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How can firms adapt to a ‘new new normal’ as costs soar?
by Danielle Levy on Jun 11, 2013 at 09:48
Wealth management firms across the globe are set to see profit margins come under even more pressure, hit by stalling demand and rising costs, representing a far cry from the pre-credit crisis glory days.
This is the view expressed by Boston Consulting Group (BCG), whose latest study of the global wealth management industry noted a 10 basis point (bps) fall in profit margins from 2007 to an average of 23bps in 2012.
This was accompanied by a 19% rise in cost-to-income ratios to 73% over the same period, due to increased back-office costs and declining front-office costs. With this in mind, the study noted a rise in revenues per relationship manager on a global basis, despite a broader 6% fall on wealth manager assets to a global average of 81bps.
‘With this lower level of performance not expected to reverse itself in the short to medium term, wealth managers must adapt to the “new new normal” climate and build successful and sustainable operating models,’ the study said.
Looking ahead to 2020, BCG suggests that the shift of wealth creation to structurally lower margin regions and segments, changing client behaviours, new value propositions, regulatory restrictions and greater competition will only serve to put further pressure on margins and cause ‘cost-to-serve’ and ‘cost-to-income’ ratios to continue to rise.
Harry Morgan (pictured) of Thomas Miller Investment is one investment manager who acknowledges high profit margins are now a thing of the past in wealth management. ‘I think there has been a profitability shift which is transformational and it is generational,’ he said.
‘The big issue for the industry is that the demand curve has shifted down and the cost curve has shifted up, so profits are being squeezed. We can’t shift the demand curve out. People are not going to pay more, so you have to either manage the costs or take a smaller margin.’
Morgan’s sentiments are echoed by Cath Tillotson of Scorpio Partnership, who highlights rising regulatory costs, coupled with declining revenues as a significant challenge.
‘This is a new normal. The question is what are the acceptable levels of profitability in an industry that is going through growing pains but maturing very quickly?’ she asked.
Contrasting with BCG’s findings, Compeer’s Q1 industry report was more upbeat, highlighting a rise in profitability for both UK stockbrokers and wealth management firms, with execution-only posting an average profit margin of 44% and wealth managers up almost 7% to 36.3%. The benchmarking group attributed this to the potential scalability of these firms and stable costs in a period of rising revenues.
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