Lack of size is not a barrier to wealth management profitability - report - 17.07.2006
Wealthnet, 17/07/2006, Ian Orton
Small size is not a barrier to profitability, at least in the UK.
ComPeer, a London-based research firm that focuses on the wealth management market, mapped pre-tax profit margin against revenue as part of its 2006 report on the UK market.
It found that "small [size] is no barrier to profitability, and there are firms with profit margins in excess of 40 percent in all size ranges".
It did find, however, that loss-making firms are generally smaller by revenue, and expects these firms to gout of business or be absorbed by larger firms.
"It is likely that this will increase further the market share of the largest players, particularly those firms who have demonstrated themselves adept at integrating teams or book of business onto their platforms.
"However, we expect more profitable, smaller firms to continue to do well," the report continues. "Open architecture, use of fund of funds and a move to a more advisory focus make it easier to operate on a smaller scale while continuing to offer a comprehensive wealth offering. The smaller business can be very attractive both to employees, where they have more control over how they service clients, and also to clients, where personal service can be a reality."
ComPeer's data also found no real evidence that economies of scale are being achieved in wealth management. ComPeer plotted total costs as a percentage of investments assets against total assets under management for each firm (apart from the very biggest to ensure confidentially of data). It found that "there is scant evidence of a correlation between size of firm and this key cost ratio, although again the worst performing firms tend to be smaller.
"Scale does not therefore necessarily lead to scale economies," ComPeer continues "Productivity and cost ratios are driven instead by the scope of the service offering and the efficiency with which it is delivered.
"This means that to achieve economies of scale through an acquisition strategy, it is imperative to consolidate quickly around an efficient service offering and supporting platform. As evidenced in the fall out from a number of recent acquisitions, the implications for client and staff retention of forcing through such change need to be carefully considered.