When another period like 2008 hits and money starts to get tight, what can wealth managers do to cut back and take control of costs?
Scrap the summer party perhaps, or rein in the more extravagant perks for high net worth (HNW) clients – like Michelin starred dining or chauffeur-driven Bentley tours?
Or, keep the summer party, but consolidate your offices, make your front office leaner and segment your clients – this could instead be the answer.
Raj Basra, managing director at wealth boutique Tacit Investment Management, believes for a lot of the big firms, cutting back on the number of offices and people would be the first thing to go in a downturn.
He says: ‘The industry, especially on the [discretionary fund manager] DFM side, has got used to lower charges. A lot of them are going as lean as they can go at the moment.
‘The biggest costs for businesses are the people and the locations at which they are based. You will find that when the market is rising, the number of people and the number of offices at a firm expands. But what will happen in a downturn is offices will get closed and we will see regional hubs.
‘That’s where you get the biggest bang for your buck, in consolidating offices.’
He highlights Barclays and Brewin Dolphin as among the firms to have consolidated offices in recent times.
And it is this consolidation which provides an opportunity for firms like his. He adds: ‘For newer firms trying to grow, a downturn is not the time to be cutting back.
‘Look at Brooks Macdonald in 2008. When other firms were cutting back, closing offices and letting people go, Brooks used that as an opportunity to expand and gain market share.
‘A lot of smaller firms can benefit from that type of environment. You almost want a downturn.’
Gilly Green (pictured), director at Knadel, says the first thing firms looking to ‘cut some fat’ in a downturn should do is look at their front office to back office ratio – with a ratio of one member of front office to half a back office staff member being the ideal.
She says: ‘In some places it’s as high as two and a half admin staff to every one front office staff. These firms might have complex business systems, multiple offices and no centralisation.
‘In a downturn, that is absolutely key. How do you [cut front office staff] without affecting client service?’
One way for firms to solve that problem, Green adds, is to segment clients – using technology and online services for smaller clients, so existing front office staff can spend more time servicing HNW clients.
It’s something several wealth firms have been doing recently, with adverts clearly visible at the moment on London Underground and commuter trains for Investec Wealth & Investment’s Click & Invest, and UBS’ SmartWealth robo-adviser, both of which are aimed at middle-class professionals with a minimum of £10,000 or £15,000 to invest.
Green highlights RBS, which recently recorded its first profit in a decade, as an example of a firm which has used the aforementioned strategies.
RBS-owned Coutts and Adam & Company saw profits grow 52.3% over 2017 as it cut back on staff, reducing their front office headcount by 11.8%.
Coutts launched its online Coutts Invest service last year, an execution-only platform enabling clients to invest with an initial lump sum of £500, while RBS launched a robo-adviser under the Natwest brand in November in its bid to ‘plug the advice gap’.
Centralisation is also important, Green adds but warns that for firms looking to save it will cost money to start with. She says: ‘Centralisation of certain functions – such as the client onboarding process, implementing some sort of CRM system – are also key.
‘But the question is, in a downturn are people brave enough to do that? To save money, you have to spend money.’
For Niral Parekh, head of retail asset and wealth management at Capco, the ‘cost to serve’ is the main thing all firms should be looking at.
He says: ‘If you’re making £5,000 a year from a client but it’s costing you £10,000 in front office spend, you’re subsidising your book keeping that client on, and it means you don’t get that profitability from the larger clients that you’d expect.’
Parekh adds that if those clients, who may account for around 10% of assets under management for example, are not contributing 10% to profitability, it’s probably time to start reviewing those relationships.
So how about getting rid of the summer party? It does not bring you in any clients after all and can be considered unnecessary duplication if you already have a Christmas party.
Not so quick, says Green. That summer party could help you keep staff, so you do not have to shell out even more to recruit someone else.
She says: ‘It’s cutting off your nose to spite your face. You have to be sensitive. If you cut the morale of your staff, people can get disillusioned and look to leave.
‘The cost of a party can be way less than paying recruitment consultants to find you new staff.’