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June 27, 2011updated 05 Jun 2017 11:36am

Pricing pressure points

Global wealth is on the rise again, but the changing regulatory environment and increasing competition for business means the performance of wealth managers is under scrutiny


Global wealth is on the rise again, but the changing regulatory environment and increasing competition for business means the performance of wealth managers is under scrutiny. PBI looks at how re-calibrating pricing points and developing new Asian-specific products can differentiate wealth managers


Wealth is on the rise, but it is not yet time to celebrate. Global wealth continued its recovery internationally in 2010, growing by 8%, or $9trn, to $121.8trn.

However disruptive forces, including increased regulatory oversight and changes in client behaviour, are rewriting the rules for wealth managers.

Boston Consulting Group’s (BCG) 2011 global wealth report, Shaping a New Tomorrow: How to Capitalize on the Momentum of Change, notes the overall outlook for wealth managers is promising with global wealth forecast to grow at a compound annual growth rate (CAGR) of almost 6% to reach $162trn by 2015.

The US-based management consultancy estimates global wealth is now $20trn above where it stood two years ago during the depths of the financial crisis.

Grpahic showing how the global average profit margins are up from 19 bps to 23 bps






Three trends to watch

BCG’s report flagged up several trends that should push wealth managers to review their operations, including varied pricing models, shifting offshore wealth and rising costs.

BCG’s survey found the average pre-tax profit margin increased by 4 basis points to 23 basis points in 2010. Revenue margins in most regions remained lower than they were before the crisis, while average global cost-to-income ratios remained well above 70%.

One of its chief observations, based on its survey of 120 wealth-management institutions worldwide, was the tremendous variation in pricing strategies between different wealth managers, often in similar wealth bands.

The BCG report found relationship managers typically have substantial discretion to use discounts which leads to significant variation in gross margins, even within narrow client clusters.

As an example, it noted the variation in Switzerland between the affluent and high net worth segments where return on assets (RoA) was on average about 137 basis points (bps) compared to the $10m to >$100m band where RoA was on average only 66 bps (see chart).

Chart showing how significant variations in return on asset levels remain between different wealth segments



Call for defined pricing bands

BCG said wealth managers need to define upper and lower pricing bands for each client segment within which relationship managers had discretion to set prices and offer restricted discounting on a client-by-client basis.

BCG’s research also suggests developing price-service models geared to client needs and interaction preferences so that client clusters should not only be based on wealth bands but should also reflect client behaviour.

The changing nature of offshore wealth, assets booked in a country where the resident has no legal residence or tax domicile, is another significant change in the industry.

Bar chart showing North American private banks had best average global return on assets

Pressure continues on offshore centres

Increased tax transparency pressures from developed market regulators and increased competition between offshore centres were two key trends highlighted by BCG.

The amount of offshore wealth increased to $7.8trn in 2010, up from $7.5trn in 2009 but the overall proportion of offshore assets to onshore assets dropped.

This has been driven by increasing wealth growth in onshore markets, such as China, and the push by regulators in many developed economies for greater transparency around offshore wealth. The greatest growth in offshore assets will come from Asia-Pacific, Latin American and Middle East and Africa.

BCG defines assets under management as including cash deposits, money market funds, listed securities held directly or indirectly through managed investments, and onshore and offshore assets.

See also –  Key opportunity: developing Asia-Pacific focused products


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