U.S. Wealth Management Survey: Trends and Emerging Business Models

The wealth management industry is undergoing a number of changes, from new client behaviors and shifts in sources of profitability to new sales formats and emerging business models. Wealth management firms can take advantage of these changes. To capture continued growth prospects, they will need to: focus on client experience; revisit market segmentation and refine their customer value proposition by segment; and upgrade or build new capabilities (e.g., product solutions, advice, client knowledge management) to deliver customer value.

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Leading Research

John Rolander Gauthier Vincent Chuck Lyman Sofia Graniello

U.S. Wealth Management Survey Trends and Emerging Business Models

This report was originally published before March 31, 2014, when Booz & Company became Strategy&, part of the PwC network of firms. For more information visit www.strategyand.pwc.com.

Executive Summary
The U.S. wealth management industry is in the midst of a series of dramatic changes, resulting from the recent crisis as well as long-term trends in the industry Full-service firms have been losing share of advisors and assets to independent and self-directed channels—a trend that preceded the crisis and has accelerated The financial crisis has created new challenges: Client satisfaction has approached historic lows, and client focus on transparency and lower-risk/return products has resulted in lower revenue yield In addition, consolidation of banks and brokerages has led to the challenge of creating a truly integrated experience and realizing the potential economic rewards Going forward, we expect the industry to focus on three key strategic challenges: 1. How can advisors and firms regain client trust? 2. What is the the role of the advisor in a world of integrated financial institutions? 3. How can wealth management operating models deliver specialization and scale to enable competitive advantage and profitable growth? Answering these questions will be key to positioning evolving wealth management firms for a new phase of growth and profitability

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North America Shows Continued Growth Prospects for High Net Worth (HNW) Markets
North American HNW1 Population and Wealth,2 2005-2013e
HNW Population (in millions)
4.0

North American HNW and Ultra HNW Population and Wealth,3 2008
* * *
15

HNW Wealth (in US$ trillions)
20

*
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 10.2 2.9 3.2

*
3.3
4.2% CAGR

3.3

2.7 12.7 11.3 11.7 9.1

10

*
7% CAGR

9.1 5 3.2 0

*

*

*

*

*

Population (in thousands)

Wealth (in US$ trillions)

1. High net worth is defined as individuals with more than US$1M in investable assets, ultra high net worth as those with more than $30M in investable assets. 2. Wealth is defined as investable assets, excluding primary residence, collectibles, consumables, and consumer durables. 3. The estimate of ultra HNW wealth in North America is based on the global contribution rate of ultra HNW to total HNW wealth = 34.7%. Note: 2013 population growth is an estimate based on Booz & Company analysis. Source: Capgemini/Merrill Lynch World Wealth Report 2009; IHS research; Booz & Company analysis and research

2

North American HNW Growth Is Outpacing Other Global HNW Markets
Global Wealth Management Market Growth
(CAGR 2002-20071) Global GDP HNW Multiple2 Europe GDP HNW Multiple 2.5% 4.4% 1.7x 3.6% 7.0% 1.9x North America GDP HNW Multiple Asia/Pacific GDP HNW Multiple Latin America GDP HNW Multiple 4.5% 5.9% 1.3x 5.2% 8.1% 1.6x 2.8% 8.4% 3.0x

Key Takeaways Rapid growth of HNW globally at 7% CAGR, with North America growing faster at 8.4% Higher HNW to GDP multiple in North America attributed to unique market characteristics: – Wealth distribution and concentration – Stability and maturity of capital markets

Middle East & Africa GDP HNW Multiple 6.1% 10.8% 1.8x

1. 2002-2007 sample used to avoid distortions from market conditions in 2008 and 2009. 2. Multiple represents the number of times that HNW markets are growing above GDP; a higher multiple represents a HNW market growing much faster than the rest of the economy. Source: IHS research; Booz & Company analysis and research

