractedadvisors from other firms by making them directly andcompletely responsible for their client relationships,with the help of centralized back-office support,which managed activities that were important but

non-core for an advisory role, such as such ascompliance administration.

Some Firms Are Scaling Back to RefocusOn Core Markets

Other wealth management f irms, acknowledging a lackof scale, are ceding some markets in order to refocus theirresources on markets they consider to be core. Someexamples include:

One large bank with Asia-Pacific aspirations focusedinstead on leveraging its home-country dominance.

The firm realized it could not successfully entermultiple countries at the same time, or effectively serveall client segments. Nor could it compete against theslew of competitors, as an increasing number of playerssought to tap into the growing population of HNWIsin Asia-Pacific. Instead, the bank focused on building astrong client base with roots and relationships in itshome country. The firm also specif ically targetedcorporate employees and entrepreneurs, who would alsoappreciate the firms robust banking offering. The firmalso acquired advisors with cultural knowledge of itshome region to make clients feel more comfortable in

their interactions.

One leading wealth management firm focused onAsia-Pacific opted for an independent assetmanagement role.As the f inancial cr isis unfolded, thefirm realized that HNW clients were suddenlyskeptical of proprietary products, and favored third-party productsand wanted to be able to choosecustodians for investment purposes. The firm alsorecognized that the independent (external) assetmanagement model was new to many Asia-Pacificclients (though well-tested in mature f inancial

markets). The firm therefore developed a wealth modelthat allows its cl ients to choose products and servicesfrom other banks and asset management firms via anopen architecture platform, while providing cl ientswith a simple fee-based cost model built on a holisticadvisory relationship.

One leading global financial services firm cut backoperations in markets that lacked scale. At one time,this firm had expanded to establish operations acrossmultiple countries, but the strategy diluted the firmsstrategic focus on core operational areas, and led to itsoperating in many unprofitable businesses. Under

regulatory pressure to raise capital ratios and undershareholder pressure to improve profitability, the bankopted to exit more than 15 countries where it lackedscalability in its offerings. The decision will help thebank to reduce costs and meet capital adequacystandards. The firm even exited private banking inlarger economies such as Japan so as to focus onhigh-growth markets when solidifying itsAsia-Pacific footprint.

CoNCLUSIoN

A range of firm-specif ic and industry-wide trends areconverging to undermine the profitability of wealthmanagement operations today. When combined, thesetrends are clearly creating stress on wealth managementbusiness models. For instance, firms are faced withmarket volatility and gun-shy investors, so need to createproducts that appropriately cater to client needs and riskprofiles, while generating margins.

Similarly, given increasingly competitive conditions,firms have to decide when and how to pursue selectivegrowth strategies or prepare for consolidationat the

same time that increased regulation may be creating newhurdles to profitable entry/expansion in some markets,especially perhaps for smaller players.

Scalabilitygrowing AuM at lower incremental cost, notsimply expanding in outright sizewill be an importantlever of sustained profitable growth for many firms. Toleverage scalability, however, firms cannot just tightentheir belts. Rather, they will need to reassess many of thecosts they once considered to be fixed or sunk, andexplore new options for rationalization. In short, firmsneed to find ways to recover revenues needlessly lost tocosts, thereby reducing their cost-to-income ratios, andultimately boosting profitable AuM.

For firms to plot their growth strategies, and evaluate thepotential for leveraging scalability in that growth, theymust first assess their starting point.


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Broadly speaking, by assessing the current state of theiroperations, firms could characterize themselves in one ofthe following four ways:

The blank slate firm is operating successfully in itshome market, but considering how to expand. It will

need to perform a gap analysis on available vs. requiredskill sets to excel in target markets, and identify how itscore strengths (which also drive brand value) can beleveraged. By leveraging whatever in their DNA madethem successful at home to effectively target clients innew markets, these firms can decide whether and howto offer non-core services (e.g., via joint ventures,partnerships), and identify ways in which technologycan help to embed scalability in that existing model.These firms have signif icant potential to get scalabilityright the first time, assuming they have the requisitecapabilities and commitment.

The limited success expander has spread beyond itshome market, but has been only partially successful.This type of firm will need to ascertain whatconstrained its success. Common issues includeexcessive competition for meager asset pools, lack of asophisticated client segmentation model, andinadequate use of digital tools to improve clientexperience and advisor productivity. Such firms willneed to consider how behavioral and cultural issues varyby market, and whether those differences are properlyaccounted for in the firms value proposition. They mayalso need to fortify client-advisor relationships. Toembed scalability, these firms will need to identify howtechnology can help target and exploit synergiesbetween operations across regions, and evaluate whetheracquisitions have been (and could be) complementaryenough to deliver the desired benefits.

The successful expander is already reaping rewardsfrom profitable operations in multiple regions. In theprocess, it will have been exposed to myriad challenges,from evolving regulations to market-specific dynamicssuch as norms in cultural and investing behavior. Tocontinue growing profitably and maintain existing

dominant market positions, these firms will need toanalyze exactly what has driven their success, and howthey managed to expand without incurring undue

additional costs. They will need to keep rationalizingcosts and activities by, for example, leveraging digitaltools as widely as possible to enhance client experience.These firms will also need to stay ahead of ongoingregulatory and other market trends that could changethe economics of their businessa capability they have

probably employed in prior expansion initiatives.

The re-focuser is not using scalability primarily tofacilitate their growth agenda. Rather, they seescalability as a way to be more responsive to marketconditions, even if business is contracting. Thechallenge for these firms will be to preserve coreoperations and minimize costs stranded in operationsthat have been de-scaled. One example of a re-focusermight be a limited success expander that is in acontraction phase. Such a firm could undertakescalability-related investments while contracting,

thereby becoming more like a blank slate firm when itultimately pursues growth opportunities at some pointin the future.

Whatever the starting point, the path to next-generationbusiness models essentially begins with identifying theeffects of legacy business models, and re-focusing on corecompetencies to expand the business. But the end-gameachieving a robust scalable business model thatalso reinforces client-advisor relationshipswill involvesystematic decisions and precise execution.

To identify and prioritize scalability levers, firms willneed to decide which processes and activities need to becentralized or decentralized, what types of products andsolutions are crucial to growth and whether they need tobe centrally and/or consistently designed, whether thetechnology is in place to leverage the chosen scalabilitylevers and support strategic business priorities, andwhether stakeholders (across business, technology, andoperations teams) are alignedand senior management iscommittedto leveraging scalability initiatives to achieveprofitable AuM growth.

And all the while, f irms will need to remain focused onwhether their decisions will bolster the satisfaction andloyalty of both clients and advisors.


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World Wealth Report 2012 Spotlight

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