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The Impact of COVID-19 on Wealth Management

Jayleen Pittman, Head of Economic Capital, AmTrust Financial Services

Jayleen Pittman, Head of Economic Capital, AmTrust Financial Services

Even before the outbreak of the virus, the wealth management industry was plagued by slow growth, commodification, digital disruption, and eroding margins

The novel coronavirus has uprooted lives and changed business as we know it. The impact of the pandemic has been so vast that no industry has been spared by it, including the finance sector. The outbreak of the virus has sent the stock market into frenzy, falling sharply in response to the unprecedented levels of economic instability. Unemployment rates are on the rise, and earnings are declining, making it even harder for the markets to recover from the pandemic. Economists expect a record-setting economic contraction in the U.S. along with another global recession. These extreme market conditions present an opportunity for wealth managers to deepen existing relations and snatch up new clients, as people will be looking for expert advice to reduce financial risks.

Even before the outbreak of the virus, the wealth management industry was plagued by slow growth, commodification, digital disruption, and eroding margins. Studies have shown that average assets-under-management fees had declined from 1.01 percent in 2015 to 0.74 percent in 2019. Despite the longest-running bull market from 2009 to 2019, wealth managers have not been able to recapture the high-profit margins they experienced before the 2008 crisis.

Revenue Leakage from Discounting

Discounting is a widespread practice across the wealth management industry. Reports suggest that an estimated 25 to 30 percent of new clients receive a fee discount. Relationship discounts can vary between 15 to 22 percent, while relatives of existing clients enjoy up to 68 percent discounts. This is further aggravated by the industry's loosely monitored discounting practices. For instance, most firms offer no guidance to their bankers on how to arrive at the relevant discounts, and discounts are given without being aware of their actual cost. At the same time, banks lack historical data on previous discount decisions.

The lack of comprehensive reports and performance indicators to evaluate the impact of discount practices on the organization’s profitability adds to the revenue leakage. This can be fixed only if banks improve their discount processes to include tracking, analysis, review and guidelines to ensure consistent pricing practices. This is increasingly critical as wealth management is becoming more susceptible to comparison shopping and commoditization.

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