Canadian Wealth Management Survey 2002

Canadian WealthManagement Survey 2002

© 2002 PricewaterhouseCoopers LLP. PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and theother member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

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Table of Contents

Foreword 1

About the author 2

The Canadian survey 3

Executive summary 4

Highlights from the European survey 10

Highlights from the North American survey 11

The Canadian marketplace 13

Market trends and competition 20

Clients 27

Products and fees 34

Information technology 38

Profitability and performance metrics 46

Risk management 53

Appendices 59

• Methodology and profile data 60• Wealth management groups 61

Contact at PricewaterhouseCoopers 62

Canadian Wealth Management Survey 2002 1

Foreword

We are pleased to present the Canadian Wealth Management Survey 2002.

The last two years have been difficult for many of the survey participants as fees continue to comeunder pressure. There is continuing emphasis on industry consolidation with a focus towardsachieving economies through operational efficiencies and revenue enhancements through assetgrowth. This has been met with mixed financial success, however, as operational costs have increasedand client and staff retention issues have not yet been fully contained.

The importance of data aggregation and analysis to facilitate a better understanding of changing clientneeds is paramount from a sales, service, and pricing strategy to enhance profitability. It is interestingto note that the emphasis on an integrated wealth management platform is most prevalent in banksand other full-service organizations.

To provide further insights into the emerging wealth management trends in Canada, we have alsoincluded selective comparisons from our North American Private Banking/Wealth ManagementSurvey, conducted in 2002, and the European Private Banking/Wealth Management Survey,conducted in 2001.

We would again like to extend our sincere appreciation to the twenty-five participating firms. As acondition of participation, all respondents were guaranteed confidentiality of the individual data and,as such, the survey does not disclose any individual company’s data.

We hope that you find the information in this report useful, and we look forward to any comments orquestions you may have.

Barry MyersCanadian Leader, Financial Services PracticePricewaterhouseCoopers LLP

NOTE: This survey was conducted in 2002, prior to IBM’s acquisition of PwC Consulting. PricewaterhouseCoopers LLP and PwCConsulting participated equally in both conducting the survey and in analyzing its results. PwC Consulting is no longer part of thePricewaterhouseCoopers network of firms and is now a part of the IBM Global Services Business Unit. IBM (including GlobalServices) and PricewaterhouseCoopers are not the same organization, and neither governs or is affiliated with the other, or anyaffiliate, subsidiary or division of the other.


About the author

Dr. Brian Metcalfe is an Associate Professor in the Business School at Brock University, St. Catharines,Ontario. He has a doctorate in Bank Marketing and is the author of many reports on foreign banks andbanking in Australia, South Africa, and Canada. He has also published a variety of articles oninternational banking and financial marketplace dynamics. He is the co-author of Consumer BankMarketing, a textbook published for the Institute of Canadian Bankers’ Fellowship Programme. Hisspecialist university courses are Financial Services Marketing, e-Business Strategy, InternationalMarketing, and International Business. He has been employed by the investment banking subsidiariesof National Westminster Bank and Bank of Ireland and has worked for Connecticut Bank and Trust Co.

This report was researched and written by Brian Metcalfe. Information presented herein, whileobtained from sources believed to be reliable, is not guaranteed as to accuracy or completeness. Thisreport is not intended to give legal, tax, accounting, or other professional advice. Readers should notact on the basis of any information contained in this report without considering and, if necessary,taking appropriate advice upon their own particular circumstances. If such advice or other expertassistance is required, the service of a competent professional person should be sought.


We are pleased to present the results of the2002 Canadian Wealth Management Survey, thefirst Canadian survey of its type in the wealthmanagement arena.

The twenty-five wealth managementorganizations that participated had in excess of$1.4 trillion in assets under their control and,therefore, represented the lion’s share of theCanadian wealth management industry. Theyemployed over 36,000 people and had in excessof 14 million accounts.

The purpose of the survey is to raise awarenessof key trends, challenges, and opportunitieswithin the wealth management industry.

This survey also benchmarks against two otherwealth management surveys: The North AmericanPrivate Banking/Wealth Management Survey,(North American survey), which includes a fewlarge Canadian participants, and the EuropeanPrivate Banking/Wealth Management Survey(European survey).

This survey provides valuable insights forindustry leaders on the thinking and strategicdirection of many of their peers throughout theCanadian marketplace.

In line with the recent North American survey,content has been structured to:

• provoke discussion on how to enhance andimprove business performance and marketposition;

• highlight areas of opportunity within theindustry on which to capitalize; and

• give insight into how the industry will evolve.

The survey findings will be useful to companiesof all sizes and in all stages of wealthmanagement initiatives.

The survey covered the following key topics:

• the Canadian marketplace;

• market trends within the wealth managementindustry;

• client relationship profiles and managementphilosophy;

• product breadth and fee structures;

• organizational effectiveness including roles,responsibilities, and compensation policies;

• information technology trends from strategy to disaster recovery;

• profitability and performance issues;

• risk management issues surrounding businessstrategy, outsourcing, and policies andprocedures.

Wealth management is defined for the purposesof this survey to include advice-centric andclient-centric financial services where the clientrelationship and value proposition resulting fromthe convergence of banking, brokerage, assetmanagement and insurance are paramount.

Typically, the respondents were asked to focuson wealth management clients with investableassets in excess of $100,000.

The Canadian survey


executivesummary

Main Findings 1. Fundamental marketplace change

The Canadian wealth management marketplace ischanging rapidly. Powerful forces are transformingthe way business is being conducted.

