US Wealth Management Survey

8/7/2019 US Wealth Management Survey

1/20

U.S. Wealth Management SurveyTrends and Emerging Business Models

Leading Research John Rolander Gauthier Vincent

Chuck LymanSofia Graniello


2/20

1

Executive Summary The U.S. wealth management industry is in the midst of a series of dramatic changes, resulting from the

recent crisis as well as long-term trends in the industry

Full-service firms have been losing share of advisors and assets to independent and self-directed

channelsa trend that preceded the crisis and has accelerated The financial crisis has created new challenges: Client satisfaction has approached historic lows, and

client focus on transparency and lower-risk/return products has resulted in lower revenue yield

In addition, consolidation of banks and brokerages has led to the challenge of creating a truly integratedexperience and realizing the potential economic rewards

Going forward, we expect the industry to focus on three key strategic challenges:

1. How can advisors and firms regain client trust?

2. What is the the role of the advisor in a world of integrated financial institutions?

3. How can wealth management operating models deliver specialization and scale to enable competitive

advantage and profitable growth?

Answering these questions will be key to positioning evolving wealth management firms for a new phaseof growth and profitability


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2

North America Shows Continued Growth Prospects for High Net

Worth (HNW) Markets

12.7

9.1

11.711.3

10.2

3.3

2.7

3.33.2

2.9

0

5

10

15

20

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

HNW Population(in millions)

HNW Wealth(in US$ trillions)

*****

**

North American HNW1 Population and Wealth,2

2005-2013eNorth American HNW and Ultra HNW Population

and Wealth,3 2008

9.1

3.2

Wealth (in US$ trillions)Population (in thousands)

*

*

*

*

1. High net worth is defined as individuals with more than US$1M in investable assets, ultra high net worth as those with more than $30M in investable assets.2. Wealth is defined as investable assets, excluding primary residence, collectibles, consumables, and consumer durables.3. The estimate of ultra HNW wealth in North America is based on the global contribution rate of ultra HNW to total HNW wealth = 34.7%.Note: 2013 population growth is an estimate based on Booz & Company analysis.

Source: Capgemini/Merrill Lynch World Wealth Report 2009; IHS research; Booz & Company analysis and research

4.2%CAGR

7%CAGR


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3

North American HNW Growth Is Outpacing Other Global HNW

Markets

GDP 6.1%HNW 10.8%

Multiple 1.8x

Middle East & Africa

GDP 5.2%

HNW 8.1%

Multiple 1.6x

Asia/Pacific

GDP 4.5%HNW 5.9%

Multiple 1.3x

Latin America

GDP 2.8%

HNW 8.4%

Multiple 3.0x

North America

GDP 2.5%

HNW 4.4%

Multiple 1.7x

Europe

GDP 3.6%

HNW 7.0%

Multiple2 1.9x

Global

1. 2002-2007 sample used to avoid distortions from market conditions in 2008 and 2009.2. Multiple represents the number of times that HNW markets are growing above GDP; a higher multiple represents a HNW market growing much faster than the rest of the economy.

Source: IHS research; Booz & Company analysis and research

Key Takeaways

Rapid growth of HNW globally at7% CAGR, with North Americagrowing faster at 8.4%

Higher HNW to GDP multiple in

North America attributed tounique market characteristics:

Wealth distribution andconcentration

Stability and maturity of

capital markets

Global Wealth Management Market Growth(CAGR 2002-20071)


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4

Recent Trends Have Posed Important Challenges to Firms in

the U.S. Wealth Management Marketplace

ClientBehavior

AdvisorMovement

Pressure onProfitability

Key Trends

Asset allocation shifts toward safer products,

and demand for transparency increases

Post-crisis, client satisfaction levels are at anall-time low

Advisor migration toward independent channelscontinues

Advisors are increasingly making trade-offsbetween compensation and services received(issue resolution, portfolio management tools)

