Many wealth managers are only marginally profitable, and a lot of wealth businesses appear to make more money than they actually do. That’s because they are effectively subsidized, using the assets and infrastructures of other parts of their parent companies without paying the full cost.
Financial institutions often underperform in wealth management for five reasons. First, they don’t have a clear picture of their own economic performance and how it varies by customer segment. Because they segment their customers poorly, they fail to target those customers that genuinely fit their business models.
Second, many financial institutions’ wealth offerings are subscale and need more customers and assets to be truly profitable. Third, wealthy investors aren’t always the dream customers they might seem. They often drive a hard bargain, negotiating lower fees and demanding more services. Fourth, financial institutions today find themselves with unsustainable cost structures in their wealth businesses. Having concentrated on revenue growth during the 1990s, they ignored the costs of acquiring and serving their new customers.
Lastly, financial institutions rarely refer good wealth management…