Increased price transparency, a shift to passive investing, and the challenging returns environment are just some of the pressures on wealth managers, forcing them to both justify and potentially reduce their fees. Firms trying to address this have inadvertently found themselves in a ‘race to the bottom’, creating new lower cost product lines and reaching into previously untouched market segments to generate the required scale to survive, with margins ever squeezed.
To retake control, firms must review their approach strategically and be precise in the way client segments are allocated to service models and product ranges. Simplifying the overall operating model and realigning services with the target client base will ensure the current value proposition is protected, whilst creating new revenue generating opportunities.
What is causing the downward pressure on fees in the Wealth Management industry?
1. Regulatory Pressure: Increased transparency of service fees and product value empower clients to directly compare products against competitors
The introduction of Retail Distribution Review (RDR) in 2013 drove investment managers to provide greater transparency when reporting fees across their value chain. This was taken a step further with MiFID II’s costs and charges obligations, and the FCA’s requirements for the value assessment of fund performance. These initiatives resulted in some wealth managers declaring significant portions of their share classes as not delivering value for money. Now more than ever, clients (along with competitors and the regulator) can more easily compare and contrast wealth management services and their associated prices.
2. Lower Barriers to Entry: Firms are able to stand up operating models at reduced cost by leveraging existing solutions in the market
Across the industry, both new and existing firms are taking advantage of the ability to stand up service propositions more quickly than in previous decades. What we are seeing is an operating model which leverages technology and processes to create a much more scalable proposition. Services can then be offered at a lower price due to the lower underlying cost base. However, such actions do take time, and adapting an existing business to achieve this scalability can be a difficult undertaking.
3. Replacement Products: Wealth managers have begun releasing lower cost propositions in response to the downward pressure on fees
The transfer of generational wealth and rise of both digitisation and passive investing has resulted in an increasing proportion of investor portfolios being given over to lower cost managed portfolio services (MPS) and robo products, rather than traditional discretionary portfolio management.
Firms are battling to differentiate themselves in this space, resulting in a recent flurry of market announcements for new, lower cost managed portfolio offerings. Furthermore, HMRC’s ruling that MPS offerings may be exempt from VAT (upon application) could result in a further reduction of MPS charges across the industry.
Should the performance of these replacement products continue to rival those achieved with discretionary portfolio management, then it can be expected that further reduction in the cost of these products will result in even more client inflows in the future.
What can you do to maintain competitiveness in a controlled ‘race to the bottom’?
If the industry is not careful, revenue pressure will continue to grow as a result of ‘keeping up with the market’. To ensure that the power of revenue generation is in the hands of your business, clients should be able to access the appropriate proposition via an absorbing user experience, whilst operations should be modern, scalable, and efficient. The industry has already begun adjusting to the low-cost world, but the activities have only scratched the surface of what is possible.
1. Proposition and Pricing Review
Being definitive in the ‘tiering’ of your overall target client base and segmentation of your offering is paramount. This will require considering the wider needs of your clients to ensure your set matches your ambitions. An effective multi-channel proposition which takes advantage of technology to streamline commodity processes will form a scalable service which can facilitate a much wider client base. In turn, with a rationalised cost base and well-formed depth of service offering, you will have greater control over what can be achieved in comparison to competitors.
2. Operating Model Positioning
Taking stock of the current processes and procedures can throw up some easy wins from an efficiency perspective. Further still, it can bring to light a number of potential areas of automation within the business – especially things like onboarding, client checks, and payment processing – which can transform and streamline operations. In turn, this generates business efficiencies, the cost savings of which can be passed onto the client.
3. M&A or Partnerships
These relationships come in many different shapes and sizes; full ownership or merger, partnerships, partial shareholdings, service relationships. Increasing the capability of your business in any one of these ways can be an extremely effective way of closing up gaps in your proposition, and with the benefit of a much-reduced lead time to market. This is especially true in automation-heavy propositions – where an acquisition or partnership can give your business the platform upon which to scale up quickly and efficiently.
It is vital that wealth managers look at the root cause of any downward pressure on revenues. Ultimately, this should not be viewed as a driver of decreased profits, but an opportunity to better understand the target client base and drive an inter-generational wealth proposition. A small amount of action can fortify a business in the short term, but the industry needs to take note of these tectonic shifts. With the right transformation, the wealth managers who take this seriously can future-proof their businesses whilst simultaneously rationalising the bottom line.
Alpha has deep-rooted credentials in helping our wealth clients understand both the requirements of end-customers and how to position the business to satisfy them. In particular, we can work with you to identify the most appropriate next steps in maintaining competitiveness, complete an in-depth review to establish impactful change initiatives, and provide a robust roadmap to realise ROI quickly.
For more information or to arrange a meeting, please contact the authors.