Global private wealth gained momentum in 2016, but wealth managers face a host of challenges if they hope to fight off competitors, deepen client loyalty, and put both revenue and profit growth on a sustainable positive trajectory, according to a new report by The Boston Consulting Group (BCG).
“Over the past decade, wealth managers have been forced to come to grips with the decline of what for many years was a highly lucrative industry that was lightly regulated, with very low capital requirements and limited transparency on offerings and price levels,” the report states. “Indeed, since the financial crisis of 2007–2008, they have been dealing with sobered investors who demand reduced fees and commissions in order to maximize returns in a low-yield world.”
The report, Global Wealth 2017: Transforming the Client Experience, reveals some key insights into how the industry has evolved since the crisis and where it is currently heading.
According to the report, global private financial wealth grew by 5.3% in 2016, to $166.5 trillion, driven primarily by accelerating economic growth and the strong performance of equity markets in many parts of the world. The rise was greater than in the previous year, when global wealth rose by 4.4%.
Despite this growth, wealth managers have seen a steep decline in top-line margins over the past 10 years, with return on assets declining across diverse regions and types of players, according to the report.
A number of institutions have been cutting costs to help mitigate negative trends. The report finds that front-office, central functions, as well as asset and product management functions, have been “particularly hard hit.” Meanwhile, some cost reductions have been long overdue – such as divestments of subscale, unprofitable, or high-risk business areas, client segments, and booking centers.
Cutting costs is not enough, according to the report. “Many wealth managers have not commensurately increased investments to help adapt to the new digital environment,” the report says.
In the past year, however, BCG has observed an inflection point, with more wealth managers using cost savings and other resources to increase their strategic investments. They are shifting from a short-term focus on maintaining profitability to a longer-term, transformative outlook that involves defining the business model of the future—one that will be digitized and vertically disintegrated, with noncore functions highly commoditized.
In order to make a true step change and leapfrog the competition, the report recommends that wealth managers need to shift their approach to digital technology and design advanced, high-impact client journeys front to back — creating a “next-generation, 2.0 version of the client experience.”
According to Brent Beardsley, a coauthor of the report, digital initiatives in the industry have centered largely on providing customers with basic portfolio functionalities and the ability to execute standard trading and payment transactions.
“What’s needed is to design and implement fully rethought, reworked, and advanced client journeys that seamlessly combine digital, relationship management, and expert channels to transform the entire client experience from end to end,” Beardsley said in a statement.
According to the report, this advance client client experience – or a “client journey 2.0” as the report calls it – should also focus on the moments that matter most to clients; inject individual portfolio analysis, proposals and instant interaction with relationship managers; and align all required delivery processes end-to-end.
Often, in the past, digital efforts have spanned across isolated parts of the service model, lacking seamless integration with relationship managers, product experts, and shared functions such as risk, compliance, and operations.
“To create client journeys 2.0, all processes, channels, and interaction points must be designed and implemented to deliver a superior client experience, largely through the use of digital technology,” said Daniel Kessler, a BCG partner and coauthor of the report. “At the same time, the use of digital in these journeys fosters process efficiency and robustness and reduces operational risk, offering a redefined client experience that is more intuitive, integrated, and individualized.”
The report believes that once client journeys have been redesigned, reworked, and become advanced, new revenue pools can be accessed through increased client engagement and cross-selling.
According to the report, the result of achieving a "client journey 2.0" can be a revenue gain of up to 20% to 25% and an efficiency gain of up to 30% to 40%, leading to a higher degree of future economic flexibility.
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