3

Recent Trends Have Posed Important Challenges to Firms in the U.S. Wealth Management Marketplace
Key Trends
1 Asset allocation shifts toward safer products, and demand for transparency increases Post-crisis, client satisfaction levels are at an all-time low 4 Business Models

Implications

Client Behavior

As a response to shifts in the market and profit pressure, firms are adapting their business models New formats in the independent space have emerged to offer new value propositions for firms and advisors New players have entered the market and are attracting breakaway advisors Consolidation is driving scale in bank brokerage and resulting in integrated institutions Team coverage models dominate the ultra HNW space Innovations have emerged in the online space

2

Advisor Movement

Advisor migration toward independent channels continues Advisors are increasingly making trade-offs between compensation and services received (issue resolution, portfolio management tools) Battle for HNW clients continues, resulting in expanding war for advisor talent

3 Changes in asset levels and pricing, along with increasing regulatory oversight, are putting pressure on wealth managers’ profitability

Pressure on Profitability

Source: Booz & Company

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1 Client Behavior

Globally, the Downturn Has Engendered More Pragmatic Client Behaviors
Changing Requirements of HNW Investors
Shift in Asset Allocation
(% of client assets invested, per product)

Sustainability of Recent Trend Toward Lower Risk*
(% of responses)

*

16%

11% 20%

*
26%

*

35%

* * *
6%

* *

* * * *

*

* Despite the recent shift in asset allocation, the majority of respondents expect a return to traditional allocation

Assets shifting away from equities and alternatives Increasing preference for safer, more transparent products such as fixed income and cash related

95% of survey respondents rated “price transparency” as being of “high importance” when asked about new pricing structures
* Based on responses of 140 private banking executives, senior financial advisors, and leaders of regulatory authorities in 15 markets worldwide to Booz & Company’s 2009 private banking survey. Source: Booz & Company research and analysis

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1 Client Behavior

Investment Returns During the Crisis Have Resulted in Plummeting Client Satisfaction Levels
HNW Client Satisfaction Index*
CLIENT EXAMPLE
1.0

Key Takeaways
Client satisfaction levels decreased to all-time lows during the financial crisis as investment performance decreased
0.9

Driven by this decline, clients experienced decreased loyalty to their advisors and firms, fueling the migration trend Advisors are facing challenges in how to best address client dissatisfaction Wealth management firms are responding by adopting a more clientfocused perspective

0.8

0.7

*

*

*

* Calculated from percentage of satisfied customers, with 1 being the highest number of satisfied customers. Source: Booz & Company

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2 Advisor Movement

The $10.8T U.S. Wealth Market Is Served by Multiple Providers with Distinct Formats but Overlapping Value Propositions
U.S. Retail Wealth Management Market
Ultra HNW Wire House Private Banks Registered Investment Advisors (RIAs) $1.2T Bank Private Banks $1.1T Wire Houses $4.2T

End Client Wealth Spectrum

HNW

Independents and Regionals $1.9T Mass Affluent

Bank Brokers and Insurance $0.6T $1 Billion $50 Billion

Discount Brokers $1.8T

$1 Trillion

Firm Asset Size

Total Assets: $10.8T
Source: Capgemini/Merrill Lynch; Aite Group; Financial Planning’s FP 50; press releases; 10-K forms; Booz & Company analysis

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2 Advisor Movement

The Shift of Advisors and Assets from Full-Service to Independent Models Is Expected to Continue
Advisor Head Count by Channel
(2004-2008 CAGR and Number of Advisors) Channel
* * * * * * * *
-5

2008 Advisors (in thousands) * * * * 99 * * 1.8% * *
0 5 10 15 20

Key Takeaways
Driven by the desire for independence and higher payouts, financial advisors have been migrating from wire houses to more independent channels The hybrid channel has benefited from this trend, as breakaway advisors typically have a mix of commission and fee businesses Independent segments should continue to benefit from investor and advisor preference for independence Independents, RIAs, and hybrid advisors have increased share and now account for about 40% of assets combined

