In the overview of the findings of the 2012 Top Wealth Managers survey, part one of our analysis of the survey, we argued that the wealth management industry is rapidly changing and has entered into the mature stages of its evolution. In this article, we focus on findings from the survey that shed light on the Top Wealth Managers' profits and productivity.
On average, firms in the 2012 Top Wealth Managers survey grew their assets under management by 9.4% in 2011. Considering the Standard & Poor's index was almost perfectly flat (0% growth) for that same year, this result is not entirely disappointing. However, it is far from the annual growth of 25% and more experienced each year from 2004 to 2008. This environment of slower growth and higher levels of competition is likely to be the future of the industry. Slower growth changes the context for management decisions dramatically—investing in the business does not pay off as quickly, valuation of the businesses may decline, and the financial and legal risks to owners increase while their income may stay relatively flat.
It is interesting to note that the fastest growing firms are actually the largest. Firms with more than $3 billion in AUM were the only ones with double-digit growth. Much of that growth came from acquisitions or recruiting of wirehouse teams (several of the firms on the list specialize in such strategies). At the same time, the lower ranges of the client market—the clients with less than $5 million in AUM—also contributed to this growth.
While it is very difficult for wealth management firms to admit they have an interest in working with smaller relationships, there are indications of their willingness to lower their minimum fees and reach down-market.
Even the largest firms’ revenue per client declined from $35,356 per client to $31,925 per client. In addition to working with smaller relationships, firms may be experiencing more pricing pressure. If we compare the revenue “yield” (the revenue of the firm in a year divided by the average AUM in that year), we find there are some small signs of decline.
The average yield was 76 basis points in 2010 compared with 74 in 2011. Such minor declines are evident in most sizes of firms, and while they are not yet statistically significant, the combination of declining revenue per client and declining yield may be something to watch in the future. Based on recent conversations, most firms tend to report that they are moving upstream and not feeling pricing pressure.
The reality of the market may be different. In order to grow, firms may need to allow some room for compromise.
No Productivity Gains
Growth in itself is of little value if it does not increase profitability. While maintaining margins will certainly add to the bottom line, most firms also hope to increase their productivity as they grow, thus leveraging the results. Unfortunately, we have not seen any significant changes in productivity since 2008, when the economic crisis began.
Productivity gains are critical for wealth management firms since without them, the only way to grow is by continuing to add new professionals and staff at a fixed rate of return. This process of staff additions in concert with revenue growth can be slow, and finding the right people can be challenging.
What is more, existing professionals in the firm have fewer opportunities to grow into owner responsibilities if the professional leverage is limited. Productivity gains made that process much easier in 2006 and 2007 and surveys such as the 2008 Moss Adams Survey of Financial Performance were reporting revenue per professional of more than $780,000.
In today’s industry, those numbers seem awfully high, perhaps even out of reach. Instead, we see a continued trend for increases in the level of client service during signs of fee compression—especially at the very high end of the client size range.
Viewing another part of the survey findings, this time by firm size as measured by total assets under management, shows some interesting service characteristics of participants. In the investing arena, the larger the firm, the more active their investing strategy. Also, the larger the firm, the more likely it is to place clients into LPs and hedge funds.
As for the primary investment goal of participants, the smallest firms--those with less than $1 billion in AUM--chose 'Wealth Preservation' as their primary goal (69%), as did their larger wealth manager peers (both at 82%), but the smaller firms also chose 'Capital Appreciation' as a primary goal at a higher percentage (26%) compared to the larger firms (both at 17%).
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