These changes include:

• industry consolidation;

• a transition from transaction-based to fee-basedpricing;

• integrated offerings;

• a switch from Do-It-Yourself (DIY) products tomanaged products;

• convergence of manufacturing and distributionwithin industry players;

• attractive emerging consumer demographics,specifically ageing baby boomers;

• challenges to the traditional brokeragebusiness;

• managing technology;

• increased client sophistication;

• globalization and new market entrants;

• bank expansion into wealth management; and

• universal accounts and multi-channel access.

The most important drivers of change are thegrowth of consumer wealth, increased clientsophistication and continued requirements fromtechnologies. The key elements inhibiting changeinclude regulation/domestic legislation, theavailability of skilled staff, and legacy IT systems.

2. Focus on revenue growth and obtaining new clients

The most pressing issue identified by wealthmanagement organizations was the need togenerate revenue growth and acquire new clients.

Over 40% of participants placed assetmanagement performance as key in drivingrevenue growth both today and in 2005.

This is a particular challenge in today’senvironment where a proliferation of productsand poor market performance are pervasive.

Focusing on other aspects of the business model,such as marketing/branding, new distributionchannels, improved sales effectiveness, newproducts and mergers and acquisitions, will bekey to customer acquisition in the future.

3. A drive to increase profitability

Scale and volume are critical to achievingprofitability, and the drive to obtain new clients fuels mergers and acquisitions andalliance activities.

The most pressing internal issue faced by theparticipants was identified as meetingprofitability targets. Fourteen participantsrecorded this issue and none of these indicatedthat they had either fully or partially achievedtheir objectives.

The need to increase profitability, amongst otherfactors, will drive the industry away fromtransaction-based fees towards fee-based fees.However, to be successful, clients will need toperceive added value as this transition takesplace. This will likely be quite transparent tocustomers as the derivation of fees becomesmore aligned with their financial objectives.

As might be expected, research found that netprofitability increases with the level of clients’assets held by the wealth management firm;however, due to the number of mass marketconsumers in Canada, organizations must becareful not to dismiss the lower end of themarket. With the right use of technology and the appropriate service model, this can be anattractive and profitable segment.


Executive summary

Main Findings 4. A need for better measurement ofprofitability

The most common method of measuringprofitability today is at the distribution channellevel. In the future, there will be significantdevelopment of profitability of customerrelationships. This will enable organizations todifferentiate service, sales and pricing, based oncustomer value.

A review of the most important MIS tools placedclient profitability in sixth position today andsecond position in 2005.

5. Fees—moving in new directions

Participants suggested that there was a growingtrend toward wrap fees, tiered fees, and feesderived as a percentage of the assets underadministration. The financial planning firmsseemed to be attracted toward a per-plan fee but not toward hourly rates.

Only two of the twenty-five respondents offeredperformance-based fees. The majority of clientsfor all participants fall into the subgrouplabelled “expect to pay competitive rates for acompetitive service.”


0 5 10 15 20

20052002

Strategic measurement tools

Activity-based costing

Balanced scorecard

Client profitability

Product profitability

Profit centre profitability

Modelling/forecasting

Cost allocation

Budget and reportingby profit centre

Number of participants

Most important Management Information System (MIS) tools

Main Findings 6. A need to improve cost control

Participants were concerned that improvedservice quality and the inherent need to hireand retain high-performing staff would result inadditional cost pressure.

Banks and investment counsellors particularlyacknowledged this issue. The impact of productproliferation on middle and back-officeinfrastructures was also seen as an added costpressure.

Furthermore, banks and other direct distributorsalso thought there was a cost pressureassociated with the need to invest in step-change capacity ahead of volumes.

7. More sophisticated, wealthier clients

Clients are ageing, and becoming bettereducated. Their incomes are growing, their net worth is rising, and the depth of theirrelationships with their wealth managementorganization is increasing.

While investment counsellors have the mostaffluent client base, all organizations will bemore vulnerable as a result of increased clientsophistication and lower levels of loyalty.

8. A need for better client segmentation

Most participants use current assets to segmenttheir client base, yet this reveals little aboutclients’ needs and preferences. Segmenting byprofitability ranked tenth and, although it willimprove, it indicates the general lack ofsegmentation strategies within the sector.

Areas of cost concern

Wealthier clients’ net worth by group


0 1 2 3 4 5

20052002

Effect of strategic investment

Increased complexity and transparency

Increasing bonus requirements

Need to invest in step-changecapacity ahead of volumes

Impact of rapid product developmenton middle/back-office infrastructure

and regulatory compliance

Pressure from the labour market(base salaries)

Over-proportionalincrease in overhead

due to rapid business growth

Based on 24 participants using the score-ranking method

0 1 2 3 4 5 6 7 8

>25m10-25m1-10m<1m<0.5

Other directdistributors

Investmentcounsellors

Life insurancecompanies

Banks

Numberof participants

2002

2005

2002

2005

2002

2005

2002

2005

Main Findings 9. Client relationship management (CRM) — acritical component in a successful future

Participants indicated that there was widespreadadoption of CRM applications by relationshipmanagers.

Organizations must question whether theseinnovators have led to significant improvementsin productivity and whether they are beingleveraged to allow relationship managers toincrease revenue growth from existing clientsand obtain new clients.

There was no acknowledgment in this researchprocess to suggest that Canadian wealthmanagement organizations have made anyprogress along the route to an across the board‘trusted advisor’ relationship.

Most pressing technology issues

10. Information technology (IT) — continued expansion accompanied bycontrolled spending

Most participants will increase both their ITcapital expenditures and operating costs in2002. A number of IT financial planning toolsare already widely used and spending is likelyto increase in areas such as client profitability(at both the relationship manager andorganizational level) and aggregated clientinformation (both internal and external).

