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August 28, 2012 at 08:32 AM
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.
In fact, the average revenue per client for firms of all sizes declined between 2010 and 2011.
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.
