Already facing higher regulatory expenses, companies are struggling to grow their businesses organically and increasingly looking to manage their cost bases more effectively to maximise profitability.
But do wealth managers know the real cost of managing their clients?
Gilly Green, wealth management practice leader at consultants Knadel, said wealth managers rarely fully assess the cost of servicing their clients.
‘Many wealth managers do have an instinct that certain types of client are expensive to service, or even unprofitable,’ she said.
‘Sometimes it’s simple – a client with £200,000 in their portfolio paying a 1% discretionary fee might generate £2,000 per year in fees, but with just two visits a year from a manager they very quickly become unprofitable.’
Additionally, the nature of the business is cost-generating, as wealth managers often have an expensive front office, employing ‘highly paid’ investment directors, wealth managers and relationship managers, who all may need support from administrators, said Green.
Firms can link the back office staff numbers to how many transactions they process or how much their outsourcing costs ‘but they will rarely have assessed exactly how much time their most expensive assets – their investment managers and/or relationship staff – spend on a client by client basis,’ she added. ‘So people are being conscious about the cost of [small] clients but not everyone has done the full cost analysis.’
While periodical analyses are essential for firms such as Thesis Asset Management, director Michael Lally believes companies still miss costs when assessing clients.
‘We know exactly what we earn on each client [as] we have monthly figures we keep track of, but that doesn’t necessarily tell you what they cost you,’ he said.
Lally said while technology has meant underlying costs have come down, the real cost is time. ‘You get incredibly variable costs, from a couple of hundred pounds spent in back office administration, or having all investments loaded, to the big variable cost of having some people travelling halfway across the country.
‘This means you are writing off a whole day, but unlike a lawyer or an accountant, you are not charging them for your time.’
Another cost that is omitted from cost per client analysis is hospitality, Lally said. Again, it is difficult to evaluate the exact costs of entertainment per client, as only a ‘small percentage’ of clients actually trigger them, he explained. ‘It also tends to be small groups of 20 to 30 people, so [it is] not easy to say who generates what. Some clients cost me thousands, some cost me a phone call.’
Richard Allison, regional intermediary sales director at Brooks McDonald, agrees. He believes ‘a good DFM will know what custody costs are, or what dealing, reporting, staff, property costs are’, but that in many cases, firms tend to omit property from their cost base.
‘It’s not just about what you do – because the business is paying for the property in which he sits. That’s all part of it, but sometimes that cost gets excluded,’ he said.
While most will agree that high net worth clients are a ‘sweet spot’ in the industry, small does not have to mean unprofitable, and while ultra high net worth clients may mean more revenue, they may not mean more profit.
In some cases, wealth managers have taken steps to address how they can service certain types of client more efficiently, especially when it comes to addressing smaller clients.
Companies looking to exit a specific client segment, or carve out a different business model to service certain client segments efficiently, need to be very careful. Some elements cannot be priced in, Green warned.
‘If you try and segment the client purely on the size, you’re not looking at whether they have relationships with larger, key clients, including family, business partners or directors of a corporate account,’ she added.
Firms must also look at the likelihood of different clients being able to grow their portfolios – for example, differentiating a young person starting out in a potentially profitable career from a retired client in drawdown.