This article explores key factors influencing profitability in wealth management, highlighting the importance of strategic decision-making beyond simple outsourcing.

The BPO Conundrum

In 2007, wealth management firms utilizing Business Process Outsourcing (BPO) enjoyed a slight cost margin advantage compared to those managing processes in-house. However, this narrow benefit suggests that BPO wasn’t reaching its full potential. Factors like high shut down costs, redundancy in operations, and cost overruns during migration hampered true cost optimization. When planned and executed effectively, BPO can deliver significant benefits, as evidenced by a cost margin advantage of -16.1 bps and a profit margin advantage of +13.6 bps in 2008.

Key Profitability Levers

Our analysis identifies several key levers that significantly impact profitability:

  • Client Focus: A clear focus on affluent/high net worth individuals and a strong institutional client base consistently contribute to profitability regardless of market conditions.
  • Product Mix: Traditional products can be market-sensitive and require careful management. Offering market-tracking products can negatively impact profitability, suggesting industry challenges with economies of scale. Conversely, extended services are emerging as a key differentiator and a means to rebuild trust with clients.

Outsourcing and International Presence

  • Strategic Outsourcing: When planned and executed correctly, outsourcing specific back-office services can significantly boost profitability, indicating operational excellence.
  • International Expansion: Maintaining an international presence, particularly in a stricter regulatory environment, can be a near-term profitability driver. However, the associated costs and complexities require careful consideration.

Proprietary Trading: A Double-Edged Sword

Engagement in proprietary trading activities resulted in a net loss over the past two years. While some firms recouped revenue losses by 2008, they continued to exhibit a higher cost margin compared to their peers without proprietary trading desks. This suggests ongoing infrastructure costs associated with maintaining these capabilities.

The Winning Formula: Leveraging the Right Combination

Our research demonstrates that leading-edge profitability hinges on effectively combining and designing these key levers. The next section will delve into ten distinct profitability lever combinations adopted by wealth managers. These combinations represent unique business models contributing to variations in profitability across the industry. Our goal is to identify those business models yielding the highest absolute profit margin and profit margin growth.

Organizational Structure in Wealth Management: The Integration Imperative

A key trend in financial services is the shift towards greater integration of wealth management with other areas like retail banking, investment banking, and asset management. This integrated model allows each platform to service clients of other platforms with their products, aiming to capture synergies in revenue growth through client referrals and cost savings through infrastructure sharing and economies of scale.

UBS: A Pioneering Example

UBS pioneered this approach in 1998, aiming to deliver the “firm” to clients through a “one-firm approach”. This strategy encourages business units to collaborate efficiently across organizational boundaries. While conceptually simple, achieving this level of collaboration is challenging in practice.

Private Banking Foundation Shared with the Universal Bank Parent

This highlights the current level of shared back-office applications between private banks and their universal bank parents, with significant potential for further collaboration in asset management functions.

Credit Suisse’s “One Bank” Initiative: A Case Study

Credit Suisse’s recent integration initiative exemplifies the move towards greater bank-wide integration. They consolidated two banking licenses into one, resulting in three core divisions:

  • Private Banking (wealth management, corporate & retail banking)
  • Investment Banking
  • Asset Management

Organizational Structure of Global Private Bank

This exhibit outlines the structure of Credit Suisse’s new Private Banking division.

The Key Aims of Integration

  • Enhanced Client Relationships: Leverage combined expertise across the bank to improve and broaden client relationships.
  • Strengthened Product Knowledge: Foster collaboration across businesses to strengthen the group’s global product know-how.
  • Targeted Market Growth: Exploit new opportunities for growth in specific markets.
  • Employee Development: Create more opportunities for the group’s employees.
  • Shared Services Efficiency: Enhance the effectiveness and efficiency of shared services infrastructure.

Business Unit Interfaces: The Importance of Structure

The trend towards greater internal integration necessitates well-structured interfaces between business lines, encompassing elements like transfer pricing, incentives, procedures, roles, and responsibilities. Success in this area depends more on the execution of a specific model than the model itself.

Overcoming Integration Challenges: A Roadmap to Success

Integrating business lines can be notoriously difficult, with no one-size-fits-all solution. Several factors influence success, including group strategy, existing arrangements, business performance, internal culture, and political considerations.

Building a foundation for successful cross-divisional collaboration requires several key steps:

  • Shared Vision: Establish a unified vision within the group on how to serve high-net-worth (HNW) clients and set clear objectives for collaboration.
  • Strong Leadership: The private bank needs a powerful figure who can champion the initiative and secure buy-in from the group board, prioritizing the private bank’s needs alongside those of other business units.
  • Senior Management Commitment: Clear and consistent commitment from senior management is crucial. This includes establishing accountability, objectives, targets, action plans, and resource allocation across all relevant parties. Effective communication of these details to employees fosters understanding and support for the change process.

Focus on Key Interfaces

We’ll now delve deeper into managing crucial interfaces between wealth management and other key business units:

  • Wealth Management & Asset Management: Given the significant functional overlap between these areas, effective collaboration is essential. This may involve joint product development, knowledge sharing between investment specialists, and streamlined client onboarding processes.
  • Wealth Management & Retail Banking: Collaboration in this area focuses on identifying and servicing clients with the potential to transition into the private banking segment. This might involve joint marketing initiatives, targeted wealth management product offerings for retail banking clients, and seamless wealth management service integration into the retail banking experience.
  • Wealth Management & Investment Banking: Collaboration here leverages the investment banking unit’s expertise in complex financial instruments to cater to the needs of sophisticated private banking clients. This could involve offering private banking clients access to investment banking products and services, or incorporating investment banking insights into wealth management strategies.

Conclusion: A Holistic Approach to Wealth Management Profitability

Profitability in wealth management is not solely driven by cost-cutting measures like BPO. It’s a complex interplay of strategic decisions across various aspects of the business. By focusing on a high-value client base, offering a well-curated product mix, and strategically integrating wealth management with other business units, firms can create a powerful formula for sustainable profitability. Building a strong organizational structure that fosters collaboration and efficient interfaces between business lines is essential for unlocking the full potential of this integrated approach.