The most pressing technology issues identifiedwere links to third-party systems, clientreporting, limited funding and data aggregation.

Internet technology has been implemented toallow marketing applications and researchdissemination, but will be more important in2005 for client access for order entry and linksto mobiles/PDAs, etc. and data aggregation.Participants looking forward three years have alimited interest in using non-financial serviceportals to distribute their services.


0

5

10

15

2005

2002

Keepin

g pac

e with

Inter

net fu

nctio

nality

Respo

nsive

ness

Lack

of in

tegrat

ed pa

ckag

es

New te

chno

logy

User-f

riend

lines

s

Links

to th

ird-p

arty s

ystem

s

Flexib

ility

Data ag

grega

tion

Limite

d rep

ortin

g

Client

repor

ting

Number ofparticipants

Main Findings 11. Data aggregation—will it be used to theclient’s benefit?

The need to provide a more open architecturewith a full assortment of third-party products,combined with an improved client focus meansthat data aggregation is critical to mostparticipants.

The need for aggregation was emphasized by thebanks and the other direct distributors. In justtwo years, many more participants will undertakeaggregation of financial information through theInternet. Progress will be made first on internallyaggregated client information and then at aslower pace with external information.

The real challenge will be to successfully harvestthe aggregated data to provide sound and valuedadvice to the client.

12. Increasing recognition of the importance ofrisk management

The application of risk-management techniques is forecast to grow over the next three years with54% of the group planning to use riskmanagement in the context of strategic initiatives.

All but one of the survey’s respondents hadpolicies in place to identify risk. The banks andother direct distributors recorded high scores forregulatory risks and the latter group wasconcerned about mis-selling risk.

Investment counsellors foresaw risk attached toprocessing errors, client relationships, andinvestment performance.


0%

1

2

3

4

5

13%

38%

29%

21%

Compliance and prevention

Operating performance

Strategic initiatives

Opportunity

AverageHazard

3.7

Average

4.5

20052002

There have been five previous PrivateBanking/Wealth Management Surveysproduced in Europe since 1993 and two inNorth America. The 2000/2001 Europeansurvey included 134 organizations in 14European onshore and offshore centres, whilethe July 2002 North American survey wasbased on responses from 29 organizations.

These surveys provide a backdrop to thisinaugural survey of wealth managementorganizations in Canada. While limitedreferences and comparisons have been made toboth surveys in the body of this report, it wasfelt valuable to highlight their main findings ina two-page summary.

Key survey headlines

• The European survey found that the privatebanking and wealth management industry hadprogressed into phase 4 of the model by 1999and, by 2000/2001, it had become firmlyestablished in this phase.

• However, the European survey also foundevidence that new business models were beingexamined and that a fundamental change wasoccurring in the way players compete andinteract with clients. As a result, theyconcluded that the industry was entering phase 5 and commented that greatopportunities awaited those organizations that

could identify the trends and capture a clearvision of their future success model.

• The market continues to grow, but tougherexternal conditions are emerging. Participantsare seeking to achieve greater differentiationin order to maintain or enhance profitability.

• The survey found that distribution channelswill be a more important and future focus fordifferentiation. They concluded thatdifferentiation is now the key to growth.

• Clients are more demanding, and encompassan increasing diversity of needs. Better clientrelationship management is critical. Theypredicted that a strong brand image wouldbecome increasingly important.

• Standard products are still important, but thegrowth is in more sophisticated andvalueadded products and services, the demandfor which varies by different client segments.They found that those serving the ultra andvery high net worth client bands are movingtowards bundling pricing and more integratedwealth management advisory services.

• There is an increased requirement for, andshortage of, highly skilled, high-cost talent.

• Pressures are evident on traditionalorganization structures and people to bemore client responsive, cost-effective, andagile. The latest technologies and betterknowledge management are key enablers.

• Upgraded and new business models are beingdeveloped to meet these industry challenges.

• It was felt that North American models may beinfluencing the evolution of the Europeanmarket. The survey predicted that greatercentralization appeared inevitable asorganizations seek greater efficiencies andcost reductions across their businesses. Theyfound that multi-channel management was amajor focus of change and transformation.


Highlights from the European survey

Phase 1

Phase 2

Phase 3

Phase 5

Phas

e 4

The IndustryTransition

Model

A re-shaped industryemerges with very

different rules of the game and the relative

positioning of participants changes

Some participantsmake significantcatch-up moves

New patterns ofcompetition and rulesof the game become

established

Initial majorresponses byparticipants

Early visibilty ofexternal

marketplace shifts

The North American survey concluded that theindustry in 2002 looked very different from whatchief executives had anticipated two years ago.They observed that with single-digit growthrates, falling profit margins, and a slowdown inthe creation of new wealth, there was a strongerfocus on profitability.

Key survey headlines

• The survey stated that there was a directcorrelation between the product mix and profitability. Firms that depended ontransaction-based income tended to be less profitable than firms that relied onadvisory/management fees.

• Client profitability is expected to become an increasingly important internal metric,defining client segmentation and the service-delivery model.

• Competition for clients and quality staffcontinues to intensify. Intense competition inthe industry, especially competition to acquirenew clients and top-quality staff, is forcingwealth managers to clearly define their marketpositioning and source of differentiation.

• The survey found that senior executives nolonger consider investment performance to be a critical differentiator. The survey suggestedthat this may be the result of increased productcommoditization, which has led to investmentperformance becoming a requirement forwealth managers rather than the basis for long-term differentiated market positioning.

• In addition, it noted that the less-than-stellarreturns of 2001 and 2002 are putting firms atrisk that differentiate primarily on investmentperformance. This is an important finding,given the opinions expressed in the CanadianSurvey regarding investment performance.