15 19 16 70

36

55 310

Advisor Head Count (CAGR)
* Broker/dealer. Source: Cerulli Associates publicly available data, “Market Update: RIA Channel Sizing and Assessment,”; Booz & Company analysis

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2 Advisor Movement

Increasingly, Advisors Are Choosing a Sales Format Based on Trade-Offs Between Compensation, Flexibility, and Risk
Advisor Compensation Structures*
Large / Valuable Low Lead Flow / Franchise Value Business Risk
60% 50% 40%

Small / Weak High

Private Bank Model Characteristics Inherited book Advisor not responsible for overhead or team costs Broad product set and team of experts HNW / ultra HNW
*
25%

Independent Model Characteristics Creates a brand and market presence Self-sourced client base Responsible for all overhead and business risks

*

*

*

* Percentages represent portion of gross revenues generated per advisor paid out as advisor compensation. Source: Booz & Company

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2 Advisor Movement

Winning in Talent Acquisition Is Key; the Battle to Win the HNW Client Is the Battle for the Advisor Who Owns the Relationship
Upgrading the Talent Pool

Opportunities to hire experienced talent are increasing – More talent on the market due to layoffs at brokerage firms / investment bank – Salary levels are normalizing However – Many experienced advisors are locked in by retention deals – Many have concerns about cultural / business model mismatch if they move

Few firms are recruiting actively (and those that are recruiting are being very selective) − Primarily growth-oriented banks − Severe constraints on head count at most firms

Internal levers increasingly important − Focus on increasing advisor productivity − Accelerating growth in performance of younger advisors − Creating incentives (bonus, deferred compensation) to encourage long-term retention

Source: Booz & Company

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3 Pressure on Profitability

Profitability Will Remain Under Pressure and Firms Will Need to Continue Managing Costs Tightly
Profitability Driver
Pricing

Trends
Greater price sensitivity in low return environment Pressure on management fees

Impact on Profitability

Priorities
Assets Lower asset values have decreased earnings Preference for simple, less risky, and transparent products Simplicity and transparency reduce clients’ willingness to delegate wealth management (fewer discretionary mandates)

1. Right-size the cost base 2. Upgrade organic growth capabilities 3. Explore new sales formats and business models

Mandates

Holistic Advice

Offering integrated advisory services (e.g., insurance, financial planning, risk management) with higher margins Can be addressed via modular product architecture Complex products will return, but with lower margins Increasing requirements regarding operations, IT, reporting, data security, regulation, etc.

Tailored Offerings

Regulation

Source: Booz & Company

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4

Business Models

Need to Balance Revenue with Cost to Serve Is Driving Specialization and Standardization Strategies
Creating New Business Models
Value Chain Marketing / Sales / Advice Product / Portfolio Management

Observed Models
Operations / Infrastructure Disintegration of value chain by segments – Focus on scale in lower segments – Specialization in upper segments Customization Niche players / RIAs – Focus on upper segments and advice; product specialization – Emphasize conflict-free platform; no commissions; no product push Large, integrated players – Team-based sales and service – Increased cross-selling, cost synergies – Separate branding (in upper segments) to increase credibility

Segment

Ultra HNW

Specialization Strategies

Depends on segment and focus of player

HNW

?

Affluent

Standardization Strategies
Standardization

Source: Booz & Company

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4 Business Models: Bank Brokerage

Consolidation Has Driven Scale in Bank Brokerage and the Emergence of Integrated Institutions
Wire House / Bank Brokerage Trends and Implications
Bank and Wire House Consolidation Acquirer
Bank of America

Increasing Scale Due to Consolidation Acquirer
Capital One

Emergence of “Bankerage” Increased perception of banks’ security in comparison to non-bank B/Ds Increased penetration of B/D services in banks’ retail branches Increased legitimacy of bank B/D model, as larger retail banks merge with brokerage firms