Battle for HNW clients continues, resulting inexpanding war for advisor talent

Implications

Business Models

1

2

3

4

As a response to shifts in the marketand profit pressure, firms are adaptingtheir business models

New formats in the independent space

have emerged to offer new valuepropositions for firms and advisors

New players have entered the marketand are attracting breakaway advisors

Consolidation is driving scale in bankbrokerage and resulting in integratedinstitutions

Team coverage models dominate theultra HNW space

Innovations have emerged in the onlinespace

Changes in asset levels and pricing, along withincreasing regulatory oversight, are puttingpressure on wealth managers profitability

Source: Booz & Company


6/20

5

Globally, the Downturn Has Engendered More Pragmatic Client

Behaviors

* Based on responses of 140 private banking executives, senior financial advisors, and leaders of regulatory authorities in 15 markets worldwide to Booz & Companys 2009 private banking survey.

Source: Booz & Company research and analysis

35%

20%

16%11%

*

*

*

*

*

*

*

*

*

*

Shift in Asset Allocation(% of client assets invested, per product)

Changing Requirements of HNW Investors

Sustainability of RecentTrend Toward Lower Risk*

(% of responses)

26%

6%*

*

*

*

1 Client Behavior

95% of survey respondents rated price transparency as being of high importance when asked about new pricing structures

Assets shifting away from equities and alternatives

Increasing preference for safer, more transparentproducts such as fixed income and cash related

Despite the recent shift in asset allocation, the majority ofrespondents expect a return to traditional allocation


7/20

6

0.7

0.8

0.9

1.0

***

Investment Returns During the Crisis Have Resulted in

Plummeting Client Satisfaction Levels

1 Client Behavior

HNW Client Satisfaction Index*

Key Takeaways Client satisfaction levels decreased to

all-time lows during the financial crisisas investment performancedecreased

Driven by this decline, clientsexperienced decreased loyalty to theiradvisors and firms, fueling themigration trend

Advisors are facing challenges in howto best address client dissatisfaction

Wealth management firms areresponding by adopting a more client-

focused perspective

* Calculated from percentage of satisfied customers, with 1 being the highest number of satisfied customers.


CLIENT EXAMPLE


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7

The $10.8T U.S. Wealth Market Is Served by Multiple Providers

with Distinct Formats but Overlapping Value Propositions

U.S. Retail Wealth Management Market

Source: Capgemini/Merrill Lynch; Aite Group; Financial Plannings FP 50; press releases; 10-K forms; Booz & Company analysis

EndClientWealthSpectrum

Firm Asset Size

MassAffluent

Ultr

aHNW

Wire Houses$4.2T

$50 Billion

HNW

Discount Brokers$1.8T

Independents and Regionals$1.9T

Bank Brokersand Insurance

$0.6T

Wire House

PrivateBanksBank Private Banks

$1.1T

$1 Trillion$1 Billion

RegisteredInvestmentAdvisors

(RIAs)$1.2T

Total Assets: $10.8T

2 Advisor Movement


9/20

8

Advisor Head Count by Channel(2004-2008 CAGR and Number of Advisors)

The Shift of Advisors and Assets from Full-Service to Independent

Models Is Expected to Continue

Key Takeaways

Driven by the desire for independenceand higher payouts, financial advisorshave been migrating from wire housesto more independent channels

The hybrid channel has benefited fromthis trend, as breakaway advisorstypically have a mix of commission andfee businesses

Independent segments shouldcontinue to benefit from investor andadvisor preference for independence

Independents, RIAs, and hybridadvisors have increased share and

now account for about 40% of assetscombined

* Broker/dealer.

