The Beat On The Street

Profitability Shift in Wealth Management, Spotlight on CRM
Bracing for a decline in gross revenues and shrinking profit margins, chief executive officers of top private banks and wealth managers are shifting their focus to stronger profitability rather than revenue growth. Profits are down from an average of 24 percent in 2000 to 35 percent today, according to the 2002 North American Private Banking/Wealth Management survey conducted by PricewaterhouseCooper's Financial Services Industry group and the financial-services practice of PwC Consulting.

However, of the 29 wealth-management firms with $2.4 trillion in assets surveyed, one-third currently lack the analytical systems and tools necessary to provide profitability information at the client or relationship level, while less than one-half have the tools at the organization level. The firms surveyed represent about one-third of the North American wealth-management market.

Increasing competition is coming from non-traditional players, including intermediaries like attorney, CPAs and financial planners, that are well-positioned to respond to client demands for a trusted adviser.

Customer-relationship management (CRM) is a key focus with 75 percent of companies executing or planning CRM initiatives, and 60 percent redesigning one or more components of the front-office function, says the survey. Despite substantial CRM investments and efforts to improve the front office, there is little evidence of significant productivity gains, says the study, citing low adoption rates of CRM technology as a hindering factor.

In terms of IT focus, aggregation - the ability to collect client data internally across the organization and externally across other organizations - is considered the next wave. Wealth managers are tackling internal aggregation first, but most haven't figured out how to differentiate their offering. According to PwC, firms need to turn their investment in aggregation into knowledge that provides "actionable recommendations for clients and also select the right tools that will enable their aggregation strategy in the future."

While technology remains "paramount" to competing, legacy systems are seen as a key obstacle impeding the move to flexible operating models. Under intense IT cost pressures to support comprehensive products and services from internal and external sources, IT departments need to develop "a low-cost open architecture," say the study's authors.

However, senior-level interest in outsourcing as a way to reduce costs, increase scale and augment competency, remains limited.

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CRM Spending Grows But Problems Abound
Despite the number of customer-relationship-management (CRM) products available and the significant sums being spent on these technologies, banks and securities firms fail to make good use of customer information to maximize profitability and satisfy customers, according to a recent study by Celent Communications. Yet, Celent predicts that the top 100 banks will spend approximately $2.2 billion on CRM technology by the end of 2002 and increase that amount to $3.5 billion by 2005, growing at a healthy 17 percent compounded-growth rate.

Though major banks and securities firms are expected to increase their CRM spending, there are problems. CRM technology silos do not take into account the various departments at banks and securities firms, and there is a lack of integration between front-end systems - in direct contact with the consumer - and the back end.

In a report entitled: "CRM for Financial Services: an Overview," Celent says that CRM should not be considered a group of technologies, but rather a set of business processes that help manage client relationships and improve internal-company workflows. "The objective for CRM is to understand customer preferences, make better use of information about customers and to make those customers profitable."

Among the trends discussed are that banks and securities firms are shifting their focus toward enhancing business processes throughout the enterprise rather than concentrating on departments; implementing analytical CRM solutions to better understand customer behavior; and focusing on third-party software providers more than internal development.

CRM for the institutional side lags behind its cousins on the retail side. Institutional operations such as sell-side-equity desks, market makers, floor specialists and buy-side firms could benefit from CRM software, Celent contends. For example, a sell-side trader could use a CRM system to identify a fixed-income instrument in inventory and match its characteristics to a set of clients.