In this strategy brief MDRC, examines the current competitive landscape of the UK wealth management market and suggests that too many wealth management firms are pursuing undifferentiated strategies and not maximising the profit available from this sector. The note identifies that those firms that are pursuing a business strategy of "Meeting Clients’ Expectations" are generating lower levels of profitability those firms following other strategy options.
Background
Over the past 18 months there has been a sharp increase in the number of firms in the UK offering what is generically termed "Wealth Management". The UK has the largest number of high net worth individuals in the EU (defined as individuals with more than £250,000 in free investible assets) and the market is expected to grow steadily over the next 2-3 years. HNW individuals represent an attractive profit opportunity for those firms able to sell their products to them and it could be argued that an attractive and growing market should attract new entrants. Should we be surprised at the number of new entrants? The surprise is that so many firms are choosing to enter a market with what are shown to be undifferentiated strategies and, perhaps not surprisingly, are finding it difficult to achieve the growth or the levels of profitability expected for their venture.
Where is the White Space?
There are over 500 businesses in the UK actively offering wealth management products and services. These firms range from the larger independent financial advisers (IFAs) and private client stockbrokers through to the large international private banks. With so many firms active in the market and with no one firm holding more than an 8% market share; it is not surprising that the obvious combinations of product and service are already offered. Although many firms claim to have a unique client proposition, when examined in detail there are often only relatively minor differences between them.
As Chart 1 shows, by comparing the breadth of investment offers with the breadth of wider financial services provided these firms, there seems to be relatively little "white space" in the market, with most combination of products and services on offer from at least one firm. This implies 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.
What is the Strategy?
As we examined the impact of open sourcing on the product strategies of 20 of the UKs 50 largest wealth management firms we asked firms to outline their business strategies to us. Surprisingly, 14 of the 20 expressed it as the ubiquitous "Meeting Clients’ Expectations". On further questioning it became clear that only 6 of the 14 firms had any structured approach to assessing clients expectations and could explain credibly how they were going to meet their strategic objective; only 2 of these firms could explain how they were going to meet that objective more effectively or more profitably than their competitors. The remaining 8 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.
From this initial study we concluded that "Meeting Clients’ Expectations" by itself was unlikely to be a sufficient source of competitive differentiation. To understand the differences between firms’ competitive position we concluded that we have to go back to first principles. Taking each firm in turn, MDRC asked two questions "What does the firm believe it is doing well" and "How does that firm’s strategy differ from its competitors"; we asked these questions to firms themselves, but we also asked key intermediaries who often introduce clients to wealth managers.
The Competitive Landscape
From analysis of the responses and a detailed investigation of the firms’ product and service offers, we concluded that UK wealth managers are probably following 3 competitive strategies, or combination of strategies. These generic strategies are:
1) Cost Leadership
2) Product Leadership
3) Service Leadership
The output of our study is an analysis of a firm’s competitive position as a mix of these 3 generic strategies. This mix can be expressed at a percentage which can then be mapped on a 3-axis graph, the closer the position to the 3 corners of the plot the greater the focus on one of the 3 generic strategies.
Chart 2 shows the estimated position of each of the 20 firms on this 3-axis graph. However, the differences in competitive position only become apparent when the estimated new business profitability (new business gross margin x cost/income ratio) is overlaid on to the position on the plot. It then becomes apparent that the firms clustered around the corners of the graph are generating the highest new business margins and had the strongest current competitive position. The firms with the relatively unfocussed business strategy of "Meeting Clients’ Expectations" are grouped towards the centre of the graphs and had weaker competitive positions. These firms were generating a 35% lower new business profit than the firms following a more focussed 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. For this study MDRC calculated the new business gross margin by "mystery shopping" the firms to identify the true level of income generated from new clients. We estimated the cost/income ratio from data already held by MDRC.
The Strategy Paradox
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.
One of the very basic management concepts is that businesses should identify where they have or can obtain an advantage over their competitors and then set about following internally consistent strategies (or combinations of strategies) to exploit these advantages. The key issue is that firms often fail to understand where their competitive advantage lies and so are unable to exploit their strengths, instead they adopt a relatively safe "me too" approach that is unlikely to produce the best long term results. From our study we have concluded that 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.
Comments
Commenting on the study Richard Williams, director of the Financial Services practice at MDRC said: "The UK wealth management sector has always been highly competitive and this study has confirmed that there is a very wide range of products available to clients from an increasing number of firms. However, what this study also suggests is that relatively few firms have developed a robust and distinctive competitive strategy, and those firms claiming that their strategy is to "meet client expectations" are not performing as well as firms that have identified their true competitive advantage. 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 ."