Wealth managers must act now to drive growth and profitability

The economics of private banking businesses are under serious pressure following a difficult and exhausting H1 2020. On average, firms are seeing a decline of 6 per cent in per head revenues; profitability is under even more strain and down by 10 per cent per head.

With Covid disruption set to continue, relief is nowhere in sight. Firms cannot afford to wait to take tough decisions, leaving senior leaders with the unenviable task of having to overhaul their strategies to preserve margins in the midst of a crisis.

Until relatively recently, firms could all but rely on steady revenue growth by making increases to headcount and winning new clients. Sales staff would be added, and sales incentive plans used, to generate new business and boost year-on-year sales.

Looking ahead, however, and these well-trodden pathways to growth seem less viable. Scrutiny of cost management and operating expenses is intensifying. Today’s context of fee and spread compression have in any case rendered the traditional growth lever of salesforce recruitment less powerful. Meanwhile, the significant erosion of revenue and profit is undoing the hard work of the recovery years since the global financial crisis. 

Rather than ‘bouncing back’ to the old trajectory, firms have no option but to find a new route to sustainable growth. But strategic initiatives around incentive plan design, location strategy and digital could yet put them on a stronger footing.

One major realisation management teams have had is that better control of staff costs can be attained by improving the balance between formulaic sales awards and pool-funded annual awards.

There is a clear rationale behind this shift in thinking. Overall revenues right now are weak, but formulaic sales commissions must still be paid to reflect new business generated for the firm. Sales awards are tracking in line with 2019 even while this year’s annual bonus pools look constrained. Sticking with the formulaic approach makes it challenging to manage compensation, given the total pool of compensation is shrinking in line with reduced profits. 

At a virtual roundtable we held for the wealth management industry in October, several HR leaders indicated that they are now striving to improve the balance of total incentive spend, primarily by shifting more dollars into annual bonus pools. This offers more flexibility than the formulaic approach. 

However, reducing sales incentives is not a silver bullet. It comes with the risk of attrition of salespeople, impairing revenue; or, less dramatically, lowers morale and depresses effort and revenue growth. The challenge is to maintain some line of sight between pay and performance, while achieving a better balance in pay awards between individual and business performance. 

If they are serious about solving the profitability problem, then firms should adopt a broader set of performance metrics. The context of fee compression and spread compression should encourage internal discussion of what sort of adviser behaviours are needed now to generate longer-term revenue growth.

Whichever levers are ultimately pulled, they must be reinforced by incentive plans that make it worthwhile for advisers to address holistic revenue opportunities, rather than just new sales. 

Anecdotally, wealth managers tell us that work is already underway on overhauling location strategies to unlock the cost saving opportunities. Organisational hierarchies that seemed fit for purpose in early spring are also being re-examined in light of the economic pressures on the business, as well as remote working requirements during the pandemic. 

Rather than simply cutting back overall staff numbers, a more focused approach would re-evaluate the client-team model taking into account the locations and structuring of certain roles now remote working appears here to stay. Over time, this may result in the ‘hubbing’ of certain roles in lower-cost locations and the consolidation of headcount elsewhere.

Needless to say, technology has a critical enabling part to play in helping firms shift gears on profitability.

Wealth managers have good intentions when it comes to investing in technology, but overall the industry has been slow to realise efficiencies by streamlining the work advisers are doing. 

Investments to date have focused on providing a 360-degree view of the client – undeniably helpful for relationship management. But comparatively less effort has been dedicated to identifying which work can come off the plates of advisers.

Stockmarkets may have bounced back, but firms must think past the crisis and carefully consider what strategies are needed to find a new path to long-term growth.  

Carter Sherwood is associate partner and Solomon Cohen senior manager Global Wealth Management at Aon