Meeting client expectations is often the mantra expressed in common by all wealth managers, but it might not necessary be the best strategy ...

Meeting client expectations is often the mantra expressed in common by all wealth managers, but it might not necessary be the best strategy in terms of profitability, according to research from MDRC, a UK wealth management consultancy.

There are more than 500 businesses in the UK actively offering wealth management products and services, but there are only minor differences between them all when it comes to their client proposition, says MDRC.

MDRC found by comparing the breadth of investment offers with the breadth of wider financial services provided by these firms, “there seems to be relatively little ‘white space’ in the market, with most combinations of products and services on offer from at least one firm.”

This suggests, said MDRC, that inevitably there is competition in the same ‘territory’ for predominately the same client group.

“Although some firms may claim to have an entirely exclusive product set, in practice the adoption of open product sourcing has significantly reduced the degree of difference between firms’ product offers, and allows even the smallest of firms to offer world-class products,” said the MDRC study, entitled: Meeting Clients Expectations - Still the Best Strategy?

MDRC went on to examine the impact of open architecture on the product strategies of 20 of the UK’s 50 largest wealth management firms. Asked to outline their business strategies, 14 of the 20 expressed it as “Meeting Clients’ Expectations”.

But MDRC found that only six of the 14 firms above had any structured approach to assessing clients’ expectations and could explain credibly how they were going to meet their strategic objective. And only two of these firms could explain how they were going to meet that objective more effectively or more profitably than their competitors.

The remaining eight firms claimed that they would achieve their strategic objective by offering “better products”, “more personal service” or “better advice”, but none had strategies that could be considered to give that firm a sustainable advantage over the competition.

MDRC said that “Meeting Clients’ Expectations” by itself was unlikely to be a sufficient source of competitive differentiation. To understand the differences between firms’ competitive position MDRC asked the firms two questions: “What does the firm believe it is doing well?” and “How does that firm’s strategy differ from its competitors?”.

MDRC asked these questions to firms themselves, but also asked intermediaries who often introduce clients to wealth managers.

The research consultancy found that UK wealth managers are probably following three competitive strategies, or combination of strategies. These generic strategies are:
1) Cost Leadership
2) Product Leadership
3) Service Leadership

MDRC believes the firms with the highest new business profitability (new business gross margin x cost/income ratio) are generating the highest new business margins and had the strongest current competitive position.

The firms with the relatively unfocused business strategy of “Meeting Clients’Expectations” are generating a 35 per cent lower new business profit than the firms following a more focused strategy.

“Arguably, new business profitability is the best way to measure the success of a firm’s current business strategy, and this can be calculated from the new business gross margin multiplied by the estimated the cost/income ratio,” said MDRC.

MDRC said it calculated the new business gross margin by “mystery shopping” the firms to identify the true level of income generated from new clients. And the cost/income ratio was estimated from data already held by MDRC.

“Few would argue that meeting clients’ needs or expectations should not be at the core of a wealth management business. However, it is arguable whether “Meeting Clients’ Expectations” should be the driver of business strategy, particularly as measuring how well firms meet client expectations is rarely conducted with much rigour,” argues MDRC.

The study went on to say that firms often fail to understand where their competitive advantage lies and so are unable to exploit their strengths. MDRC said they instead adopt a relatively safe “me too” approach that is unlikely to produce the best long-term results.

Those wealth management businesses following this “me too” strategy of “Meeting Clients’ Expectations” are unlikely to be building on their strengths and so, paradoxically, are probably not developing the products and services needed to meet the evolving expectations of their clients, said MDRC.

“Perhaps the most startling finding from the study is that the sector’s key source of new business – professional intermediaries – often have difficulty in understanding how one firm differs from another, and there is often a mismatch between what a wealth management firm believes it is delivering to its clients and what is the intermediary believes the firms offers,” said Richard Williams, director of the financial services practice at MDRC.

For more information on this report please contact Richard Williams at MDRC.
Email: richard_williams@mdrc-uk.com