CLIENT ACQUISITION COSTS SOAR 40%
LONDON - Strategy consultants Market-Dynamics Research & Consulting Ltd (MDRC) have published the results of their latest study into the cost of acquiring a client into a discretionary investment management service in the UK. The study has found that the cost of acquiring a client (on a full cost allocated basis) has risen by 40% since the previous review in 2004. However, one finding has not changed over the past 3 years, relatively few private banks or wealth managers understand the full costs associated with acquiring a client, with most costs assumed to be in meeting the client, when these only account for 30% of the total acquisition costs.
Key Findings
The study has found that the average, fully allocated cost of acquiring a high net worth client with approximately £1m to invest in a discretionary portfolio has increased from £8700 in 2004 to £12200 in 2007. Although client interviews remain the most expensive steps in the process, they only account for 30% of the total new client acquisition costs.
The best and the worst
The study also found that the difference between the most efficient and least efficient firms had also increased. The most efficient firm in the 2007 study had a client acquisition cost of £5200, while the least efficient firm had a client acquisition cost of over £23000. This 4.4x cost difference is substantially higher than the 3.5x cost difference seen in 2004. However, as in the earlier study, size of firm was not an indicator of acquisition costs, with both large and small firms appearing at the top and bottom of the cost range.
Why have the costs changed?
MDRC’s consultants have assessed the costs in each of the 4 key stages in the usual process of acquiring a client. They found that the unit lead generation costs have more than doubled, unit lead management costs have risen by 76%, the costs of client interviews have risen by 38%, but the costs of the pre-completion administration have fallen by 11%.
MDRC’s analysis suggests that wealth management firms and private banks have been adding resources to their sales and business development activities but without achieving a proportionate increase in productivity. Higher salaries account for 47% of the unit cost increase, but the balance of 53% is an indication of this reduction in sales productivity.
Although the increase in business development resource has brought tangible benefits in some firms, for much of UK private banking and wealth management key elements of the client acquisition process remain unstructured, inefficient and expensive.
Doing the right thing or doing things right?
Commenting on the findings, Richard Williams MDRC’s Managing Director said “We had expected to see an increase in the average costs of acquiring a client, simply because salaries have increased significantly across the industry, but we were surprised at the level of the increase found. Although some of these costs are associated with increased regulatory activity, most of the increase is in the general areas of marketing and business development, activities where the wealth management sector has tended to under-spend and where an increase in expenditure usually translates directly into new clients and assets under management.
So, firms are doing the right things, but are they doing things right? The answer in most cases is probably not. From our discussions with the UK’s wealth managers, we found that the increase in business development resource was driven by the expected growth in the size of the market rather than an assessment of the real needs of the business. Relatively few firms had attempted to develop business processes to ensure that what they were doing was efficient and effective. Without a structured approach to developing business and acquiring clients it seems probable that the costs of acquiring wealth management clients will continue to increase.”