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. In part two of our analysis, we addressed profitability and productivity. In this article, we focus on an interesting finding from the survey—the point at which HNW clients appear to require more in service than they add in revenue—and look ahead to the future of wealth management.
Working with wealthier clients and larger portfolios seems to be the intuitive solution for achieving higher productivity for wealth management firms. But our 2012 Top Wealth Manager data suggests that at some point, the very wealthy clients seem to require more in service than they add in revenue.
If we split the participants in the survey by the average size of their client accounts, we will find an inflection point near $20 million in AUM per client. Firms that have an average client size over $20 million reach very high levels of total AUM, an average of $4.1 billion, but a relatively lower average revenue size of $4.8 million compared to AUM.
In contrast, firms that work with relationships between $5 million and $20 million have total AUM of $1.8 billion, but have $7.4 million in revenue. If we calculate the relationship between revenues and assets, we can clearly see the inflection point. Firms with large relationships have a yield (revenue to AUM) of 18 basis points while medium-size firms have yield of 40 basis points.
The high cost of the relationship is also visible in the ratio of clients per advisor. Firms with over $20 million per relationship have eight clients per advisor on average; firms who work with smaller relationships, those under $5 million in AUM, have 59 clients per advisor. This is where the lack of leverage becomes apparent.
While average client size is vastly different, the revenue result is about the same. Firms working with the largest clients have revenue per professional of $474,612 while firms working with small relationships have revenue per professional of $456,863, slightly smaller but not qualitatively different. It seems the optimum trade-off between size and productivity is between $5 million to $10 million in AUM.
Where Wealth Management Begins: Client Retention
We mentioned that growth is a priority, but in wealth management, everything starts with a focus on existing clients.
It should be of no surprise that first and foremost, advisors want to focus on retaining their client
This is true for firms of every size (see table below to view the priorities expressed by the wealth management firms in this year’s survey, based on their size measured by total assets under management).