Wealth managers failing to adjust to changing markets says BCG

"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 Bruce Holley, a BCG vice president and co-author of the study. "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 new study predicts that the wealth market will increase globally by more than 10 percent a year to reach $66 trillion in 2005 and potentially generate $700 billion in annual revenues for the wealth management industry, up significantly from the current estimate of $500 billion.

The BCG study, 'Richer Prospects in Wealth Management: Global Wealth 2001, A Senior Management Perspective', identifies 34 million households with net investment assets in excess of $250,000, controlling $40 trillion in wealth overall. 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.

Among the study's major findings:
* Today, 46 percent of the assets of the wealthy are in North America and only 25 percent are in Europe. But this is set to change, with higher European economic growth and a stronger euro. This should cause assets in Europe to grow nearly twice as fast as those in the US over the five years to 2005, leaving North America holding 42 percent and Europe 30 percent of wealthy investors' assets;
* Although European competitors will continue to find it difficult to break into the US market with its lower prices for wealth management services, the European market should become very attractive to US players. However, regulatory complexities across the different markets mean Europe presents its own challenge;
* Although individuals with less than $5 million to invest are often neglected by institutions in favor of the ultra-rich, this emerging affluent class currently accounts for 79 percent of wealth revenues. While those with more than $5 million are predicted to grow faster up to 2005 (11.6 percent per year compared to 9.6 percent), the affluent provide a much steadier source of growth from their accumulating savings. BCG believes it is possible to focus profitably on this customer segment by offering a more self-directed, Internet-enabled approach at a lower cost to serve;
* The wealthiest investors are graying rapidly. The fastest-growing age group, people aged 50 to 59, will increase 47% over the next 10 years; those aged 75 and over will rise 37% during the same period. As they age, investors shift from borrowing to saving and investing, then to a period of consuming wealth in the latter part of their lives. Institutions need to ensure that they are offering the right product mix to satisfy these changing needs.

The study also reveals that, although asset management is the traditional focus of wealth management providers, investment-related products now account for only 41% of financial services revenue from the wealthy. The remaining 59% is made up of revenue from debt products, insurance, and deposits and cash management - services which are often neglected by private banks.

"The double-digit equity market returns that we have come to expect over the last five years can no longer be guaranteed and wealth management providers need to adapt in order to be profitable," explains Chuck Callan, a BCG vice president and head of the firm's financial services practice in North America.

According to BCG, leading financial institutions that are most effectively responding to the changing market include:
* Charles Schwab which has implemented a sophisticated customer segmentation program, with "Signature" tiering for more affluent customers and its recent acquisition of US Trust to cater to higher-end clients;
* Citigroup which now encompasses the full wealth management spectrum for its private bank customers, offering banking through Citibank, insurance through Travelers, and investment products through Salomon Smith Barney; and
* Credit Suisse which has increased fund sales by one-third following the introduction of open architecture and the offering of third party products alongside its own.

Importantly, the study shows that the global wealth management industry is highly fragmented - with the top 20 players holding just over 12 percent of the total wealth assets. That offers significant opportunities for consolidating market share through mergers or alliances, says BCG.