Bank Acquired
Merrill Lynch

Bank Acquired
Chevy Chase Bank

$1.5T client assets1
Wells Fargo Wachovia

$167B total assets
Fifth Third Bank First Charter

$1.2T client assets2
PNC

$111B total assets
National City

$270B total assets

1. Combined 2009 and 2007 estimates; includes $1.4T in assets at Merrill Lynch Global Wealth Management (2009) and ~$100B at U.S. Trust (2007 figures; updated AUM estimates not available). 2. 2009 estimates; includes $1.1T assets at Wells Fargo Advisors and ~$100B at Wells Fargo Private Bank and Wells Fargo Family Wealth. Source: Press releases; Booz & Company analysis

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4 Business Models: Hybrids

Hybrid Formats Offer Flexibility for Firms and Advisors That Have a Mix of Fee-Based and Commission-Based Business
Hybrid Firms’ Operating Models
B/D only B/D Offering Corporate RIA B/D Supporting Corporate RIA and Advisor-Owned RIA RIA with B/D Affiliation RIA Only

Firm / Advisor Regulatory Structure

Holding company (B/D)

B/D

Typically offer corporate RIA

RIA

B/D

Corporate RIA

Advisor

Advisorowned RIA firm

Advisor

Affiliated B/D

Advisor

Typically, firms that support advisorowned RIA offer corporate RIA as well Ability to recruit/retain advisors desiring additional independence Higher percentage of revenues generated by fee business Maintenance of independent business in the context of an independent B/D Higher payout, offset by higher costs and initial investments RIA with ability to support B/D product set and revenue model RIA with ability to recruit new advisors with commission business Ability to join or found an independent firm while still serving a broad range of client needs

Model Benefits

Firm

Broader options for advisor recruiting and fulfillment of investor needs Highest percentage of revenues generated by fee business Flexibility to serve broad range of client needs Higher level of support / lower investment

Advisor

Source: Booz & Company

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4 Business Models: Private Banks

Team Coverage Models Dominate in the Ultra HNW Market
Competitor Map: Coverage Models
Ultra HNW
Harris (myCFO) HighTower Morgan Stanley (PWM*) Merrill Lynch (PBIG**) J.P. Morgan Private Bank Citi Private Bank Harris Private Bank Bessemer Trust

Goldman Sachs

High-End Brokerage
Credit Suisse

Private Banks

Wealth Spectrum

Full Service and Bank Brokerage
Morgan Stanley Smith Barney Merrill Lynch Wells Fargo Advisors

Mass Affluent

UBS Citi (PWM*)

Harris

Advisor

Team

Coverage Spectrum
* Private Wealth Management ** Private Bank Investment Group Source: Booz & Company

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4 Business Models: Private Banks

An Integrated Model Positions Wealth Managers to Serve Entrepreneurs Better Through Wealth Creation Strategies
Sources of Ultra HNW Wealth*
100%
*

Wealth Creation: The “Private Investment Banking” Model Broad range of private banking, commercial banking, and investment banking capabilities Team-based, multidisciplinary sales and service coverage model Referral protocols to access products within a diversified financial services firm

* * * *

21%

*

*

*

*

*

*

*

*

*

Entrepreneurial Wealth

* Percentages represent composition of the Forbes 400, 2008. Source: Booz & Company analysis

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Conclusions

The wealth management industry is undergoing a number of changes, from new client behaviors and shifts in sources of profitability to new sales formats and emerging business models Wealth management firms can take advantage of these changes. To capture continued growth prospects, they will need to: – Focus on client experience – Revisit market segmentation and refine their customer value proposition by segment – Upgrade or build new capabilities (e.g., product solutions, advice, client knowledge management) to deliver customer value

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Contact Information
New York John Rolander Partner +1-212-551-6069 [email protected] Gauthier Vincent Senior Executive Advisor +1-212-551-6522 [email protected] Chuck Lyman Principal +1-212-551-6429 [email protected] Sofia Graniello Senior Associate +1-212-551-6803 [email protected]
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