Source: Cerulli Associates publicly available data, Market Update: RIA Channel Sizing and Assessment,; Booz & Company analysis

2 Advisor Movement

1.8%

15

19

16

70

99

36

55

310

-5 0 5 10 15 20

* *

* *

* *

* *

* *

* *

* *

* *

Advisor Head Count (CAGR)

2008Advisors

(in thousands)Channel


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9

Increasingly, Advisors Are Choosing a Sales Format Based on

Trade-Offs Between Compensation, Flexibility, and Risk

60%

50%

40%

25%

* ** *

Inherited book

Advisor notresponsible foroverhead or teamcosts

Broad product setand team of experts

HNW / ultra HNW

Creates a brandand marketpresence

Self-sourced clientbase

Responsible for alloverhead andbusiness risks

Advisor Compensation Structures*

2 Advisor Movement

Lead Flow / Franchise Value

Business RiskLow

Large / Valuable

High

Small / Weak

* Percentages represent portion of gross revenues generated per advisor paid out as advisor compensation.


Private Bank Model

Characteristics

Independent Model

Characteristics


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10

Winning in Talent Acquisition Is Key; the Battle to Win the HNW

Client Is the Battle for the Advisor Who Owns the Relationship


Upgrading the Talent Pool

Few firms are recruiting actively (and those thatare recruiting are being very selective)

Primarily growth-oriented banks

Severe constraints on head count at most firms

Internal levers increasingly important

Focus on increasing advisor productivity

Accelerating growth in performance of youngeradvisors

Creating incentives (bonus, deferredcompensation) to encourage long-term retention

Opportunities to hire experienced talentare increasing

More talent on the market due to layoffsat brokerage firms / investment bank

Salary levels are normalizing

However

Many experienced advisors are lockedin by retention deals

Many have concerns about cultural /

business model mismatch if they move

2 Advisor Movement


12/20

1111

Profitability Will Remain Under Pressure and Firms Will Need to

Continue Managing Costs Tightly

TrendsProfitability Driver Impact on Profitability

Assets Lower asset values have decreased earnings

Preference for simple, less risky, and transparent products

Mandates

Simplicity and transparency reduce clients willingness to

delegate wealth management (fewer discretionary mandates)

Regulation Increasing requirements regarding operations, IT, reporting,

data security, regulation, etc.


1. Right-size thecost base

2. Upgrade organicgrowthcapabilities

3. Explore newsales formatsand business

models

HolisticAdvice

Offering integrated advisory services (e.g., insurance,financial planning, risk management) with higher margins

Pricing Greater price sensitivity in low return environment

Pressure on management fees

Priorities

3 Pressure on Profitability

TailoredOfferings

Can be addressed via modular product architecture Complex products will return, but with lower margins


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Ultra HNW

HNW

Affluent

Need to Balance Revenue with Cost to Serve Is Driving

Specialization and Standardization Strategies


Creating New Business Models

Operations /Infrastructure

Product /Portfolio

Management

Marketing /Sales /AdviceSegment

Value Chain

StandardizationStrategies

SpecializationStrategies Depends on

segment and

focus of player

4 Business Models

Observed Models Disintegration of value chain by

segments

Focus on scale in lower segments

Specialization in upper segments

Niche players / RIAs

Focus on upper segments and advice;product specialization

Emphasize conflict-free platform; nocommissions; no product push

Large, integrated players

Team-based sales and service

Increased cross-selling, cost synergies Separate branding (in upper

segments) to increase credibilityStandardization

Customization

?


14/20

13

Consolidation Has Driven Scale in Bank Brokerage and the

Emergence of Integrated Institutions

Wire House / Bank Brokerage Trends and Implications

1. Combined 2009 and 2007 estimates; includes $1.4T in assets at Merrill Lynch Global Wealth Management (2009) and ~$100B at U.S. Trust (2007 figures; updated AUM estimates not available).

2. 2009 estimates; includes $1.1T assets at Wells Fargo Advisors and ~$100B at Wells Fargo Private Bank and Wells Fargo Family Wealth.

