Wealth Management is an Attractive Industry Experiencing Strong Growth
With EUR 18 trillion of financial assets held by individuals, Europe represents one of the largest wealth management opportunities in the world. Individual financial assets have been growing at 4.3% per annum since 2010—approximately one percentage point faster than European nominal GDP. Furthermore, with average returns on equity of 13-15%, wealth management is still favoured by capital markets over other financial services businesses. Wealth managers are currently valued at price-to-earnings multiples of 10-12x, higher than their corporate and investment banking counterparts at 6-8x. Finally, wealth management remains attractive especially for established players, with personal relationships underpinning client retention and high fixed costs acting as barriers to entry.
Wealth Managers are Facing Significant Challenges
However, the wealth management industry faces a number of significant challenges. Due to its attractiveness, competition between players is increasing, and industry profit levels continue to be approximately 20% below pre-crisis levels. Newly created wealth has also been limited, with new inflows accounting for 25% of the asset growth and the balance of 75% coming from market appreciation.
From the client perspective, the industry faces further challenges. Trust in wealth managers and financial markets has not been fully restored since the financial crisis, causing changes in client behaviour. For example, clients are increasingly making direct investments in real estate and private equity (not through wealth managers) and maintaining higher deposit levels. Despite these challenges, capital markets expect wealth manager executives to deliver significant earnings growth of approximately 6-7% per annum.
The Industry is Poised to Change
Against this backdrop, the industry is poised to change significantly. Our executive interviews and research have helped us to identify four main forces behind this change:
- The next generation of clients is emerging as wealth is created in new industries and a peak transition of wealth to a younger generation occurs over the next 20-30 years.
- Digital innovation will provide opportunities to better engage and service clients, but will also enable innovative players to disrupt the market.
- A regulatory focus on client protection and stability of the financial system is creating numerous challenges for wealth managers, but is also opening up opportunities for differentiation.
- Demand for full tax transparency (in response to OECD rules and automatic data exchange, for example) is putting the traditional offshore model under pressure.
Success Depends on Delivering Against Five Strategic Imperatives
In the face of these forces of change, wealth managers must redesign their business models to be successful in the future. Through our executive interviews and research, we have identified five strategic imperatives that can better prepare wealth managers to master the challenges ahead:
- Embrace and fully leverage digital capabilities to successfully compete in a changing competitive landscape.
- Develop and strengthen advice and outcome-oriented portfolio construction—the core of a wealth management proposition—for clients.
- Nurture deeper and closer relationships between wealth managers and asset managers to deliver stronger investment propositions and solutions.
- Improve the transparency of client engagement models—discretionary, advisory and execution-only mandates—for clients, while making them more efficient and automated for wealth managers.
- Boost frontline productivity and operational efficiency to address industry-wide cost increases and declining revenue yields.
Wealth managers must be prepared for sweeping change in the European wealth management industry. A clear understanding of the industry forces at play, a focused strategy and efficient execution will be critical for success.
Authors
Claude Kurzo, J.P. Morgan Asset Management
Claude Kurzo is Head of Strategy & Business Development EMEA for J.P. Morgan Asset Management, based in London. He is responsible for driving the global and EMEA strategic priorities of the Investment Management and Wealth Management businesses of J.P. Morgan.
Prior to joining J.P. Morgan, Claude was with McKinsey & Co. in Zurich and Dubai, with a focus on investment management and private banking.
He holds an MBA from IESE Business School in Barcelona, Spain, and a master's degree in law from the University of St. Gallen, Switzerland.
Dr. Stefan Jaecklin, CFA, Oliver Wyman
Dr. Stefan Jaecklin is a partner at Oliver Wyman with a focus on asset/wealth managers, investment banks, as well as regional banks and exchanges. He was the founder of the global wealth and asset management practice at Oliver Wyman and joined in 1997.
Prior to joining Oliver Wyman, Stefan worked at Credit Suisse in private banking.
Stefan Jaecklin holds a doctorate in International Economics of the Institut Universitaire de Hautes Etudes Internationales (Université de Genève, Suisse), a M.Soc.Sci (Economics) of the National University of Singapore and is a Chartered Financial Analyst (CFA).
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