Wealth Management: Achieving a Low Bank Efficiency Ratio
September 5, 2021
Bank of America crossed $1 trillion in assets under management for the first time in its history in Q3 2017. And Morgan Stanley generated almost half (46%) of its revenue from asset and wealth management in the same period. Wealth management is a game-changer for business, and the banks know it.
Wealth management – why it’s hotter than ever
While financial institutions clamor to evolve in a digitally transformative era being disrupted by fintechs, the banks have realized that managing assets and wealth provides an attractive revenue stream that offers superior profitability over most other business segments. After all, it doesn’t take as much capital for a bank’s wealth management unit to produce a high return on equity in comparison with other banking segments such as loan operations that are riddled with high risk, for example. The risk/return proposition in wealth management is a no-brainer and provides the banks with a lucrative revenue stream.
But while asset and wealth management revenue continues to grow in financial services institutions and banks, they are still struggling with a high efficiency ratio. When it comes to efficiency ratio, lower is better, and most institutions aim to keep it at or under 50%. However, wealth management business units continue to be highly inefficient compared to other bank divisions, and in some cases almost 20% higher as the operational costs soar.
Efficiency ratio defined
In banking, efficiency ratio is calculated by dividing operating costs (referred to as “non-interest expenses”) by total revenue minus “interest expenses.” All you have to do is look at the financial statements of any tier 1 bank’s wealth management division and you will likely find that most are faced with particularly high efficiency ratios, especially when compared to other institutional segments. You don’t need a PhD to figure out that wealth management efficiency measures ranging from 67 to 73% are extremely high, particularly when overall bank efficiency ratios hover around the 50% mark. But there’s more to it than just reducing costs.
You don’t need a PhD to figure out that wealth management efficiency measures ranging from 67 to 73% are extremely high, particularly when overall bank efficiency ratios hover around the 50% mark. But there’s more to it than just reducing costs.
Efficiency ratio packs a double punch: stock appeal
So, while wealth management revenue is growing steadily and contributing more consistent performance, banks still have a problem to solve. Their efficiency ratio impacts their stock value and hence their brand. The measurement has a direct correlation with the financial health of the business to provision for loan losses and risk in other segments, to distribute dividends to shareholders, and to fuel book value per share which weighs heavily on the price of their stock. So, while wealth management is more about opportunity than it is about risk, it is safe to say that operational efficiency is more than just about reducing cost. It packs a double punch on the overall business.
Monetizing the need for elite service
CNBC’s “On-Air Stocks” editor Bob Pisani, points out that high net worth individuals (HNWI’s) are willing to pay for access to what they perceive to be higher-level advice and banks are figuring out ways to monetize that need1. Over the last decade, the wealth management industry has been pursuing a new direction from commission-based financial advice to fee-based advice and this move is proving to be a major growth driver. In fact, almost $1 trillion of Morgan Stanley’s client assets are in fee-based accounts. However, the model inherently carries elevated client demands when it comes to service and access.
The secret lies in automation
Because wealth management is a high-touch, personalized market based on long-standing, trusted relationships between advisors and investors, many banks haven’t applied the same automation to this segment as they have to other business units, and it is costing them in a big way. Digital onboarding alone has the potential to deliver a differentiating experience that could completely transform the client-advisor experience, as well as positively impact efficiency ratios. A recent report reveals that it takes 41 days for a wealth management firm to onboard a high net-worth client2. Digitizing the process is essential to delivering the seamless, integrated client experience HNWI’s are seeking, with the added benefit of increasing their overall satisfaction with their fee structure.
Consider that the average advisor spends upwards of 80% of his or her time on non-revenue generating activities such as administration and paperwork3. The opportunity costs associated with productivity-siphoning processes alone would impact a bank’s bottom line in a powerful way. And its impact on efficiency ratio? When a financial institution can improve productivity by 96% through digital onboarding, workflow automation, automated risk decisioning, and business analytics – not to mention the reduction in papering costs by going paperless – it is not hard to draw a direct correlation with improvements in its efficiency ratio, stock value, and client satisfaction.
Learn more about digital onboarding and workflow automation solutions for wealth management.
1 Source: “Wall Street banks have found a great new way to make big money now that trading is down,” Bob Pisani, CNBC, July 2017
2 Source: Towards True KYC: Technological Innovations in Client Due Diligence, ClearView Financial Media, 2016
3 Source: “The Human Dividend: Taking Advantage of Digital Disruption to Fuel Next-Generation Wealth Management,” Accenture, 2017