• The growth of private wealth and theincreasing sophistication of high net-worthindividuals require wealth managers to

change the way they go to market and provideclient service.

• The role of the relationship manager isincreasingly demanding and is the key tomeeting CEO expectations around increasedrevenue growth from existing clients, as wellas acquiring new clients.

• The ability to implement a “Trusted Advisor”relationship model is key, but organizationscontinue to struggle to provide the right levelof training and development, relevant toolsand operating environment to transform thefront office.

• Despite significant CRM investments andefforts to enhance and enable the front office,there is little evidence of significantproductivity improvements being achieved.

• 75% of companies are executing or planningCRM initiatives, and 60% are redesigning oneor more components of the front officefunction.

• Low adoption rates of new CRM technologyin the front office is a significant hinderingfactor and will have to be addressed quickly if wealth managers want to realize returns on investments. More comprehensive trainingand clarity around goals and metrics are veryimportant to realize these benefits in the nearfuture.

• The survey predicted a significant increase inthe reliance on introductions from other partsof financial services’ organizations. When thisis the case, organizations have to be able toleverage relationships across organizationaland product silos, and manage clientinformation in an integrated way. There is arisk of competition within the organizationover ownership of the customer, which willimpact the ability to cross-sell effectively.


Highlights from the North American survey

Key challenges—a future road map

The North American surveyconcluded that much workremains to be done. It foundthat top performers havefocused on staffing andorganizational change butmuch future effort surroundsprofitability and the effectiveuse of technology.

• Aggregation technology is an IT focus butindustry is slow to adapt. Going forward,organizations have to leverage their internalinvestments in aggregation to turn aggregatedinformation into knowledge that providesactionable recommendations for clients.

• Organizations are struggling to create aflexible operating model that puts into placean organization for future growth andmaximizes operating efficiencies. Existingstructures, especially legacy systems withinthe current IT environment, are seen as a keyhindering factor for change in the industry.

• Interest in outsourcing as a major enabler toachieve cost-efficiencies, scale, and competencyaugmentation remains limited. At the functionallevel, however, more than one-third oforganizational redesign efforts involves partial or complete outsourcing of functional areas.

• Mergers and acquisitions continue asorganizations seek scale and scope, with morethan half of the organizations participating inthe survey currently planning or executing amerger or acquisition.


ShareholderValue

OrganizationStructure

Products andServices

Staff

Profitability

Branding andStrategy

Technology

Define product mix

Define delivery channels and

supporting requirements

Build in-house

Form Alliances

Mergers & Acquisitions

Vendors

Analyze/redesign processes

Define service levelagreements

Build specialized supportfunctions and units

Explore outsourcesolutions

Assess currentcapabilities

Perform vendor analysisincluding outsourcing

Integration with legacy and core

processing systems

Analyze requirements tosupport revised org.,

aggregation and value-added advice

Define RM/staffroles in entrepreneurial

environment

Provide staff necessarytools and organization

to perform

Develop compensation model that supports

business goals

Administer training Inmethods, processes and

requisite systems

Develop ability tounderstand client andproduct profitability

Link compensation toincreased profitability

Restructure fees tomaximize profitability

Robust P&L reportingat RM level

Competitor analysis Accurate marketsegmentation

Use CRM tool to developmanage campaigns and

and marketing

Brand all internal andexternal touchpoints

Explore sourcing

PremierWealth

Manager

Average participantBest in class of participants

Assess how well yourstory is understood

externally

Articulate your “story”define its measurement

criteria

Align internalperformance

metrics with goalsCommunication strategy


the Canadian marketplace

This section provides a useful foundation for the survey’s findings. Itdocuments the major changes occurring in the wealth managementindustry and identifies the issues that are demanding the closeattention of senior management.

Q. What are the three mostimportant changes takingplace in Canada’s wealthmanagement sector atpresent?

Participants were asked to identify the mostimportant changes currently taking place inCanada’s wealth management sector.

Several themes were identified:

Consolidation

Approximately one-third of participants citedongoing consolidation as an important change.This term spanned a number of issues, includingthe consolidation of money management firms,a comment on the absence of any one strongindependent wealth manager, and theconsolidation of 5,000 mutual fund offeringsbecause of a lack of shelf space.

Price change

A price transition from transaction-based to fee-based.

Integration

The challenge of offering an integrated whole.The banks, in particular, are attempting toaddress this issue.

DIY reversal

A trend from do-it-yourself products to managedproducts. Attraction of clients that are delegatorsrather than do-it yourselfers. Clients havechanged their attitudes toward advice.

Convergence

The converging of manufacturing anddistribution with, for example, some distributorsbecoming involved in making products.

Attractive demographics

The ageing of the baby boomers and thegenerational change in wealth makes this acompelling segment. There was wideacknowledgement of the attractions of thewealth management segment. One investmentcounsellor commented that investmentmanagers were now trading down to the$100,000 level.

Failure of brokers

A growing dissatisfaction with the pure brokeragesector and, therefore, a transition of clients to themore holistic wealth management firms.

Technology

The leveraging of technology to produce a betterproduct and reaching down to include abroader definition of high net worth individuals.The challenge of serving the mass affluent.

Regulation

Regulatory change at the federal and provinciallevels was often cited with several smaller firmscommenting on the growing costs associatedwith increased regulatory demands.

Client changes

Recognition of increasing levels of clientsophistication and empowerment. Betterinformed clients making more demands on thefinancial services providers. The upskilling of theclient base. Clients are demanding more choice.

Globalization

Globalization has been accompanied byincreased competition. Examples include theentry of U.S. firms such as Legg Mason andPutnam.

