In the firm’s latest annual World Wealth Report, it surveyed over 3,000 high-net-worth individuals (HNWIs) across 26 countries including 103 in Australia. It also conducted surveys with 75 executives.
HNWIs are classed as those individuals with US$1–5 million ($1.5–7.5 million) in assets under management while ultra-HNWIs (UHNWIs) have US$30 million or more.
Australia was identified as having seen the second-highest growth in both HNWI assets and population in Asia-Pacific, behind India.
This year, firms identified, however, that their primary revenue sources “are facing substantial pressure”. Some 80 per cent of wealth managers’ revenue is driven by external factors, the firm said.
“Our analysis of annual reports from wealth management firms uncovered that their primary revenue streams are currently facing substantial pressure. This pressure stems from external factors such as a challenging macroeconomic landscape and heightened geopolitical uncertainty in the short term.”
Breaking it down by specific fee types, it said management and performance-based fees currently comprise 55–70 per cent of firms’ total revenue. However, these are under pressure from slower market growth.
“Asset prices are unlikely to grow as high as they did during 2010–20, exerting pressure on management fees charged as a percentage of assets under management and performance-based fees for generating above-threshold returns.”
At the same time, transaction and brokerage fees typically generate 15–25 per cent of total revenue but are under pressure from client preferences for wealth preservation during a turbulent time.
According to Reuters, assets managed by dedicated portfolio manager could generate up to 15x the revenue for a typical wealth management firm compared to when clients decide to remain in cash or cash equivalents.
Further down the fees spectrum, advisory and value-added service fees account for 5–10 per cent of the total revenue. These are also under pressure as investors tend to only use a few of the firm’s services and divide assets between multiple providers.
Value-added services can be both financial and non-financial, covering services such as tax planning, inheritance planning, legal consultation and concierge services. These are particularly important for UHNWIs with 78 per cent saying they are “essential” to their relationship with their wealth manager and this was cited as a reason they may opt for a family office over a wealth manager.
“An analysis of revenue structure and pressures on different constituents indicates that external market factors drive over 80 per cent of a typical wealth management firm’s revenue. Advisory and service fees, although driven by internal factors, cannot compensate for revenue loss from management, performance and transaction fees.”
Finally, regulatory costs and IT spending also weighed on firms’ bottom line.
What can firms do?
“With rising revenue pressures and increased IT and compliance costs, wealth management firms will face challenges on both side of the balance sheet. Firms must find ways to maintain profitable growth during macroeconomic volatility and stock market uncertainty,” Capgemini said.
It recommended:
- Wealth management firms that deeply understand client behaviour can deliver personalised value and value-added services to earn mind share that boosts wallet share among HNWIs especially in the profitable UHNWIs.
- As competition from other players, including family offices, heats up, wealth management firms will find themselves competing to retain primary partner status among UHNWIs.
- Strategic wealth managers will monetise their existing capabilities by offering products and services to family offices to create new, diversified revenue streams.
“Winning the wallet share of UHNWIs is critical to boost wealth managers’ asset management, leading to higher management fees which is their largest revenue driver. In response, wealth managers need to figure out how to both compete and collaborate with family offices,” it concluded.
Last month, consultancy EY shared how wealth managers can use personalisation to deeper client relationships.
The 2024 EY Global Wealth Management Industry Report called for greater customisation when it comes to advisers’ client service models as client preferences shift towards greater personalisation, known as “hyper-personalisation”.
“Clients’ financial and wealth advice needs vary widely according to their circumstances, needs and expectations, but the relevance of hyper-personalised advice in strengthening client relationships and client perceived net value is generally undisputed,” the EY report wrote.
