Study by Roland Berger Strategy Consultants on wealth management

• Value of worldwide assets under management down 20% to EUR 24 trillion
• Action needed to boost efficiency as earnings drop by up to 25%
• Confidence can be recovered if wealth management industry focuses strictly on customer requirements
• Wanted: Efficient organization, a deeper understanding of customers, adjusted portfolios and customer-centric structures
• Roland Berger Strategy Consultants debunks 13 of the industry myths in its "Regaining momentum in wealth management" study

After enjoying a protracted growth phase, the wealth management business has suffered a huge and hitherto unparalleled collapse at the hands of the financial crisis. Private investors have conceded paper losses of approx. EUR 6 trillion. To put that in perspective: All the value added to their investments in the past ten years has been wiped out. Around the globe, market players' confidence has been in free fall. What began with the bursting of a lending bubble in the USA has since pulled virtually every category of investment and every market worldwide down with it.

For its "Regaining momentum in wealth management" study, Roland Berger Strategy Consultants questioned 300 clients and advisors in Europe and Asia, enriching its insights by interviewing wealth management experts around the globe. The study also drew on Roland Berger's extensive project experience. A detailed questionnaire was, for example, filled out by more than 1,800 wealth management clients. The findings are unequivocal: The market is far from returning to normality. Business models must be adapted specifically to improve both efficiency and customer-centricity.

Until recently, the steady growth realized by wealthy and very wealthy clients combined with the countless investment opportunities afforded by a generally booming global economy made asset management a singular success story. A number of regulatory changes meant that, although the advisory process was adjusted around the "know your client" requirements, it shifted toward technical aspects and essentially moved away from client needs. Investors focused their attention on growth, without taking anything like a detailed look at the risks inherent in any financial decision.

Value propositions ripe for reorientation

Conducted from August 2008 through January 2009, Roland Berger's worldwide study aimed to capture the big picture. It examined the size of markets and the changes affecting them; the needs of customers; the market players, their business models and what they have to offer. "For each of these aspects, we compared the situation before the crisis of confidence with the environment as it stands today. On the basis of hypothetical future trajectories, we then put together recommendations for action," explains Daniel Gresch, Partner at Roland Berger Strategy Consultants. "It became apparent that the wealth management industry must redefine its value proposition if it is to weather the current crisis."

Less complexity, more individuality

The answers we received from clients and advisors alike underscore just how uncertain the market is right now when it comes to risk assessment. As a result, investors will hold their cash positions until the markets are stable again. Only then will we see a fresh increase in demand for growth-oriented products. In the medium term, customers are likely to want more advice than they did before the crisis. Despite the fact that today's customers are better educated and have access to more information, the knowledge gap in financial matters is widening. The expectations of private banking customers are based not so much on the size of their wealth as on their personal values and attitudes. Whether a customer opts for straightforward, modular solutions rather than very specific services is thus determined more by individual outlook than investment volume. "The discovery that customers must be segmented on the basis of different criteria – such as their values – may turn out to be one of the study's key findings," says Olaf Toepfer, Partner at Roland Berger Strategy Consultants. "Those organizations that operate customer-centric business models have shown themselves to be far more crisis-proof than the more widespread product-oriented models."

The study debunks myths

The authors of the study investigated 13 myths about wealth management – and refuted them all on the basis of collated responses and statistical data. For instance, one widely held assumption is that the significance of offshore business will wane as tax loopholes are plugged and "tax havens" come under increasing international pressure. Though recent developments do indeed confirm that undisclosed offshore business will remain under fire, other factors will also continue to drive the growth of legitimate offshore business. One such factor is a lack of trust in the stability and creditworthiness of customers' home countries. Another is dissatisfaction with the quality of wealth management service in customers' domestic market context. Our study also refuted the common but spurious "rule" that the economies of scale resulting from large volumes of managed wealth are crucial to profitability. On the contrary, we found that profitability depended more on the composition of investments and the use made of distinctive regional opportunities.

Optimizing wealth management services

The key to successful wealth management is not broadening the range of investment opportunities or products as far as possible. It is rather personal advice and the ability to tailor solutions specifically to the individual situations and needs of each customer. "To win back people's trust and inject fresh momentum into this business," Daniel Gresch affirms, "the industry needs to overhaul its product and service offerings and take the complexity out of its business model. One aspect involves establishing a well-structured advisory process that gives due consideration to the customer's overall situation – including liabilities and projected future cash flows."