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Future of Wealth Management Series

Future of Wealth Management Series: Maximising Client Profitability

Our latest series explores some of the key challenges facing the wealth management industry. In our first article, we address the issue of ‘unprofitable’ clients and consider some of the practical solutions that wealth managers can use to maximise client profitability.

18 Mar 2021 | 7 min read

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This article is part of the Future of Wealth Management Series

Our latest series explores some of the key challenges facing the wealth management industry. In our first article, we address the issue of ‘unprofitable’ clients and consider some of the practical solutions that wealth managers can use to maximise client profitability.

The wealth management industry is an overlapping Venn diagram of customer segments and demand. With rapid technological developments, regulatory changes, and evolving client needs and expectations, organisational agility and the ability to make tough decisions in order to adapt to market dynamics is key.

In this series, we will consider some of the key challenges currently facing the wealth management industry and offer some practical solutions. We will address:

  • client profitability;
  • digitalisation and the customer experience; and
  • philanthropy and impact investing.

In this first article, we look at how wealth managers can maximise profitability with regard to their clients.

What is the problem?

There is continued pressure on gross margin. According to McKinsey’s 2020 Private Banking Survey, by the end of 2020, profit margins fell to 21 basis points of AUM, only slightly better than the lowest ever recorded (20 basis points in 2009).1 The squeeze on profits stems from a number of factors, including compliance costs, operational overheads and ongoing relationship management.

98% of financial advisors have clients that are not commercially viable

Value creation through certain clients is well known. SimplyBiz research shows that 98% of financial advisers surveyed have clients that are not commercially viable2, and several studies have shown that clients with a negative contribution margin can reach up to 30% of business relationships3. This data illustrates the significance of the issue at hand: servicing ‘unprofitable’ clients is not a rare phenomenon, and these relationships can account for a substantial proportion of wealth managers’ books. When taken as a whole, these relationships can have a drastic impact on profit margins.

Profit margins fell 21 bp of AUM by the end of 2020

Servicing clients with low or negative contribution margins can also present problems for quality of service. Advisors risk adding cost and complexity to smaller client relationships without adding value, and the time and resources spent servicing these smaller clients may eat into time they would otherwise dedicate to larger, higher-paying clients. As a result, larger clients may end up effectively subsidising smaller clients. This, of course, raises ethical concerns. Smaller clients’ needs could be better met elsewhere (and at a lower cost), and larger clients should be entitled to a level of service that is proportionate to the fees they pay.

Ultimately, servicing clients who add little value is a delicate balance between managing the bottom line and managing the reputational risk of exiting such clients. With increasing competition and pressures on profit margins, wealth managers’ ability to resolve this issue will be key to their success.

What to do?

Maximising client profitability

Reassess client relationships

Reassess the profitability of client relationships and customers’ lifetime value through lifetime management (CLM) data points.

Some in the industry suggest that servicing clients with up to US$1m in assets is not commercially viable when their cost-to-serve is compared to the income they provide.4 The cost to acquire (circa US$25K), maintain (circa US$15K) and then close (circa $10K) can be significantly higher than annual fees (a paltry US$10K)5.

Wealth managers should look to identify any loss-making relationships, evaluate how ‘deep’ they are, and assess potential opportunities to reduce their cost-to-income ratio.

The mass affluent market and client segment is expected to grow significantly and requires the greatest scrutiny when it comes to profitability.

BCG suggests that the mass affluent segment will grow from 76 million in 2018 to 94 million in 2023, with AUM increasing at a rate of 6% p.a. from USD 18 trillion to an estimated USD 24 trillion.

Figure 1

There are now sophisticated AI tools6 that can look over customer spend patterns, needs and interests. This will not only allow relationship managers to become better connected and anticipate future needs but will also offer opportunities to cross-sell.

This assessment should not be viewed as a one-off exercise. As clients’ contexts evolve, ensuring that these relationships remain profitable requires active management.

Redefine service offering

Wealth managers should adapt their pricing models and service strategies in order to ensure that the level of service that clients receive is proportionate to the revenue they bring in and that their cost-to-serve does not exceed the income they provide. For example, banks could offer a minimum standard package that covers costs, ensuring a minimum profit per client.

A well-defined client segmentation plan with a tailored service offering is a useful tool for profitably servicing client needs. Defining each segment, identifying their unique range of wealth management needs, and matching these with an appropriate combination of services will enable managers to balance the different levels of service required by various client segments.

Balance is a key word here. Focusing too much on high-net-worth segments risks alienating mass market clients, many of which may have significant profit potential, while concentrating resources on the mass market segment may increase banks’ cost-to-income ratio and risks underserving high-net-worth clients. This balance is tricky to achieve, but essential for maximising client profitability. Banks should reassess their segmentation models to ensure they are best positioned to meet client needs in a cost-efficient way.

Fintech solutions and digital tools that enhance operational efficiency should also be explored for their potential to reduce the time-to-revenue ratio that is fundamental to client profitability.

Divest from ‘unprofitable’ clients

The nuclear option, but is it reasonable to do so?

Client divestment faces some resistance on account of managers’ sense of duty to clients with whom they have developed a relationship. However, in a survey conducted by the Harvard Business Review, 90% of executives said they had “given some serious thought to divesting customers,” and 85% said they had “already undertaken divestment”.7

90% of executives have given serious thought to divesting customers

Client divestment offers a hard and fast way for wealth managers to detach themselves from clients who take more than they give, freeing up time to service more profitable clients and boost their growth prospects. However, divestment should not be taken lightly. Disengaging with clients must be well-considered and handled delicately in order to mitigate the risks it presents. Managers must assess the potential impact client divestment could have on the firm’s reputation and its relationships with remaining clients and consider whether it is compatible with the firm’s corporate values. The chances are that clients will not be pleased to hear that their wealth manager intends to dissolve their relationship. Research conducted by the Harvard Business Review shows that 80% of divested customers reported feeling angry, frustrated or embarrassed about being cut off.8

Steps can be taken however, to alleviate any acrimony. One such step is to assist clients in migrating to another service provider that is a better fit for their needs. A number of fintech platforms have emerged that specifically target smaller clients that are unprofitable for traditional wealth managers and private banks. Opportunities presented by platforms such as these may offer a fiduciary-friendly solution to the concerns around client divestment.

Key takeaways

‘Unprofitable’ clients have long been a source of difficulty for wealth managers, but as profit margins face ongoing pressure, it is an issue that banks can’t afford to ignore. Solutions are out there for those who harness a proactive approach and explore the opportunities presented by fintech.


  1. https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/european-private-banking-survey-update-december-2020
  2. https://www.wealthadviser.co/2020/09/22/289932/simplybiz-and-wealthify-partner-provide-low-fee-digital-investment-option
  3. https://www.researchgate.net/publication/23647896_Unprofitable_customers_and_their_management
  4. SISAA, 21st Century Private Banking: Revolutionizing Affluent Wealth Management
  5. SISAA, 21st Century Private Banking: Revolutionizing Affluent Wealth Management
  6. InvestCloud and Finantix solution are a leading provider of this technology
  7. Vikas Mittal, Matthew Sarkees and Feisal Murshed, ‘The Right Way to Manage Unprofitable Customers’, Harvard Business Review, April 2008
  8. Vikas Mittal, Matthew Sarkees and Feisal Murshed, ‘The Right Way to Manage Unprofitable Customers’, Harvard Business Review, April 2008

Figure 1: SISAA, 21st Century Private Banking: Revolutionizing Affluent Wealth Management


Hannah Smyk