How Wealth Managers Can Reduce Costs and Increase ROI

Wealth managers face a myriad of daily challenges, including talent recruitment roadblocks, operational workflow inefficiencies and pricing pressure driven by regulations, passive investing trends and competition from lower-fee “robo-advisors.”

These challenges have a noticeable impact on the financial management profitability equation, which is already sensitive due to the industry’s tightening profit margins. 

Unfortunately, managing the cost side of the equation has gotten harder in recent years. According to a special report by Deutsche Bank, between 2015 and 2017 cost growth outpaced revenue growth for the wealth management industry as a whole.

Managers that wish to remain competitive — and more importantly, that wish to increase profitability via higher total returns on investments — must focus on reducing costs wherever and however possible. Some possible opportunities to reduce wealth management costs and increase profitability may include dealing with employee turnover, outsourcing and adopting new technology.

Three Ways To Improve Profitability in Wealth Management

1. Reduce Employee Turnover

Human capital represents a considerable cost for wealth managers, as well as an investment in future financial management profitability and growth. The loss of key employees, or any employees for that matter, can have a significant bottom-line impact. In terms of an advisory’s present operations, employee turnover can be a major cost driver. 

According to a report by the Center for American Progress, the median cost of turnover is 21% of an employee’s annual salary. The authors note that jobs that are very complex and that require specialized training, licensure or higher levels of education — like many of the positions within a wealth advisory practice — tend to have even higher turnover costs.

There are many direct costs related to employee turnover:

• Separation costs, such as exit interviews and severance pay
• Replacement costs, such as job advertising and recruiter/staffing agency fees
• New employee training costs, such as orientation and certification programs

As high as these costs are, they may pale in comparison to the indirect, variable costs of employee turnover, including lost productivity, lost institutional knowledge and in some cases even lost clients.

Direct and indirect costs combined, it is obvious that employee turnover should be a major focus for wealth managers intent on cutting costs and increasing profits. The Society for Human Resource Management (SHRM) provides more information on the impact turnover has on employers and how managers and companies as a whole can mitigate these effects through robust retention strategies.

2. Outsource the Middle- and Back-Office

Analyzing the wealth management departments of leading global financial institutions, Deloitte found that the highest cost factors for traditional wealth management are salaries and the connected personnel-related costs, including Social Security, pensions and health benefits. In fact, these costs averaged around 60% of total costs for wealth managers, according to Deloitte. Outsourcing is one way to bring these costs under control.

The middle- and back-office are comprised of people directly supporting the managers and advisors who are directly interfacing with clients. The nature of these jobs, while critical to a firm’s success, can be trusted to outside parties that provide specialized operational talent for the wealth management industry, such as Empaxis.

Because wealth managers only pay these providers for labor, outsourcing helps reduce personnel-related costs that would have otherwise gone to in-house positions. Outsourcing can also help wealth managers reduce costs associated with employee turnover, especially productivity losses resulting from vacancies in the middle- or back-office.

3. Invest in Wealth Management Technology  

In recent years, one of the primary cost drivers for wealth management firms has been increased spending due to compliance. Some estimate that smaller wealth management firms could be spending as much as 10% of revenues on compliance; not an insignificant amount for firms looking to increase profitability and ROI.

At the same time, technology has helped wealth managers offset (or at least absorb) these and other risings costs. In a pair of studies by GlobalData and the British Banking Association, technology investments, particularly in so-called RegTech, helped the wealth management industry reduce its overall costs by 3% in 2016 compared to 2015. Again, not at all a small amount considering the tight margins and high cost-to-income ratios wealth managers face.

Outside of compliance, new and emerging digital capabilities may help wealth managers reduce costs in other high-impact areas such as operations efficiency and credit risk management.

In a report on the benefits of deploying new, cutting-edge technologies and capabilities, the Boston Consulting Group (BCG) found that “digital transformations” can help wealth managers cut costs across a range of variable costs, including:

• 5%-10% reduction in customer service costs
• 5%-15% reduction in HR costs
• 10%-20% reduction in office service costs
• 20%-30% reduction in credit review costs
• 20%-40% reduction in operations costs

Even marginally small spending reductions in any of one these areas can amount to significant cost savings for wealth managers. But more than cost savings, the return on investment in capabilities such as advanced analytics and next-generation performance reporting platforms may also have an impact on KPIs related to profitability.

For instance, the BCG report states that transformational wealth management technologies may lead to:

• 5%-10% growth in assets
• 5%-10% increase in sales to existing clients
• 5%-15% increase in price realization
• 10%-20% increase in client acquisition
• 10%-20% reduction in client attrition

As services and operations become increasingly digitized, and as wealth managers use new and emerging technology to their benefit, firms that are focused on technological transformation today will reap the most benefit in terms of cost savings and ROI tomorrow.