When the financial service industry’s top executives want in-depth research and insight about the wealth management business, Wallace Blankenbaker is often their go-to guy.
Blankenbaker is senior director and executive advisor for the financial services practice at the Corporate Executive Board, a for-profit, publicly-traded firm that provides research to global business executives and professionals. His clout is considerable: 85 percent of Fortune 500 companies are clients of CEB or part of the organization’s member network, and Blankenbaker counsels senior executives on business economics, sales strategies, staff development, product creation and operational improvement. Blankenbaker, a ten-year veteran of the CEB’s financial service practice, is also a frequent speaker at industry conferences.
WML: From a macro point of view, how do you see the state of the wealth management business now and what trends do you see being influential for the next several years?
WB: I see several supply-side and demand-side trends driving the business. On the demand side, client apprehensiveness about the market is really affecting wealth management firms’ revenues because conservative asset allocations don’t deliver the revenue that more aggressive ones do. So client inertia is having a huge effect. The good side of that is clients aren’t moving around in this environment. We’re seeing historically low turnover rates.
On the supply side, there’s huge pressure on wealth management firms to grow, especially if they’re part of a large and diverse organization. Banking revenue, for example, is getting hammered at retail and on the commercial side. So banks are looking for wealth management to drive growth. These growth aspirations are met by adding talent and as a result there is and will continue to be a war for advisor talent.
WML: Do you think the business will remain fragmented?
WB: In the short-term client inertia will keep market share fairly fragmented. I don’t think you’ll see a big shift. Wirehouses, RIAs and banks will stay about the same. In the long-term, if firms are successful at consolidating baby boomer assets at retirement, it will start to drive shifts in the market. The winners could be wirehouses and brokerage firms, if they put more emphasis in that area.
WML: What about banks? How have they done in wealth management and where do you see them going?
WB: In the last decade banks have done an amazing job building out an offering comparable to brokerages and RIAs. There’s really no big difference between them. But they have a perception problem: clients are still asking themselves if a bank is really a capable wealth manager. We see that in client survey after survey.
So the challenge for banks is branding and positioning with the high-net-worth individual and convince them that they can do something beyond trust and fiduciary services. It will take time to change that perception. On the positive side, they have access to a retail and commercial client base that should keep acquisition costs relatively low. And because of their compensation model of salary and bonus, their margins are better and they can grow more profitably.
WML: But isn’t the flip side of that model the banks’ reputation for being cheap?
WB: They have to work on branding with the client and the talent. They are very competitive in the middle but not at the high end. If a broker comes over from a wirehouse and doubles his book at a bank, they won’t double his salary.
Wirehouses Will Get “Lion’s Share” Of Top Talent
WML: What kind of future do you see for wirehouses?
WB: They will have a continuing advantage because their compensation model rewards performance, so they will continue to get the lion’s share of the best talent. They also enjoy a good reputation with clients for the depth and breadth of their product. The challenge for wirehouses will be the push towards transparency regarding fees and revenue-sharing arrangements from clients, Congress and regulators that will put pressure on their pricing model.
WML: What about fall-out from reputational damage to their brand from scandals and internal mismanagement?
WB: I think that’s more of a problem on the talent side. If there’s bad news, it’s more likely to impact talent who may look to leave and take clients with them. I don’t think clients understand as much about what’s going on with the firm when it’s in the news as their own advisors do.
WML: Where do RIAs fit in the big picture? Do you think the “breakaway” phenomenon has been exaggerated or do you think it will be real force going forward?
WB: I think the breakaway trend has been exaggerated. It’s scary for a lot of advisors to go out on their own in this environment. The safety of Mother Merrill is not nearly as unattractive as it’s made out to be. It sounds great to hang out a shingle, but the risk of being on your own and the extra administrative work is more than a lot of advisors want to deal with.
In the big picture, RIAs have slowly increased their market share, but we didn’t really see a spike before or after the financial crisis. So yes, they’re slowly taking share from wirehouses and banks, but it’s hard to predict where that share stops. Some clients want to work with a local firm, others don’t. We have not seen the predicted rush to RIAs.
WML: What’s your view of the aggregator model that is trying to establish a national network of RIAs?
WB: I see nothing particular about that model that’s better or worse than what there is now. Isn’t being local the point of being an RIA? Otherwise what’s the difference between them and a BNY Mellon? Clients care a lot less about the business model than we give them credit for.
WML: How do you see the future of multi-family offices?
WB: They’re under pressure to grow, especially the ones that are part of a large organization. Their biggest challenge is that scaling a highly customized model is hard. You can roll out a family governance service, but doing it for 100 families costs you ten times more than doing it for ten families. There’s very little scale. The winners among multi-family offices will strike the right balance between building and outsourcing services and get the pricing model right. We’re also seeing a trend of domestic MFOs taking the model international.
Room For Multiple Pricing Models
WML: Speaking of getting the pricing right, do you think that charging a fee based on a percentage of assets under management will continue to dominate the business, or is there room for flat fees?
WB: Ultra-high-net-worth client want to pay a single fee and have the firms do whatever they want. There needs to be transparency, but people want to pay fee based on how much work is done. So I think there is room for multiple pricing models and it starts with the client.
But big firms are competing with smaller firms who may not need to make a 20 percent profit margin. So I think a firm’s ownership and profit margin will drive the pricing model more than anything. If you’re charging basis points, the key is to manage service expectations. The advantage of a flat fee for services is that you have a built-in profit margin.
WML: There seems to be a lot more emphasis lately on “soft side” services such as family governance and meetings. Tom Rogerson of Wilmington Trust said recently that family governance today is like estate tax planning thirty years ago.
WB: I would agree with that. The challenge for firms is where do those services fit into their offering and can they get paid for it? If you don’t do family governance well, you won’t necessarily lose the business. But if you do it well, you have a client for life. The key is you have to do it well for the client to appreciate it. Just OK is not good enough. It won’t buy you anything.
WML: What do wealth managers need to do now and going forward to acquire and retain clients?
WB: The real trick we see to acquiring and keeping clients is putting more emphasis on the client experience. In particular, there’s a much higher demand now for more tailored and teaching-based experience. Tailored means a deep understanding of the clients’ needs and goals in building a wealth plan.
Teaching is a crisis-related trend. Clients want a much deeper rationale around advice, product selection and pricing. It’s no longer good enough to say ‘I want to make a trade in your account.’ Now you must say this is why you want to make this trade.
WML: Where does social media fit in?
WB: Social media is a ten-year trend, not a one-year trend. We see high usage of social media among high-net-worth clients of all ages. But we see no interest today in using that technology to decide who their wealth manager will be or to make investment decisions.