By Wei Ke and Wenbo Li
The coronavirus pandemic has sent stock markets around the world rising and falling sharply in response to unprecedented levels of economic uncertainty, unemployment and loss of earnings. Economists are expecting a record-setting economic contraction in the U.S. and a global recession. Extreme market conditions present an opportunity for wealth managers to deepen relationships and acquire new clients, as people need reassurance and guidance on ways to reduce risk.However, structural issues can make it challenging for wealth management industry to fully capitalize on this to emerge from the crisis stronger.
Even before the pandemic, the wealth management industry was plagued by slow growth, commodification, digital disruption and eroding margins. According to Simon-Kucher research, average assets-under-management fees have declined from 1.01 percent in 2015 to 0.74 percent in 2019. Despite the longest-running bull market from 2009 to 2019, wealth managers have not been able to recapture the high profit margins they experienced before the 2008 crisis, according to various reports.
Revenue leakage from discounting
Across the wealth management industry, discounting is a widespread practice. An estimated 25 to 30 percent of new clients receive a fee discount, according to a 2018 WISE Gateway report. Relationship discounts are typically 15.7 percent and can go as high as 21.8 percent, while relatives of existing clients enjoy on average a generous 68.2 percent discount, according to the report.
Revenue leakage is aggravated by the industry’s loosely monitored discounting practices. For example, most firms offer no guidance to their bankers on how to arrive at the relevant discounts, and discounts are given without being aware of their true cost. Similarly, many banks lack historical data on previous discount decisions. Comprehensive reports are unavailable and there are no performance indicators to evaluate the impact of discount practices on the organization’s profitability.
Banks must improve their discount processes to include tracking, analysis, review and guidelines to ensure consistent pricing practices. This is increasingly critical as wealth management is becoming more susceptible to comparison shopping and commoditization.
The widespread practice of discounting also complicates client relationships. Offering a discount to one client but not to another means we are now charging different prices for the same service. This erodes customer trust and creates an expectation of future discounting. A variety of pricing levels can also be administratively challenging and chaotic to manage, especially in large organizations.
Wealth management teams must step up their use of data analytics and digital technologies to strengthen pricing practices. Using client characteristics and market information, similar peer groups can be created to enable an accurate comparison of discounting performance across client groups. Historical and projected data can be used to develop a scoring criterion and benchmarks to guide discount decisions.
Overlooking digital experiences as a value driver
Another challenge facing wealth managers is a tendency to sideline technology to a supporting role relative to the core business.
The need to adopt and integrate digital technologies has never been more paramount. This is the case for every part of the value chain, from onboarding all the way to fulfillment and trading. Unsurprisingly, the COVID-19 pandemic accelerated clients’ demand for digital wealth management services. More than ever, they valued the ability to access their portfolios with one-click. They wanted real-time updates, especially in times of market volatility, and digital tools to help them manage their investments and financial planning. Instead what many clients experienced during the pandemic, was an alarming number of brokerage and trading platform outages.
We must take the lead as innovators to reimagine the wealth management digital customer experience. Some firms have already introduced video-conferencing, biometric authentication and other innovative technologies to allow for a seamless online account opening experience. Similarly, tablet apps are helping relationship managers facilitate more interactive sales discussions, while advanced trading tools and personalized contents have made remote collaboration a reality.
Wealth management operations must start to position digital technologies as a value driver and core component of its offering to stay relevant in a post-pandemic world. Firms like Truist Financial, Mariner Wealth Advisors and Pinnacle Financial Partners have already incorporated demonstration of digital tools available to clients in their sales conversations.
Undifferentiated product offerings
Perhaps the most worrisome of all is the industry’s largely undifferentiated product offerings. An over-reliance on asset levels to determine how much to pay is restrictive and does not address specific needs of client segments. Since the price a client pays bears little correlation to the value or amount of services they receive, price enforcement and value communications is also nearly impossible. To truly develop a competitive advantage in the market, firms must focus on value differentiation, which requires long-term strategic thinking and development.
Competing on price, low fees and discounting presents an image of poor-quality advice, when wealth management services should be perceived as a premium product. Wealth management operations must start to reprioritize the role of digital technologies, not just to optimize pricing practices but also to leverage it as a competitive advantage to win over and retain clients.
In the wake of the COVID-19 crisis, some of these cracks will start to become even more apparent. Clients might question the value they are receiving in exchange for the fees they are paying, especially if they had trouble getting through to their wealth managers during the market turmoil. The lockdown also forced many people into digital interactions they would not have otherwise considered. More than ever, clients expect advanced digital experiences. The current situation presents a defining opportunity for the industry to reinvent itself and emerge from the crisis more relevant and better equipped for a digitized world.
Wei Ke is a managing partner and Wenbo Li is a director at global consulting firm Simon-Kucher and Partners.
