top wealth managers logoIn the lead story in the 2011 Top Wealth Managers Survey Special Report, we discussed the overall findings of survey respondents in terms of assets under management and growth in revenue. In part two of our special report below, we focus on the services offered by wealth managers and the prices they charge for those services.

All firms in the report market themselves as “wealth managers,” but the services provided under that label vary widely as well as the prices charged to clients exhibit significant differences.

In addition, the investment philosophy and approach of the wealth managers can be very different. The variability in the service package and pricing can be attributed to the fragmented nature of the industry as well as the relatively young age of the “wealth management” service model. Still, it likely also conveys some confusion regarding the exact practice standards and the best practices the industry follows.

The relationship between the revenue of a firm and its assets under management (we call it AUM Yield) should convey information about the pricing of the firm’s services and the typical size of the client relationship the firm works with. Since firms reduce the AUM fee for larger clients, there should be a strong negative correlation between the AUM Yield and the revenue per client for a firm.

However, what we find in the report is that the correlation between the two variables is very weak (-0.17). The average AUM Yield in the survey was 68 basis points but the standard deviation of the sample was 31 basis points, indicating that 75% of the firms charge between 99 basis points and 37 basis points—an obviously wide range.

Perhaps the variability in pricing is a function of the investment approach of the firm. The vast majority of firms use mutual funds as the primary investment vehicles for their clients (see chart below). Much of the client assets are also invested in index funds and ETFs. 

(Click here to enlarge chart)

Top Wealth Managers--Percentage of Total Assets in Investment Vehicles

 

 

 

 

 

 

 

 

For some of the firms, this is clearly the investment philosophy of choice. On average, only 20% of the client’s assets are invested in individual securities (i.e.  are being managed by the firm). Larger firms show a higher propensity to manage assets internally.                  

Thirty-four percent of the respondents do not have an investment research department. This decision is very size dependent with 46% of the smallest firms lack an investment department versus only 6% of the largest firms. The majority of investment departments focus on managing portfolios of mutual funds. Only 14% of all firms focus on managing assets and generating “alpha”–return above the benchmark rate.

Top Wealth Managers--Function of Investment Department

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The majority of firms pursue an active style of management: 60% of the largest firms, 47% of the midsize firms and 56% of the smallest firms. What is interesting is that many of the firms have both active and passive portfolios. About 30% of the largest firms, 41% of the midsize firms and 25% of the largest firms follow this approach, perhaps combining passive management in core asset classes with more active approach in “satellite” asset classes.

Top Wealth Managers--How Firms Manage Their Assets

 

 

 

 

 

 

 

 

 

 

The financial crisis of 2008 and 2009 forced every firm to articulate how it reacts to changes in the market and macro-economic news. The temptation is high to manage client assets more actively and respond to the changes in the overall climate. Sixty percent of the largest firms, 47% of the midsize firms and 53% of the smallest firms react to the market as they see opportunities and threats. All participating firms continue to focus on strategy but it seems that the majority of firms are not comfortable with just accepting the market risks and talking clients through it.

Top Wealth Managers--How React to Market Movements

 

 

 

 

 

 

 

 

 


 

 

 

Finally, creating a formal, written financial plan has become a relatively rare
service. Only 26% of the largest firms, 31% of the midsize firms and 13% of the small firms create financial plans. Considering that the roots of the wealth management movement are in the financial planning movement, it is somewhat ironic to see that the firms have moved away from creating formal financial plan documents.

Top Wealth Managers--Do You Create a Formal Financial Plan?

 

 

 

 

 

 

 

 

 

 

 

See part three of our special report on the findings of the 2011 Top Wealth Managers Survey.

Return to our 2011 Top Wealth Managers home page for further analysis and data.