Maximising productivity to counter rising cost income ratios and diminishing profitability

Wealth Management & Private Banking

21 April 2016

Wealth Management & Private Banking


Expert: Sebastian Dovey, Scorpio Partnership

Key message

Business efficiency, particularly operating cost is taking effect on the core functions of wealth managers. Cost income ratios (CIRs) are the primary measure for firms to determine efficiency. CIRs have not been improving for pure wealth management focused firms for a number of years. Personnel and regulatory costs are the major factors that are affecting the operating margins.

 It is widely acknowledged that regulations and costs associated to complying with them – are a necessary part of the operational environment. But these costs are unlikely to decline. Improving the situation with personnel productivity (thereby making the costs more manageable) will be an area of increased attention.  Essentially, the key is to determine what the key drivers of commercial productivity are. 


  • Cost income ratios trends remain high across the board. While pure-play wealth managers are facing tougher operating conditions than diversified firms.
  • The distribution of income, from different parts of the business, is being squeezed, with traditional wealth managers failing to diversify sources of income.
  • Firms are increasingly finding weaknesses in staff productivity as net returns are subdued because of rising costs.
  • Advisers should be paid based on the profitability of the firm, rather than by the revenue they bring in.

 Key themes

The industry benchmark optimal cost income ratio (CIR) level is 70%. However the level of efficiency at the firm is dependent on the nature and operation of the business. Pure wealth management firms have on average higher CIRs than the more universal banking firms. These wealth management firms have a different business model that relies on a core set of products and services. The difference for universal banks is that they have multiple streams of revenue to rely on that helps diversify troughs in financial performance. 

 “The market rate is changing because the role of wealth managers is changing.”

 Gross margins and profit margins continue on a downward trend. There is less profit being extracted from wealth management business income and expenses continue to come under pressure. Personnel costs for example make up nearly half of all costs at a wealth management firm. Ensuring that client advisers and their assistants are outperforming means a rethink about how they are being incentivised. The necessity to make advisers more productive at a gross level is imperative. 

 “At the moment, wealth management is not an increasing profit margin sector with the growing cost of relationship and investment managers as well as the regulatory burden.”

 Determining the right incentive schemes for advisers will not only help the payout ratio on a total reward basis but it will also help to bring advisers in line with the firm’s objectives. Crucially, ensuring that reward schemes are benchmarked across the life cycle of the market and advisers are being paid based on the profitability of the firm, rather than by the revenue they bring in.

 Staffing costs make up close to half of wealth management operating expenses. However, a further significant expenditure for wealth managers are IT costs. These IT operating costs increase for firms with single or a multiple of legacy systems. And so the question whether virtual (robo) advice is a threat or an opportunity to the industry was raised. Although the virtual advice industry is young and relatively untested, financial technology is and will be a requirement for wealth managers in the future. The cost associated with either using a legacy system or new financial technology is significant, but for the long term efficiency of the company, digital is the future.

 “People are richer, earlier than they have ever been. Robo-advice might not be a core focus, but it is asking the right sort of questions.”


  • Maximising productivity requires the control of operating costs. The biggest drivers for firms are those pressures from regulation, staffing and IT costs
  • Building a suitable and efficient platform for clients, incentivising staff in the most appropriate way and managing compliance costs are critical to the long term survival of wealth managers

The industry is still on the path of re-rebuilding and now is the time to find ways to innovate business models, most obviously through best practice payout ratios and financial technology. Ensuring the financial longevity, stamina and crucially the goal of satisfying clients are all now the industry’s benchmark for being a successful wealth management firm.