North American wealth management: Money in motion, but not always to the bottom line

We learned from the last crisis that companies were not rewarded for standing still and waiting. Wealth managers will need to be fast, bold, and agile to succeed.

The wealth management industry in North America has been relatively fortunate, in terms of financial performance, during a year of crisis. While the pandemic has had an impact on traditional macroeconomic indicators (e.g., GDP growth, unemployment, consumer confidence), financial markets recovered quickly from initial lows to reach record highs over the past few months. And despite market volatility caused by subsequent waves of infection, valuations remain high as the low rate environment has left investors with little choice but to embrace riskier assets.

Therefore, it is not surprising that at first glance the industry performance in North America would appear as resilient as ever. As of end of the third quarter of this year, the industry was managing a record-high $34.7 trillion in client assets, with annualized year-to-date net flows at a healthy 2.6 percent (equal to the first nine months of 2019). However, the underlying economics of the industry tell a different story. Revenue pools, which have remained almost flat this year at an annualized $220 billion, have been significantly aided by equity markets—average client assets have been up by 10 percent—while return on assets has dropped by 11 percent (8 bps), the largest year-over-year decline in the last 15 years. The dramatic decrease in revenue yields has primarily resulted from narrowing spreads on deposits and the proliferation of zero commission trading for equities and ETFs. At the same time, costs continued to rise as they do perennially—with an increase of 4 percent year over year. As a result, industry profit pools and pre-tax margins declined by 15 percent (roughly $8 billion) and 4 percentage points, respectively.

Despite the boost from the capital markets, the performance of North American wealth management firms in terms of returns to shareholder has been weak: As of the end of the third quarter, year-to-date shareholder returns have been at negative 18 percent, a bottom-quartile performance when compared to all other industries.

Perhaps most concerning, beyond the profit and loss shifts, was an increase in money in motion of roughly 3.5 times pre-pandemic rates. The uncomfortable message is that clients may not be as loyal as the industry once thought.

In the report available for download on this page, we examine the factors behind a striking jump in money in motion, and what it means for wealth managers, and present ideas for rewriting the industry narrative over the next six months to a year.