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35% increase in the cost of acquiring a private banking client
LONDON - Strategy consultants Market-Dynamics Research & Consulting Ltd (MDRC) have published the results of a study into the cost of acquiring a client into a discretionary investment management service in the UK. The study has found that the cost on a fully allocated basis has risen by over 35% since the previous study in 2002. The research has been carried out over the last 6 months and involved an extensive "mystery shopping" exercise together with interviews with the staff and management at 10 of the UK’s private banks and wealth managers.However, one finding has not changed over the past 2 years, few private banks or wealth managers understand the costs associated with acquiring a client. Richard Williams, a director at MDRC commented: "Ask the Chief Executives of 10 wealth managers what it costs them to acquire a client and only 1 will even come close to the answer." Key findings
The study has found that the average, fully allocated cost of acquiring a high net worth (HNW) client by a UK wealth manager has increased from £3850 in 2002 to £5271 in 2004. MDRC’s consultants have dis- aggregated the usual process of acquiring a client into 4 stages and assessed the cost of each stage. In this study they found that lead generation costs have fallen by 38%, lead management costs have risen by 48%, the costs of client interviews have risen by 35%, but the costs of the pre-completion process (including all regulatory compliance activities) have risen by 130% and this has become the most expensive element in the process of acquiring a new client. Why have the costs changed? MDRC’s analysis suggests that wealth management firms have been actively trying to reduce their cost bases without having a negative impact on new business generation. Although this has brought tangible benefits in some areas, key elements of the client acquisition process still have to be addressed. Lead Generation
Lead Management Despite the reduction in lead generation costs, the costs of managing those leads through to interview have continued to rise - from £729 in 2002 to £1080 in 2004. Too few wealth management firms recognise that managing leads through to the sales interview is a complex exercise and many succumb to the temptation to throw scarce resources (like the CEO or the Chairman) into this process in a relatively unstructured way. Although no firm wants to risk losing a "warm" lead, our research suggests that an expensive and unstructured approach to lead management is no more effective than a defined and structured approach to the client.Interview Management
Pre-Completion Processing There has been an extraordinary increase in the costs associated with implementing the UK’s anti-money laundering regulations. In this study, the costs incurred by a firm after the client has signed the investment management agreement, but before the account has been opened, have increased from £804/sale in 2003 to £1846/sale in 2004. Most firms are aware that their sales administration activity has increased but few are aware of the real costs they incur before an account is opened. This pre-completion processing stage has become the most resource hungry step in the client acquisition process.Doing the right thing or doing things right? Our research has concluded that cost of acquiring a client has increased sharply over the past 2 years, and that a substantial proportion of these costs are associated with increased regulatory activity. Although regulation of the industry has not changed significantly in the past 2 years, firms are now keen to demonstrate the adoption of best practice, and are allocating an increasing proportion of the firm’s resources to this activity. So, they’re doing the right things, but are they doing things right? The answer in most cases is no. In this study we found that although all the firms had the appropriate procedures manuals and compliance methodology, only a third had attempted to develop business processes that were appropriate to their new procedures. Few firms had "mapped" their processes to ensure that what they were doing was efficient and effective. It would seem that many firms are relying on inspection to provide their process quality, rather than building effective processes. This cost of inspection appears to be the major cause of the increase in the costs of acquiring clients, but without a new approach to the business process design it seems probable that the costs of inspection will continue to be an increasing part of acquiring wealth management clients.
END A research brief on this topic will be published later this year For more information on this study contact Richard Williams on 01932 268475 or by e-mail richard_williams@mdrc-uk.com |
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Market-Dynamics Research & Consulting Ltd
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