Wealth management industry successfully adapts to complex conditions

In July, we launched the Scorpio Partnership Private Banking Benchmark for 2013. Scorpio Partnership has been benchmarking the progress of the wealth management industry for 12 years. When we started the exercise, our aim was to get an understanding of the business case and the drivers behind international wealth management.

The charting over the years has resulted in a market ‘mappa mundi’. It has affected the ways in which we, the banks and the consultants consider the wonderful world of wealth. Since then, the benchmark has evolved to evaluate the impact of industry trends on the day-to-day operations of firms.

In an ever-changing landscape, wealth management firms have needed to adapt considerably and especially so in the last five years. Margin pressure, managing increased regulation and the stretch for growth into new markets are the three driving forces of the industry today.

Rising to the challenge

This year, again, we see these themes converging and we have looked to see which part of the wealth management industry is dealing most effectively
with these challenges. Are pure play wealth managers or diversified firms performing better in these complex conditions?

What we find is that 2012 was a better year for wealth managers on the whole. Assets under management for the industry as a whole, increased on average by 8.7 per cent to a mean figure of $97.2bn, (€72.8bn) while net new money saw a positive bounce following a poor performance in 2011, up 23.7 per cent to a mean of $1.9bn across the sample (see figure 1).

We also find that the business models of pure players and diversified firms are increasingly distinct. For diversified firms, success comes from leveraging group capabilities, managing costs and making the most of multiple income streams.

Critical defence

For pure players, meanwhile, defending margins is critical and that requires a clear value proposition and commitment to specialism and excellence. The cost of delivery is higher, but the reward comes in the form of more stable earnings (see figure 2).

Indeed, each business model has its own challenges when it comes to the issue of scale. However, what is increasingly clear is that size and scale should not be confused. While many diversified firms tend to be larger than pure players in terms of assets under management, this does not automatically translate into greater efficiency. For both business models, scale is function of the operational efficiency of the business, not its volume.  

These results highlight that even though there were good signs of recovery for the industry in 2012, the current year and the years ahead will continue to present complex strategic choices. By understanding the impact of those choices on the business, wealth managers are more likely to be able to steer an even course.  

James Horrax is senior associate at wealth management think-tank Scorpio Partnership