The wealth-management operations at the integrated and independent investment dealers have reaped large revenue and profit gains during the past five years. However, this strong performance belies several negative undercurrents that threaten the future performance of retail operations, despite a buoyant outlook for wealth-management services.
Operating costs in the investment industry have risen significantly and steadily, up by an annual average of 5% in each of the past five years and accelerating in the more recent three years. Furthermore, profit margins have been squeezed by approximately one-third for boutique firms in the past three years.
There’s no end in sight to rising costs, which have been driven by the implementation of compliance management relating to recent retail regulatory reforms, and ongoing application of emerging technologies and systems. To make matters worse, firms cannot rely on the continued upward momentum of equities markets to boost portfolio performance and fee increases. The challenge for investment dealers will be to build the expertise among advisors to serve clients effectively across an increasingly complex array of products and services on the wealth-management platform. This expertise will be necessary to generate sufficient revenue to keep ahead of rising costs and the eventual slowing in market momentum.
So, what’s the key to success? Improved advisor productivity. Firms have taken the obvious steps to improve advisors’ performance and enable relationship building with clients, giving advisors the tools to design high-performing and cost-effective portfolios. For example, new technology has enabled online account opening and electronic signatures for client documentation. New technology also has facilitated securities order management and processing, mitigating the growing administrative burden on advisors.
However, the opportunities for future productivity gains rest in the proactive delivery of a widening range of wealth-management products and services, including typical investment advice, investment products and financial planning, as well as less conventional services such as tax planning advice and filing, estate planning, critical illness and disability insurance, and long-term health-care options. The effective provision of this diversified and tailored range of services provides value-added benefits for clients and their families while boosting revenue for both advisors and their firms. Furthermore, a successful strategy of effective client interaction builds referrals and contributes to the revenue base.
The benefits of an increasingly diverse and complex wealth-management platform to meet clients’ expanding and evolving needs can only be realized if advisors can understand, identify and articulate the utility of the financial services they provide to their clients. Outsourcing wealth-management services may be a good strategy, but referrals can only work if the advisor recognizes clients’ needs in the first place.
Advisors and firms need to focus on promoting professional accreditation; training in specialized financial products and services; techniques for effective client communication; becoming the “financial quarterback” for clients; and integrating younger and ambitious advisors into teams to facilitate the transition from older advisors.
Regulators have an important role to play. Specifically, they need to update the existing proficiency standards for advisors and recognize that existing rules and requirements can interfere with advisors carrying out their responsibilities. Registration requirements should be streamlined and legal barriers removed so that advisors have the scope to meet the needs of their clients. Finally, although new rules should encourage “client-first” conduct, care should be taken not to obstruct advisors’ flexibility.
The retail investment business has stayed consistently profitable in the most recent five years — despite the rapidly escalating costs — thanks to strong client demand for wealth-management services and higher portfolio valuations from an upward trending stock market. However, these conditions cannot be taken for granted. Firms need to build out advisor capabilities to exploit the expanding shelf of wealth products and services to the benefit of clients. Regulators can help to facilitate the delivery of wealth-management services to clients by introducing higher proficiency standards and reducing legal and regulatory barriers.