The wealthiest Americans grew even richer as stocks rallied last year, alleviating, for now, the cost pressures faced by the banks, wirehouses and registered investment advisers that manage their money, according to a consultancy that tracks the industry.
Still, the cost of doing business for these firms — organizing a complex mix of investment, estate and financial planning, and domestic services, around those rich families — is a threat to their long-term competitiveness.
And the zero-sum game for the assets of those wealthy families means that beating competitors for assets is the only key to achieving above-average growth, according to a report released Monday by the Boston Consulting Group.
“If you actually want to grow faster than the market, it means you must steal share from your competitors,” Bruce Holley, a senior partner at BCG and co-author of the report, said at a press event.
The first challenge is the cost of retaining advisers. The consultancy said broker pay in the U.S. is high by global standards. The firm tracks a metric called relationship-manager compensation as a share of revenue. By that measure, brokers earned 41% of revenue they helped generate last year, compared with 25% globally and 22% in the North American bank channel, BCG said.
Revenue stayed the same even as net new assets rose by 3% and assets overall grew by a tenth in North America. Revenue per broker at large firms was the same last year as in 2012, $900,000 per broker.
By comparison, private-banking-relationship managers earned $2.6 million on average, with net new assets of 4% and overall asset growth of 17%.
Revenue failed to grow as fast as assets, leading a measure of the return on assets to fall slightly for both private banking and other bank wealth management units such as wirehouses, which are the top institutional providers of services for the richest investors, along with — to a lesser degree — family-office-styled registered investment advisers, according to Cerulli Associates Inc., another consulting firm. And there is more money to be divided between those firms. In all, private wealth in the U.S. grew by 16.3% to $46 trillion last year, BCG said. The firm said the number of millionaire households in the U.S. grew by a fifth to 7.1 million last year, driven largely by market gains as the S&P 500 rose around 30%.
Meanwhile, households with more than $100 million in wealth grew nearly 60% to 4,754.
But costs for wealth management firms rose as well, by some 3.5% globally, led by compliance, product and asset management and front-office expenditures.
The consulting firm said U.S. brokerage firms have the world's most cost-intensive wealth management business model.
Broker-dealer compensation rubrics, known as the grid, drive a more cumbersome cost structure than private banks, according to BCG. And the firms are less likely to keep their best clients. Despite “major efforts” to build up lending and otherwise increase services to clients that do not require the individual adviser, firms have been unable to break “the primary client link,” that is, the one they have with their adviser. “These players thus continue to be plagued by a relatively high level of customer turnover and advisers are still able to take a majority of their clients with them if they move to a new firm,” the report reads.
“The wealth market is so fragmented that it is hard for any firm to get out of step” on compensation, Brent Beardsley, a senior partner for BCG and an author of the report, said in an interview.
As brokerage firms increasingly move to planning-first conversations and fee-based relationships, they're finding their leadership challenged to move advisers in that direction.
“It's a huge change management effort to get the adviser to change,” he said.
At the same time, lending-and-banking-centric bank wealth management units are struggling to provide credible investing expertise. And those banks offering strong capital markets expertise “are often perceived to have robust investment expertise and products — but not the necessary skills to develop holistic advisory relationships,” according to the report.
As part of the research, the consultancy collected data from about 143 mostly bank-affiliated wealth management enterprises around the globe.