Financial institutions need to recognize and adjust to significant changes in the economics of the wealth management industry if they are to realize their full potential, according to a study released today by The Boston Consulting Group.

“There is a popular belief that wealth management is a very attractive business with high returns. But our experience with clients and our research suggest that many competitors are not nearly as profitable as they should be,” says Paul Orlander, a BCG vice president and head of the firm’s financial services practice in Canada.

“Many wealth managers let their costs grow rapidly during the 10-year bull market and don’t have a clear picture of their own economics — particularly of their cost to serve customers. As a result, many are targeting the wrong customers, focusing on those with either too much or too little wealth to match their current business models.” The consulting firm believes that one-third to one-half of client accounts at most wealth management firms hold balances below the stated minimum size.

The study estimates that Canada is home to 872,000 households with net investment assets in excess of $250,000, accounting for $955 billion in wealth.

The study notes that the key to profitability for wealth managers may lie in deciding which customer segment — a specific wealth level or geography — they can most effectively serve.