3 Reasons Behind European Wealth Managers Falling Profitability

3 Reasons Behind European Wealth Managers Falling Profitability

by February 13, 2017
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European wealth managers are facing bittersweet challenges in recent years. A Deloitte study shows that bankable European assets had grown by 40% but their profits had fallen by 60%. This brings along the big question why?

Wealth Managers Market Volume

Wealth Managers vs Market Volume, Source: Deloitte

The profitability of any company lies in the difference between its revenue and cost. European wealth managers are no exception. Let us explore why falling profitability has been the trend for the past 17 years.

Rising Revenue Pressures

Regulations are one key factor that is forcing down fees for European wealth managers. The Markets in Financial Instrument Directive II (MiFID II) impose greater transparency in fee requirements. This encourages clients to press wealth managers to lower their fees and prevent them from raising in the first place.

Europe is in a low interest rate environment which makes it hard for wealth managers to earn much on their net interest margin. If you add these to new low cost instruments such Exchange Traded Funds and new innovative fintech solutions such as robo-advisors, this put European wealth managers in a tough position.

Price Sensitivity of Wealth Management

Price Sensitivity of Wealth Management, Source: Oliver Wyman

Last but not least, European clients are very sensitive to price. 75% of them are willing to switch their managers for a low discount of under 20%. Only 9% of them are not price sensitive compared to 52% in North America. This is partly due to the erosion of trust in the quality of advice following the 2008 Global Financial Crisis.

High Fixed Cost

Wealth management is a business that is underpinned by personal relationship between the relationship manager and the client. It is often the case that the client will leave when the relationship manager switches bank. So labour cost is one major component.

Next, the regulatory pressures are forcing these wealth managers to invest significantly in compliance such as anti-money laundering, cross border tax reporting. This increase the complexity of their business model and add more fixed costs to their business. The industry is also being held back by legacy systems and processes.

Cost Income Ratio Split

Cost Income Ratio Split, Source: Oliver Wyman

As you can see from the chart above, European wealth managers have the lowest variable cost across the region. This means that even when revenue were to dip, they can’t reduce their cost as well as their counterparts in North America and Asia.

Innovation Gap

Current Relevance of Innovation

Current Relevance of Innovation, Source: Deloitte

Besides going through the traditional analysis from the revenue and cost sides, Deloitte also looked at how European wealth managers are not leveraging on technology to bring about the product and services that their clients need and desire. In other words, there is an innovation gap to be filled.

 

Most European wealth managers are satisfied with using existing technology (known as core to Deloitte) to service their clients across the value chain. The only transformational technology that they are looking for to collaborate with fintech companies are robo-advisor. Even then, they are doing it with skepticism.

Besides the product side, Deloitte found out that they are not making efforts to re-brand themselves after the erosion of trust in the recent financial crisis. In terms of processes, they are also forgoing operational savings if they were to replace their legacy system. Finally, their clients prefer to meet their relationship managers only for complicated issues. For all other issues, their clients feel constrained by the lack of effective digital channels to gather the necessary information.

Conclusion

European wealth managers are resistant to change and they prefer to stick to what they know despite the potential of fintech companies to reduce their cost and increase their revenue. UBS wealth management is one famous recent victim despite having the most productive relationship managers in the industry.

 

Featured Picture via – Pixabay.com 

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