Providing integrated wealth management presents a range of challenges, such as how to assess pricing power, and what capabilities to build in-house, and what to outsource to third parties. This article stems from a discussion at the recent UHNW Institute's Symposium in NYC.

The following article stems from a discussion that took place at the November 13-14, 2024 Symposium of the UHNW Institute in New York City. This particular panel discussion took place on November 14. Speakers at the panel were were Joe Calabrese (chief operating officer, Key Wealth) and Kevin Casey (managing director, Pathstone Family Office). They also wrote the following article.

Here is a link to the Institute’s website. Family Wealth Report is exclusive media partner to the organization. (Here is an outline of the Symposium’s array of topics.) Also, see this November 19 report of one of the Institute's discussions.

One of the key initiatives undertaken by the UHNW Institute revolves around Integrated Wealth Management. The objective of this work is not to conclude whether providing integrated services is better or worse for a firm’s strategy. That decision rests largely with a firm’s management and its client base. Clients are the ultimate arbiter of whether a business model suits their needs or not. This is often reflected in a firm’s growth and retention rates, NPS (net promotor scores) and profitability. 

Rather, the objectives of this initiative are to provide industry leaders with insights, tools and frameworks for how to think about the pros and cons of providing integrated services and the impact they will have on a firm’s client base and enterprise value. 

Providing clients with a comprehensive offering, consistent with the Ten Domains of wealth management, as detailed by the UHNW Institute, is a daunting task. There are dozens of consequences to the decision and dozens of questions leaders must address before embarking on this journey. These include everything from: How will it affect your service delivery and pricing model? What will my clients desire or value? What impact will this have on your technology requirements? How will it affect workflows? And, importantly, how will your culture adapt to the need for greater collaboration and potentially different compensation structures. Providing integrated services can seriously add complexity to a firm’s business model. The more services one provides, the more coordination is required, the more risk there is in the business, and the greater the likelihood that a firm veers away from its core competencies and primary cultural DNA. 

While this strategic move can offer significant growth opportunities, it also presents a range of financial implications that must be carefully considered. Key factors include assessing pricing power, pricing models, and the decision to build internal capabilities versus partnering with third-party providers. 

While these are all important questions and issues, they are not the focus of this article. Here we will focus exclusively on the economics of the decision and the potential impact on profitability. Based on the feedback of various industry experts and real-life experience having evaluated countless RIA’s financials and business models, we believe that the following core questions will have a meaningful impact on the profitability of your firm:

-- What is our current pricing model and how will we adapt it to the provision of additional services?
-- Does the firm – supported by a strong brand – have the pricing power to charge for the additional services?
-- Or will the firm make them available for free – eroding margins – hoping to achieve other objectives (better retention, NPS, etc.)?
-- Who will provide the services? 
-- Will we need to staff up to hire the competencies required to deliver the additional services or will we outsource to a third-party provider? 
-- If we outsource, will we oversee and supervise the work or simply delegate it to a third-party in the spirit of a referral? What checks and balances will be required to ensure that the client experience meets the experience expected by your clients?
-- Will the costs of outsourcing be borne by the client (via direct engagement with the third-party vendor) or will the costs be absorbed by the firm?

An insightful way to understand the implications of these decisions on the profitability of a firm is to examine them via the lens of the DuPont financial analysis approach. 

Applying the DuPont financial analysis model to financial services: A customized approach
An elegant way to think about and analyze the different financial levers in the wealth management industry is to apply the DuPont financial analysis model. This model was originally developed in the early 20th century by an engineer at DuPont to evaluate the profitability of various business units. What is insightful about the model it is that it takes a key ratio of profitability or return on equity and breaks it down into its many component financial drivers. This allows leaders to understand the underlying dynamics of profitability and to be able to improve their businesses more surgically based on the performance of what I will call building block ratios. 

Here's how it works. Traditionally, the DuPont model breaks down return on equity into profit margin, asset turnover, and financial leverage. By reworking the ratios to match specific wealth management industry attributes, the DuPont model can provide meaningful insights into performance drivers. What we’ve done here is tailor the model to provide a clearer view of profitability drivers in our industry. This approach will allow us to drill down into key elements of client revenue, advisor effectiveness, and operational efficiency. 

