The pressure on wealth managers is greater than ever and they must take steps to revise their business models, improve the customer experien...

The pressure on wealth managers is greater than ever and they must take steps to revise their business models, improve the customer experience and tighten management rigor, according to Boston Consulting Group’s latest wealth management report.

BCG argues in its annual wealth management report, that global wealth managers, despite a steadier revenue climate, face a fierce battle to create value for their clients as competition becomes increasingly global, developing markets present new challenges, and the significance of conventional offshore banking decreases.

The report, entitled Searching for Profitable Growth: Global Wealth 2005, argues that global wealth is back on a solid growth path, following a period of recovery from losses early in the decade.

Global assets under management rose by more than 9 per cent in 2004 to around $85 trillion, and should show real annual growth of roughly 4 per cent up until 2009, according to BCG.

There are now over seven million millionaires worldwide, of which more than two million are in Western Europe and four million in the US.

BGC argues that industry growth in North America and Europe will come mainly from the established wealthy segment (clients with AUMs above $5 million), whereas in developing markets it will come from the emerging wealthy segment (clients with AUMs between $1 million and $5 million).

Hardly surprising, BCG argues that China, India, and Russia are currently the most attractive developing markets. Although they are still small, their onshore investment climates are improving significantly — greatly boosting their long-term potential.

The report points out that the needs and attitudes of wealth management clients have changed as markets have rebounded. Higher fees relative to returns have made them more conscious of getting value for their money, and they are demanding greater price visibility and additional value-added services. BGC argues these developments will require wealth managers to revisit both their business models and their traditional approaches to client service.

"Clients are searching for a combination of enhanced performance and security," says Christian de Juniac, co-author of the report and head of BCG's global wealth-management practice.

He added: "Their asset mixes are changing as conventional portfolios are combined with alternative investments. Given increasing regulatory complexity and uncertainty about pensions, they will require integrated, long-term solutions."

The report says that three core business models have emerged in the wealth management landscape. Global players are targeting numerous onshore and offshore locations and are building a portfolio of mature high-margin and emerging high-growth markets.

Medium to large players are focusing on both onshore and offshore business at home, as well as on selected foreign locations. Small institutions and boutiques, which have limited scale, are focusing on product, customer or geographic niches, said the report.

The trend to move onshore is increasing overall transparency in the wealth management industry, the report says. This tendency, combined with increasing investor awareness and slow consolidation in the industry, has put significant pressure on prices and margins.

The report further argues that in order to remain competitive, wealth management institutions must focus on overall rigor and excellence by optimizing all relevant growth and efficiency levers.

Broad initiatives are primarily those for enhancing revenue from existing clients, gaining revenue from potential new clients, and improving overall cost position. But BCG says that wealth managers need to place special focus on specific elements of these initiatives.

Top priorities include sharpening pricing strategies, improving management of small clients, reducing overall client attrition, and raising the performance of relationship managers.

"Among the most important growth levers for wealth management institutions are increasing share of wallet and retaining existing clients," says Victor Aerni, co-author of the report and a BCG vice president.

He added: "The quality of a client’s experience at a wealth management institution is the foundation of these levers. Yet only a few institutions have succeeded in properly understanding clients’ needs. Perfecting the client experience will be one of the most important issues for wealth management institutions over the next few years."