Neobrokers and digital banks are advancing into wealth management and are putting further pressure on margins in the sector. Firms must choose between scale or differentiation to avoid ending up in a so-called “Valley of Death.”
That is according to Sjors van der Zee, partner at Bain & Company, in an interview with Investment Officer. According to the consultancy firm, traditional banks have been losing market share for years: their share of total revenues from wealth and asset management declined from around 95 percent in the early 2000s to about 80 percent today. Bain expects this decline to continue toward 65 percent by 2030.
The threat comes from the growth of neobrokers, where consumers with limited expertise and time can invest themselves at low cost, and neobanks, which are expanding their client relationships with relatively simple investment propositions.
Two routes
The Bain expert refered to the two well-known strategic routes for wealth managers: scaling up or differentiation. “If you have neither, you end up in what I call the ‘Valley of Death.’ Then volume flows to parties offering similar services at lower cost.”
Market participants are aware of this, as reflected in the focus on scale through consolidation in the sector. At the same time, Van der Zee noted that margin pressure affects both large and smaller firms. In both groups, cost-income ratios of both 90 and 60 can be observed, he said.
Wealth managers are experimenting with their revenue models to improve profitability. For example, managers are increasingly charging different fees for different parts of the portfolio, instead of a single all-in fee. “But the effect remains the same. There is price pressure on parts of the portfolio.”
Difference between Belgium, Luxembourg, and the Netherlands
There are clear differences in price pressure between countries, Bain observed. In the Netherlands, the dominant role of pension funds and insurers leads to relatively strong price pressure in wealth management. In Belgium, for example, where competition is more limited, prices are higher, while greater competition in Luxembourg leads to lower prices there.
Earlier, M&A advisor Bruyn & Brenninkmeijer stated that revenue per client at German wealth managers can sometimes be up to 25 percent higher than in the Netherlands. Bain recognized this picture. The German market is more fragmented than the Dutch market, resulting in lower competitive pressure and a larger addressable market.
Although private equity firms are appearing as buyers in the Dutch landscape, this makes the country less attractive from a market size and margin perspective. In other countries, Bain more often sees private equity playing a role in strengthening wealth managers, including through professionalization, digitalization, product development, and scaling.
Van der Zee said there is a clear need for further consolidation in the wealth management sector, partly due to the substantial investments required by increasing regulation and changing client expectations.
Differentiation
Meanwhile, increased client mobility—clients are switching wealth managers more quickly—makes differentiation increasingly important. It is becoming more important what firms stand for, Bain wrote. Firms that do not take a clear position risk losing market share to providers with lower costs or a stronger differentiated profile.
According to the consultant, many market participants are currently focused on the question of where their long-term differentiation should come from. A distinctive product offering helps, said Van der Zee, as does personal contact with clients at key moments. “A client with a portfolio of ten million wants to speak with their advisor in today’s volatile markets, where developments follow each other rapidly, not with a chatbot.”