A universal account

A trend towards the development of universalaccounts with multi-channel access, with afocus on a solutions-based approach.

Bank expansion

This describes the proliferation of banks in thewealth management sector. Some participantsasked whether banks will be able to harnessresources and at the same time keep their client focus.


Major changes

Q. To how much change,driven by external factors,do you expect to respond?

Increasing external pressurewill drive change.

The pace of change isescalating.

The participants anticipate acceleration inchange over the next three years.

The greatest degree of change was forecast bythe ‘Other Direct Distributors’ group, where50% anticipates very significant change by

2005. The banks think there will be significantmarketplace change at that time. The investmentcounsellor group also believes that change willescalate over the next three years.


External change

Very Significant

Significant

Moderate

Minor

2005

2002

Banks in 2002 and 2005

Very Significant

Significant

Moderate

2005

2002

Other Direct Distributors in 2002 and 2005

Very Significant

SignificantModerate

2005

2002

Investment Counsellorsin 2002 and 2005

Significant

Moderate

2005

2002

Life Insurance Companies in 2002 and 2005

Q. Main actions to achieveyour growth targets for themarket?

Strong performance in assetmanagement is critical togrowth for investmentcounsellors and life insurancecompanies.

Banks are interested in furtherM&A.

The need to improve saleseffectiveness was important tothe banks, direct distributors,and investment counsellors.

Over 40% of participants ranked assetmanagement performance in first or secondplace as the most important action to achieveprojected growth both today and three yearsfrom now.

Marketing/branding and developing newdistribution approaches were seen as importantgrowth mechanisms for a quarter of the group.This finding was not influenced by anyparticular subgroup.

These factors were followed by improving saleseffectiveness (the most important factor in theNorth American survey), new products, andmergers and acquisitions (M&A).

How to achieve projected growth

The banks ranked M&A activity, developing newdistribution approaches, and improving saleseffectiveness as important in 2002.

The investment counsellors and life companieswere focused on performance of assetmanagement.

Both the life companies and other directdistributors saw growth through new productdevelopment while the direct distributorsrecorded strong marketing/branding scores for 2005.


Achieving growth

0

5

10

15

20

25

30

35

40

45

2005

2002

Develo

ping n

ew di

stribu

tion

appr

oach

es/ch

anne

ls M&A

Develo

ping n

ew pr

oduc

ts

Impr

oving

sales

effec

tiven

ess

Mark

eting

/bran

ding

Perfo

rman

ce of

asse

t man

agem

ent

% of CEOsthat ranked

action #1 or #2

Based on 24 respondents

Q. Most pressing issues?

The need to improve revenuegrowth and acquire new clients.

The most pressing issues faced by wealthmanagement executives today centre on theneed to generate revenue growth and obtainnew clients.

The competitive nature of the market is reflectedin the need to retain existing customers,improve service quality, and focus oninvestment performance.

On a group basis, the banks are concerned withobtaining and retaining clients and servicequality, the life insurance companies and otherdirect distributors on improving revenue growthand the investment counsellors on managinggrowth and investment performance.

Competitive differentiators: The North Americansurvey found that the key competitivedifferentiators were:

• Top-notch client list

• Excellent customer base

• Quality of staff

• Strong brand image

• Best of breed products.

It found that less emphasis was being placed onproduct differentiation and more on competitivepositioning.

There is less need to develop proprietaryproducts as long as clients have access to acomprehensive product offering provided eitherin-house or by third-party providers.


Most pressing issues

0 1 2 3 4 5 6 7 8

2005

2002

Product/service range

Investment performance

Service quality

Retaining existing clients

Managing significant growth

Obtaining new clients

Improving revenue growth

Number of participants ranking factor first or second in importance

Pressing Issues

Q. What is the level of interestand action on key issues?

M&A and monitoringprofitability receive mostattention.

Participants were asked to indicate whether theywere simply interested in a range of key issues orwere seriously dealing with them in the form ofplanning action or actively executing those plans.

Almost 70% of the group was planning onexecuting action on M&A and around 66% wassimilarly engaged in profitability analysis.

The most critical areas for the banks were M&A,profitability analysis, multi-channel delivery andCRM.

Disaster recovery planning and CRM weremost important for the investment counsellors,while the other direct distributors rankedprofitability analysis, product profitability, and M&A as priorities.

Around 40% of the group records that they are planning on executing outsourcing andaggregation.

These results exceeded the levels recorded inthe 2002 North American survey, with 24%planning on outsourcing and 35% planning on aggregation.


Action on key issues and trends

0 10 20 30 40 50 60 70 80

Interested in gathering more information

Planning or executing

Globalization

Alliance models

Aggregation

Profitability by client

Outsourcing

Multi-channel delivery

Disaster recovery planning

Brand repositioning

Customer relationship mgmt


Profitability analysis

M&A

Percentage of CEOs

Q. What are the mostimportant issues that youcurrently spend time on?

Setting strategic goals,leadership and goodcommunication.

The allocation of time across responsibilitiesreveals which issues are most pressing for theheads of wealth management.

Setting and resetting strategic goals andleadership and communication are the two mostimportant management functions.

Furthermore, leadership and communication willincrease in importance over the next three years.

The pursuit of mergers and acquisitions andalliances mentioned on the previous page arealso deemed to be critical tasks.

Reshaping corporate culture, consolidatingbusiness units, and retaining staff all reinforcethe important role of harnessing efficiencieswithin organizations.

Retaining talented staff is a critical issue forinvestment counsellors both now and in thefuture, while leadership and communicationwill continue to be very important to the otherdirect distributors.

M&A is predicted to be high on the agenda ofbanks in three years—three banks ranked it firstin 2005.