Source: Press releases; Booz & Company analysis

Bank and Wire House Consolidation

$1.2T client assets2

$1.5T client assets1

Acquirer Bank Acquired

Increasing Scale Due to Consolidation

$167B total assets

4 Business Models: Bank Brokerage

Bank ofAmerica

Merrill Lynch

Wells Fargo Wachovia

Capital OneChevy Chase

Bank

Fifth Third Bank First Charter

PNC National City

Emergence of Bankerage

Increased perception of bankssecurity in comparison to non-bankB/Ds

Increased penetration of B/D servicesin banks retail branches

Increased legitimacy of bank B/Dmodel, as larger retail banks mergewith brokerage firms

Acquirer Bank Acquired

$111B total assets

$270B total assets


15/20

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Hybrid Formats Offer Flexibility for Firms and Advisors That

Have a Mix of Fee-Based and Commission-Based Business

Hybrid Firms Operating Models

RIA OnlyB/D onlyB/D Offering

Corporate RIARIA with B/D

Affiliation

B/D SupportingCorporate RIA and

Advisor-Owned RIA

4 Business Models: Hybrids

Holdingcompany

(B/D)

B/DCorporate

RIA

B/D

Advisor-owned RIA

firm

RIA

Advisor Affiliated B/DAdvisor

Typically, firms that support advisor-

owned RIA offer corporate RIA as well

Advisor

Typically offercorporate RIA

ModelBenefit

s

Firm/A

dvisor

Regulatory

Structure


Firm

Broader options for advisor recruiting and

fulfillment of investor needs Highest percentage of revenues generated

by fee business

Ability to recruit/retain advisors desiring

additional independence Higher percentage of revenues generated

by fee business

RIA with ability to support B/D product

set and revenue model RIA with ability to recruit new advisors

with commission business

Advisor

Flexibility to serve broad range of clientneeds

Higher level of support / lower investment

Maintenance of independent business inthe context of an independent B/D

Higher payout, offset by higher costs andinitial investments

Ability to join or found an independentfirm while still serving a broad range ofclient needs


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WealthSpectrum

Mass

Affluent

UltraHNW

Team Coverage Models Dominate in the Ultra HNW Market

Competitor Map: Coverage Models

Coverage Spectrum

Advisor Team

PrivateBanks

Business Models: Private Banks

Morgan StanleySmith Barney

Merrill Lynch

Wells FargoAdvisors

UBS

Citi (PWM*)Harris

Full Service andBank Brokerage

Credit Suisse

Goldman Sachs

Morgan Stanley(PWM*)

Merrill Lynch(PBIG**)

High-EndBrokerage

Harris(myCFO)

HighTower

Bessemer Trust

J.P. MorganPrivate Bank

CitiPrivate Bank

HarrisPrivate Bank

* Private Wealth Management** Private Bank Investment Group


4


17/20

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An Integrated Model Positions Wealth Managers to Serve

Entrepreneurs Better Through Wealth Creation Strategies

* Percentages represent composition of the Forbes 400, 2008.

Source: Booz & Company analysis

Sources of Ultra HNW Wealth*

Business Models: Private Banks

100%

21%

*

*

*

*

*

*

*

*

******

Entrepreneurial Wealth

Wealth Creation: The PrivateInvestment Banking Model

Broad range of private banking,commercial banking, andinvestment banking capabilities

Team-based, multidisciplinary

sales and service coveragemodel

Referral protocols to accessproducts within a diversifiedfinancial services firm

4


18/20

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Conclusions

The wealth management industry is undergoing a number of changes, from new client behaviorsand shifts in sources of profitability to new sales formats and emerging business models

Wealth management firms can take advantage of these changes. To capture continued growthprospects, they will need to:

Focus on client experience

Revisit market segmentation and refine their customer value proposition by segment

Upgrade or build new capabilities (e.g., product solutions, advice, client knowledgemanagement) to deliver customer value


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Contact Information

New YorkJohn RolanderPartner+1-212-551-6069

[email protected]

Gauthier VincentSenior Executive [email protected]

Chuck [email protected]

Sofia GranielloSenior [email protected]

Documents

US Wealth Management Survey