by Jacqueline Teoh
Managing Director
Januar, 2021
An accurate pricing strategy can help wealth managers boost annual revenues and profits as well as build valuable trust in an increasingly competitive market.
Rising competition and costs have prevented many Wealth Managers (WMs) in Asia from growing revenues and profits even as their own client base has become richer. While personal assets of the wealthy have almost tripled in the past 20 years, WMs’ cost-to-income ratios have steadily climbed, reaching 77% by 2018. Some experts project further rises to as high as 85% 1.
This strong growth in wealth offers great opportunities for WMs in Asia to increase the size of their businesses, but they must first find ways to reduce the pressure on margins in order to help achieve a profitable, sustainable business model.
One area most WMs in Asia have historically not addressed with the required rigour is their pricing policy. This is an oversight that might not only impact revenue, but also could damage client trust and retention – and could lead to trouble with regulators. The good news is that quick wins can be achieved by working with experienced third parties.
From our experience it appears that there are additional dollars to be earned by implementing a carefully constructed pricing strategy.
Whilst reviewing one of our client’s pricing strategy we found that their custody fees were below the market level; as were its discretionary fees, which affected more than 1,000 legacy accounts. With equities, we found that prices could be raised in certain markets; while in funds and bonds there was insufficient spread and price differentiation. When it came to foreign exchange, we found low margins, inconsistent fee enforcement and fee waivers on secondary trades that were adding up to $5 million a year in lost revenues alone.
Based on those insights, we were able to help our client implement a series of measures to stop them undercharging and to control the discounts offered by its relationship managers. Thanks to this, most of the additional revenue gained from our measures fell straight to the bottom line as leveraging them incurred minimal costs. Furthermore, this is recurring revenue, and not one-off additions.
Other areas for improvement we often come across during client pricing strategy reviews include poor documentation of bilateral agreements between manager and client as well as poor pricing analytics in real or near real time. We also see firms over-relying on Excel spreadsheets rather than adopting innovative (fintech) solutions that provide essential analytics on profitability and spend.
The upside of pricing reviews goes even further than capturing lost revenue. For example, firms that benchmark pricing and impose strict controls on fees could significantly reduce the risk of overcharging clients and, consequently, avoid fines meted out by regulators.
Correct pricing also builds trust – and when it comes to client retention, trust has never been more important than it is today. The industry is currently facing the biggest intergenerational transfer of wealth ever seen. Over the next 10 years, almost 20% of wealth held by high net worth individuals is expected to change hands – that’s about $15 trillions.²
Our recent Accenture – Orbium Wealth Management C-Level Survey shows that on average 32% of wealth is expected to leak away from retained WMs over the next five years. Some of the losses can be accounted for by the megatrends identified in our survey, such as clients looking for digital services, environmental, social and corporate governance (ESG) advice and products, and next-generation advisers. But poor reputation and lack of trust could surely play a part as well. Clients might shop around to find good service at a cheaper cost. Faith that one’s WM is competitive when it comes to pricing could plug at least some of that loss.
Trust is also vital when it comes to attracting new money – something WMs are finding increasingly hard across the globe due to growing competition from fintechs and new challengers. Those with a reputation for competitive and fair pricing would likely find it easier to sign up new customers.
Thus, getting pricing right is a key to sustainable revenues. But it’s not easy, particularly if a bank wants to offer relationship pricing, where clients are charged according to the size and profitability of their relationship with the firm. Relationship pricing requires even more: A well thought through data selection, collection and analysis, and therefore investments in the right new technology. Without that, a firm cannot hope to know which client is profitable or might be deserving a discount. Given the risks of fines for overcharging and lost revenues due to undercharging, fees should no longer be left to the discretion of a relationship manager.
Relationship pricing also demands a carefully constructed and benchmarking framework, with the appropriate controls in place. These controls could and should be implemented through the bank’s order entry system via its core banking platform. As a company, we have been able to advise clients in Asia on the importance and order of implementing these controls and have helped them adapt their IT systems accordingly.
Given that the pressure on margins is likely to continue, that clients are increasingly price sensitive and that regulators could punish overcharging, the benefits of a thorough pricing review and strategy could not be underestimated. In working with the right partner, quick wins could easily be identified that could add to the bottom line, while greater data transparency helps ensure that the price is right for the client and their bank.