Most critical issues faced by headsof wealth management

0 10 20 30 40 50 60 70 80 90 100110120130

2005

2002

Developing the management team

External promotion with clients

External promotion with introducers

Hiring staff

Internal relations with parent organization

Post-merger integration

Retaining talented staff

Consolidating multiple business units

Reshaping corporate culture

Exploring potential M&As/alliances

Leadership and communication

Setting/resetting strategic goals

Based on 23 participantsScoring system of 10 for 1st, 6 for 2nd and 4 for 3rd


markettrends

and competition

Respondents were asked to record their views on the level of intensityof competition in the wealth management industry today and in thefuture. Furthermore they were asked to record what drives competitiveactivity and how the drivers and hinderers of change will evolve overtime. They also review and rank the most important internalpositioning issues.

Q. What is the level ofintensity of competition inyour particular market?

Q. What drives competitiveactivity?

Competition intense for newclients.

Scale and volume critical.

The moderate wedge of the adjacentcompetition chart makes up about one-third forbanks, investment counsellors, and other directdistributors, while two-thirds view competitionas intensive.

The life insurance companies in contrastperceive competition to be moderate.

Participants believe that competition is strongestin the areas of trying to acquire new clients.

Scale and volume are critical to achievingprofitability and the drive to acquire new clientsencourages mergers and acquisitions andalliance activities.

This factor is followed by investment performanceand competition for attracting good staff.

Service quality and products ranked ahead ofprice today and in three years.

Products are predicted to be the second mostimportant driver of competition in three years’time.


Intensity of competition

Intensive Moderate Light None

Other direct distributors

Investment counsellors

Life insurance companies

BanksIntensity of competition

0 1 2 3 4 55 4 3 2 1 0

Other

Advertising to increase brand awareness

External aggregation capabilities

Use of new IT to differentiate service

Competition to retain good clients

Price

Products

Service quality

Competition for good staff


Competition to acquire new clients

Importance now Importance in three years

1

2

3

4

5

6

7

8

9

10

11

Average across all participants

1

3

4

5

2

7

6

9

8

11

10

Q. How do you measure theperformance of yourrelationship managers?

Assets under management is a key indicator.

The most important measure of performance forrelationship managers is the growth in assetsunder management.

This is followed by client satisfaction and thenumber of clients acquired annually.

Revenue targets/client profitability was ranked insecond place by three banks.

Cross-selling, retention levels, and clientsatisfaction were important measures for theother direct distributors.


Impact now Impact in three years

Average across all participants

1

2

3

4

5

6

7

8

9

10

11

1

2

4

3

5

7

9

6

8

12

10

6 5 4 3 2 1 0

Number of referrals from existing clients

Number of complaints

Cross-selling of other services

Revenue targets/client profitability

Value of assets acquired through new clients

Sale of own products

Retention levels

Client satisfaction with relationship manager

Number of new clients acquired annually

Client satisfaction

Growth in assets under management

0 1 2 3 4 5 6

Performance of relationshipmanagers

The most important external drivers of changewere compliance and regulatory issues followedby increased competition and changing clientneeds.

Competition for qualified staff and scale/criticalmass requirements follow closely behind.

New/emerging IT technologies are anticipated tomake a medium impact in three years’ time.

In contrast to both the North American surveyand the European survey, where competition forqualified staff was placed in first position,Canada ranks this factor fourth.


Q. What is the impact of thefollowing external driversof change on yourorganization?

Compliance and regulatoryissues are causingorganizational change.

External drivers of change

Impact now Impact in 3 years

Average across all participants4 3 2 1

Risk management and control

New/emerging IT technologies

Changes in distribution models

M&A/industry consolidation

Slowing rates of market growth

Scale/critical mass requirements

Competition for qualified staff

Changing client needs/profiles

Increased competition

Compliance and regulatory issues

No impactLightimpact

Mediumimpact

Highimpact

1 2 3 4

No impact Lightimpact

Mediumimpact

Highimpact

1

2

3

4

5

6

7

8

9

10

1

2

4

6

5

7

8

9

3

11

Q. Please rank the relativeimportance of the factorsthat most enable change in the industry. Rank thetop 3, where 1 is the factorthat most enables change.

Growth in private wealth andclient sophistication is drivingchange.

Q. Please rank the relativeimportance of the factorsthat most hinder change in the industry. Rank thetop 3, where 1 is the factorthat most hinders change.

Legislation and new regulationshinder industry change.

In order to gauge the change agents that enablegrowth and success and, conversely, those thathindered growth, participants were asked torank the top three in each category.

The two most positive forces for change havebeen the growth of private wealth and increasedclient sophistication. New entrants from withinthe industry are also seen as drivers of change.


Enablers/hinderers of change

On the negative side, regulation and domesticlegislation are viewed as strong hindrances ofchange. At a significantly lower level of impactis the availability of skills and technologyassociated with legacy systems.

Management and staff quality and a slowacceptance of the Internet by some clients werealso identified as negative influences on change.

0

10

20

30

40

50

60

70

80

Staff q

uality

Globali

zatio

n

Man

agem

ent q

uality

New en

trants

from

finan

cial s

ervice

s ind

ustry

Pace

of te

chno

logica

l cha

nge/

new te

chno

logies

Increa

sed c

lient

soph

istica

tion/

clien

t exp

ectat

ions

Growth

of pr

ivate

wealth

Percentage of participants

0

10

20

30

40

50

60

70

80

Clients

' acc

eptan

ce of

Inter

net

Staff q

uality

Man

agem

ent q

uality

Pace

of te

chno

logica

l cha

nge

Exist

ing in

formati

on te

chno

logy

Availa

bility

of sk

ills

Regula

tion/d

omes

tic le

gislat

ion


Q. What are the most pressinginternal positioning issues,and how much progresshave you made over thelast twelve months inaddressing these issues?