More specifically, we will see how the addition of additional services in the journey to provide integrated wealth management may affect a firm’s potential profitability. What we will see is that providing integrated wealth management comes with both headwinds and tailwinds. 

Customized DuPont model components
In this adaptation, we use revenue/total expenses as a proxy for profitability. All profit-seeking firms are generally motivated to increase this ratio.

Source: UHNW Institute

In turn, the profitability ratio – using the DuPont methodology – is broken down into four building block ratios. The magic happens by eliminating similar variables in the numerator and denominator resulting in the four building block ratios multiplying out to equal the overall profitability ratio. Again, this breakdown, gives us insight into the four primary levers of profitability in wealth management. These are: 

1. Revenue/clients: Measuring value creation per client
This ratio reflects the firm’s ability to maximize revenue per client. Again, all firms are motivated to maximize revenue per client by improving their service offerings, and deepening and broadening relationships. This ratio is one where providing integrated wealth management services can provide a meaningful tailwind by accelerating growth efforts via new avenues to engage families, enhancing the firm’s value proposition as clients seek to consolidate advice and providing opportunities to expand share of wallet within the existing client base and externally. The addition of value-added services also has the potential to improve a firm’s pricing power, helping to set and maintain prices which reflect the value delivered to clients.

2. Clients/Advisors: Assessing advisor capacity and client load
This ratio is crucial for understanding how many clients each advisor is responsible for and the related workload. An optimal clients/advisors ratio indicates that advisors have manageable client loads, allowing them to provide personalized service while also maintaining capacity for continued growth. A high ratio may signal over extension, while a low ratio may indicate untapped capacity. This is an area where providing integrated wealth management services can be a challenge. The increased level of effort required to deliver an integrated solution could negatively impact an advisor’s capacity. This decrease in capacity must be weighed against a potential increase in revenue per advisor and client retention rate.

3. Advisors/Compensation: Evaluating cost efficiency per advisor
This ratio examines how a firm’s investment in advisory talent aligns with the advisor headcount. This ratio helps in evaluating whether advisor compensation levels are consistent with productivity and market norms. While a narrow focus on profitability could lead firms to aim toward minimizing the level of compensation paid to advisors; this comes with hidden costs. Compensation and financial upside are major factors in attracting and retaining talent, and become increasingly important as a firms seek to provide integrated wealth management. The level of talent and experience required to operate effectively in an integrated wealth management firm is almost certain to put pressure on compensation and drive costs higher as the increased complexity of providing integrated services narrows the pool of eligible advisors. 

This puts upward pressure on compensation and downward pressure on profitability. Again, firms need to evaluate this headwind against the potential for increasing average revenue per client and greater client satisfaction levels. By managing the advisors/compensation ratio, firms can balance attracting top advisory talent while keeping costs within reason, ultimately supporting sustainable profitability.

4. Compensation/total expenses: Ensuring sustainable cost structures
This ratio highlights how much of total expenses are allocated to advisor compensation, a significant cost driver in financial services. Maintaining a balanced compensation/total expenses ratio helps the firm ensure that investment in talent does not overshadow other critical business areas like technology, compliance, and client experience. Here the effect of providing integrated services comes with opposing effects. 

There are headwinds created by increased investments in technology and support staff required to provide integrated services – think about additional reporting requirements, tax work, bill pay, etc. And there is a tailwind created from having a pathway to accelerated growth which helps defray or amortize the additional fixed costs as each incremental dollar of revenue generated likely comes at a higher margin from the previous as investments are made to create economies of scale.

Conclusion
This customized DuPont model provides a structured approach to analyzing profitability through the lenses of client revenue, advisor productivity, and cost efficiency. By focusing on these specific areas, we gain insights into how an integrated wealth model may affect a firm’s profitability, and ultimately value. While the decision to integrate additional services ultimately lies with the clients and their service needs, this model provides a simple, yet effective, framework to assess how integration will affect your business. 

A key benefit of the UHNW Institute is the access to detail and data behind various business models which supports the creation of this model. In an industry of entrepreneurs this network and thought leadership is invaluable as both the industry and the needs of our clients continue to rapidly evolve.