A report on the European wealth management industry published by Deloitte, the business advisory firm, has highlighted a growing disconnect between high net worth individuals and the wealth management industry. This perceived ‘trust deficit’ is restricting the industry’s potential growth and profitability.

The report ‘Reconnecting for profit’ was based on an in depth study of the European wealth management industry. The research shows that the industry will struggle to sustain margins due to a number of factors including a decline in asset prices, escalating costs, operational limitations, increased competition (from insurance companies, IFA, and niche consultancies), providers not maximising client profitability and an overall disconnect from the client base.

Commenting on the findings of the report, Padraig Cronin, Partner, Deloitte said: “It’s clear that the European wealth management industry, which has traditionally been the darling of financial services, achieving around 25% returns on equity after tax, is facing tougher times ahead. Our research shows that not all wealth managers can claim to have fostered better relationships with their clients.  Many high net worth individuals entrust other external advisers to ‘manage their wealth managers’; evidenced by a relative increase in execution-only services over discretionary mandates. This presents a key challenge to an industry where the most profitable client relationship is that of ‘trusted adviser’.”

Key facts: 
• ‘Ultra’ (€19m/$30m+) and ‘very’ (€9.5m/$15m-€19m/$30m) high net worth individuals are the least likely to grant discretionary mandates yet are worth over €3.5m/$5.5 trillion in Europe;
• Meeting the needs of ultra and very high net worth individuals is crucial: the group comprises 72,000 in Europe but represents almost 50% of all financial assets owned by the whole high net worth group (€640,000/$1m+);
• Cost-to-income ratios in the wealth management sector have dropped from 75% to 71% in two years;
• Cost-to-income ratios in the wealth management sector were, however, significantly higher than in universal banks (61% compared with 71%);
• High end private clients are multi-banked clients, with on average, 4.7 wealth management relationships. 

The research also showed that, on average, private clients’ make between 25% and 30% of their assets available to the wealth management industry.  While a significant portion will be tied up in illiquid assets such as property, the figure demonstrates the growth potential for the industry. The research highlights the need for the industry as a whole to regroup and consider the needs of its clients before it can tap into additional wealth.  While diversification, performance and efficiency are the common influencers on the choice of wealth manager by a high net worth individual, wealth managers also need to consider the specific needs of each client.  The needs of a financial professional, for example, can be quite different to those of a client with inherited, non-financial wealth.

Commenting on the HNW market in Ireland, Cronin said: “In Ireland, there was significant growth in the wealth management industry - on the back of our economic transformation the ranks of Irish millionaires grew considerably. The market became very attractive for both indigenous and international wealth management providers resulting in a large number of players entering the Irish HNW market. However, in line with the changing economic environment, recent reports show that the number of HNW individuals has fallen by approximately 4% to 20,000[1]. With a smaller pool of potential customers, service providers simply can’t afford to be in a position whereby clients do not feel they are receiving the best service.  There is an opportunity for the industry here in Ireland to learn from these recent findings and avoid repeating the same mistakes. It is therefore time for HNW providers in Ireland to assess whether this trust deficit is relevant to their client base and determine what strategies can be implemented to minimise this risk – and so take full advantage of the opportunities that do currently exist.

“Ultimately those providers that will continue to be successful – both in Europe and in Ireland - will be those that can retain client knowledge, that can manage their client relationships successfully and provide them with timely, objective and accurate information, including the potential downside, and can manage their assets to deliver on the client’s expectations over a sustained period,” concluded Cronin.