The need to meet profitabilitytargets is paramount.

Fourteen participants recorded that their mostpressing internal issue was meeting profitabilitytargets.

Within that group, four said results had beenfully achieved, while a further five said they hadbeen partially achieved. Only one said noprogress had been made.

Obtaining new clients also ranked as animportant priority alongside image andreputation.

Although developing a clear segmentationstrategy was important to almost 40% ofparticipants in the North American survey,only four participants in Canada highlighted it as an issue.

This suggests that developing a soundsegmentation strategy has not yet reached the same degree of importance in the Canadian market.


Internal positioning issues—present

0 3 6 9 12 15

No progress

Plan in place

Implementation in progress

Results partially achieved

Results fully achieved

Overall IT strategy

Need to offer third-party products

Client segmentation strategy

Developing new markets

Multi-channel distribution

Improving product/service track record

Adapting to changing client needs/profiles



Image and reputation/brand value


Meeting profitability targets

The life insurance companies scored well onmeeting profitability targets but poorly on imageand reputation and brand value.

The lowest score for a bank on meetingprofitability targets was implementation inprogress, which suggests that this issue is being addressed.

A few banks awarded themselves “no progress”on plans to retain existing clients, ITinfrastructure, and third-party products.

The investment counsellors thought they weredoing well on obtaining new clients but not aswell on meeting profitability targets.

The other direct distributors were weak onimage and reputation and retaining existingclients.

While image and reputation are expected to beless important in the future (in contrast to theNorth American survey findings), there will be agreater need to develop new markets andimprove product/service track records.

Multi-channel distribution and adapting tochanging client needs/profiles are also expectedto be less important in three years’ time.

Q. What are the most pressinginternal positioning issuesin three years’ time?

Need to develop new marketsand improve service isbecoming more important.


Internal positioning issues—future

0 3 6 9 12 15

Adapting to changingclient needs/profiles

Multi-channel distribution

Product/service range

Developing clientsegmentation strategy

Adapting toageing client base


Improving image andreputation/brand value

Improving product/service track record

Developing new markets



Meeting profitability targets


▲

▲

▲

▲

▲

▲

▲

▲

▲▲

▲

▲


clients

This section focuses on the wealth management client base. Itprovides insights into client wealth measurement, the evolving clientprofile, client segmentation, and the reasons behind client selectionand departure decisions.

Q. How do you measure yourclients’ investable wealth?

Clients provide the informationwith little or no independentassessment.

In total, 80% of participants rely on clients toprovide them with details of their wealth. Bestestimates are used by 30% of participants.

The life insurance companies and banksindicated that in all cases client wealth wasbased on information provided by the clientdirectly.

Only five participants said that they hadaggregated wealth reporting for clients. Thisgroup was composed of two other directdistributors, two banks and one investmentcounsellor.

Three banks said they tracked client accountmovements. This method was also used by oneother direct distributor and one investmentcounsellor.

The North American survey found that 70% ofwealth managers rely on clients to provide thisvaluable information.

It stressed the importance of collecting datafrom indirect sources rather than relying only onthe client as the sole source of financialinformation.


Measuring clients’ wealth

0

10

20

30

40

50

60

70

80

Aggreg

ated w

ealth

repo

rting

for c

lient

Track

ing of

clien

ts’ ac

coun

t mov

emen

ts

Prov

ided b

y clie

nt su

rvey

Best e

stimate

s

Prov

ided b

y rela

tions

hip m

anag

er

Prov

ided b

y clie

nt dir

ectly


Q. Why do clients select yourorganization?

Personal relationships andimage are critical selectioncriteria.

Q. Why do clients leave yourorganization?

Poor performance and a lackof proactive advice.

Personal relationship, image, and service qualityare the top three reasons cited in the selectionof a wealth management organization.

These responses varied by group. For example:banks chose service quality, image, size andproduct range; life insurance companiesselected product range, relationships andinvestment performance; investment counsellorsopted for relationships, image and performance;and finally, other direct distributors citedrelationships, recommendations from existingclients and advice.

While image is expected to increase inimportance by 2005, the order will remain the same.

Personal relationships are predicted to be just a little less important in three years’ time.

Inadequate investment performance was seen asthe primary reason for clients leaving anorganization. This result was influenced bystrong input from life insurance companies andinvestment counsellors.

Banks cited “lack of proactive advice” as their clients’ primary trigger for departures.Furthermore, following key staff was importantto both banks and other direct distributors.

This reinforces the need to offer ‘best of breed’third-party products.


Client selection and departure

0

20

40

60

80

Recom

menda

tions

from

other

third

parti

es

Prod

uct r

ange

Valued

advic

e

Inves

tmen

t perf

orman

ce

Recom

menda

tion f

rom

an ex

isting

clien

t

Servi

ce qu

ality

Imag

e

Perso

nal r

elatio

nship


2002

2005

0

5

10

15

20

Price

too h

igh

Poor

quali

ty of

statem

ents

Gaps i

n the

prod

uct r

ange

Death

Too m

any e

rrors

Follo

wing ke

y staf

f to

other

orga

nizati

ons

Lack

of pr

oacti

ve ad

vice

Inade

quate

inve

stmen

t

perfo

rman

ce

Numberof responses

Fourteen participants mentioned “too manyerrors” as a cause of departures.

Q. Please indicate thesegmentation criteriacurrently used and thecriteria you would expectto use in three years’ time.

Current assets is the primarycriterion.

