Cost control for wealth managers: Time to move beyond band-aids
- September 2, 2019
- 3 min. read
In many respects, the wealth management industry in Asia has never been more vibrant or ripe with opportunities. By many accounts this is now the world’s largest wealth region, and demand for sophisticated, specialised wealth management services is on the rise. [1]
Yet while the market might be flourishing, profitability has become a problem. The steady advance of regulation is forcing managers to spend more on compliance. According to one recent study anti-money laundering compliance costs alone are rising at around 10% annually, with no end in sight. [2] At the same time, fees are coming under substantial pressure from a blend of regulatory changes, demands for transparency and technology-driven competition. PwC is predicting aggregate fees will drop almost 20% over the next five years. [3]
It’s no wonder then that for many managers, expenses are growing faster than revenues, pushing cost-income ratios upwards. Operating jaws – i.e. the extent to which revenue growth is outpacing growth in expenses – for leading wealth managers turned negative again in 2018, according to Deutsche Bank and Oliver Wyman. [4]
Realistically, the main drags on profit aren’t going away anytime soon. Whether you’re in Hong Kong, Malaysia, Indonesia or Singapore, increasing regulation is a fact of doing business. Fees and expenses are coming under heavier scrutiny in markets around the world. And competing with a new crop of nimbler, tech-driven players is only set to become more challenging. In this kind of environment, controlling costs isn’t just a sound business practice – it’s a strategic necessity.
A new cost control code
The issue is that a lot of managers still see cost control as something to be instituted on an ad-hoc basis, or basically synonymous with cost-cutting, and adopt what I’ve come to see as a ‘band-aid’ approach. For example, as expenses rise, the manager introduces a round of layoffs to keep margins intact, and then it’s back to business as usual. Moves like these can temporarily improve the bottom line, but as soon as a new regulatory requirement comes along, cost-income ratios climb again. Not only that, but as institutions look for more and more areas to cut, client service risks becoming compromised.
The situation we face now as an industry demands a new mindset, where cost management is a continuous practice rather than a form of crisis response. And technology can play a massive enabling role in this shift – if it’s approached in the right way.
Technology expenses can quickly spiral out of control if a manager is layering on different solutions from different vendors to address various functions, creating complexity, risk and, funnily enough, additional costs. But more integrated solutions can reduce the time and redundancy associated with administrative or compliance tasks, provide unprecedented insights into client behavior, and give advisors and relationship managers the tools they need to do their jobs more efficiently and effectively.
This, I believe, is what creates the foundation for a more sustainable form of cost control, that supports sound client lifecycle management and can actually increase income. In the coming weeks I’ll explore how the most effective form of cost management is leveraging technology that streamlines bureaucratic processes and empowers relationship managers to do what they do best – win new clients, and nurture existing ones.
[1] https://www.reuters.com/article/us-asia-wealth-analysis/asias-billionaires-develop-taste-for-boutique-wealth-managers-idUSKCN1SX0FO
[2] https://www.prnewswire.com/news-releases/the-cost-of-anti-money-laundering-compliance-in-asia-pacific-region-increased-10-in-past-24-months-finds-study-by-lexisnexis-risk-solutions-300867959.html#targetText=True%20cost%20of%20AML%3A%20Midsize,%242.08%20million%20for%20smaller%20firms.
[3] https://www.linkedin.com/pulse/three-priorities-protecting-asset-wealth-management-olwyn-alexander-1e/
[4] https://www.oliverwyman.com/content/dam/oliver-wyman/v2/publications/2019/may/Global-Wealth-Managers-2019.pdf
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