Profitability by client will bemore important in future.

Current assets, attitude to risk, and income levelsare the top three segmentation criteria used.

The fact that approximately 90% of participantsuse “size,” which could be argued provides littleinsight into client needs or level of profitability,suggests that there is considerable scope forimprovement in gaining a better understandingof clients and how they can be effectivelysegmented.

Although profitability by client ranked in tenthplace in 2002, it is expected to gain usage as animportant segmentation criterion by 2005. Bythen, five banks and four other directdistributors plan to use it.


Segments

0

20

40

60

80

100

2005

2002

Profi

tabilit

y by c

lient

Active

/passi

ve in

vestm

ent s

tyle

Distrib

ution

chan

nel u

sage

Geogra

phy

Prod

uct m

ix us

age

Age

Poten

tial a

ssets

Incom

e lev

els

Client

attitu

de to

risk

profi

le

Curren

t asse

ts

Percentage of participantsthat use criteria

0

3

6

9

12

15




Banks

20052002


Q. Please define thedemographics thatdescribe your averageclient base today and inthe next three years.

The most typical client profile portrays a 50–70year old, with a university degree, a$200k–$500k salary and a net worth exceeding$1 million, who has been with his/her wealthmanagement firm for 5 to 10 years.

This is very similar to the profile described in theNorth American survey, although both salarylevels and net worth are higher than in Canada.

A number of participants had difficultyarticulating the characteristics of their individualclient base. This suggests that a goodunderstanding of client profiles that would berequired for effective CRM and segmentationstrategies is still missing.

The findings indicate that income levels, networth, and age levels are all expected toincrease over the next three years.


Client profile

50-70

30-50

2005

2002

Client base is ageing

Master’s degree

College degree

High School or Less

2005

2002

Clients better educated;most have college degrees

>10 years

5 to 10 years

1 to 5 years

2005

2002

Relationships are getting longer

<1year

$10-$25MM

$1-$10MM

<$1MM

<$0.5

2005

2002

Net worth is rising

>$1M

$500K-$1M

$200K-$500K

<$200K

<$100K

2005

2002

Incomes are rising

Client profiles by individualgroup.

As expected, the investment counsellors havethe greatest number of clients in the high net-worth category.

All the investment counsellors in 2002 said thattheir client net worth exceeded $1 million, andthat by 2005, half of the firms will be in the$10–$25 million net-worth category.

All the groups anticipated an increase in networth over the next three years.

Again, the investment counsellors displayed themost affluent client base, with further upwardimprovement anticipated by 2005.

One bank portrayed its wealth managementclient profile to be in the $500,000–$1 millioncategory by 2005, but most opted for the$200,000–$500,000 level.

Net worth by group

Annual income by group


Clients’ net worth and income

0 1 2 3 4 5 6 7 8

>25m10-25m1-10m<1m<0.5




Banks


2002

2005

2002

2005

2002

2005

2002

2005

0 1 2 3 4 5 6 7 8




Banks


2002

2005

2002

2005

2002

2005

2002

2005

<100K <200K 200K-500K 500K-1M >1M

Q. Why might clients beencouraged to leave?

Take too much time or arediscount hunters.

Q. Clients’ willingness to pay?

Most are willing to paycompetitive rates forcompetitive services.

The most important reason given for askingclients to leave an organization centres on theclient’s “taking too much time to serve.”

This figure was strongly influenced by theresponses of banks, investment counsellors andother direct distributors.

The life insurance companies ranked “discounthunter” as most influential.

Further reasons include “unrealistic” investmentgoals and failing to meet revenue criteria.

Other reasons included “market timers” andinappropriate service for the client.

Overall, the largest category in terms ofwillingness to pay for services is the “paycompetitive rates for competitive services.”

This category accounts for 50% or more of eachof the four subgroups’ client base.

More than 20% of clients for all the groups fallinto the “premium” category; for the lifeinsurance companies this climbs to 40%.

The “discount for limited service” category issmall for all groups; for the banks, it is 11%.


Clients’ departure

0

1

2

3

4

5

6

7

Do not

meet s

egmen

tation

crite

ria

Do not

meet a

sset s

ize cr

iteria

Do not

meet p

rofita

bility

stan

dard

s

Do not

meet r

even

ue cr

iteria

Other

Client

is a “

disco

unt h

unter

”

Take

too m

uch t

ime t

o serv

e

Based on responses from 23 participants

0 20 40 60 80 100

Other

Expect discount for limited service

Expect to pay discount for high-level service

Expect to pay competitive rates

Expect to pay premium for high-level service

All

Banks




0 20 40 60 80 100Percentage

Averages are calculated in each segment, based on 24 participants.


productsand fees

This section outlines third-party product offerings. It also examines feestructures and participants’ willingness to discount. It reveals futurefee trends.

Q. Do you offer third-party oroutsourced products?

Majority of wealthmanagement firms offer third-party products.

Q. Do you offer performance-based fees?

Performance-based fees arerare.

Participants were asked about their productofferings and the extent to which they providedthird-party products.

They were also questioned on their willingnessto discount products and services to retain andattract new business, which in turn could havean adverse effect on profitability.

Four investment counsellors said they did notoffer third-party products.

The types of third-party/outsourced products(which varied according to the background ofthe organization) included:

• mutual funds

• wrap accounts

• hedge funds

• pooled funds

• insurance

• securities

• U.S. equities

• bonds and GICs.


Products and fees

Only two of the twenty-five respondents to thisquestion said that they offer performance-basedfees.

The organizations where such a practice occursincluded an investment counsellor and a bank.

No

Yes

No

Yes

Fees


Q. Trust services, feecommission schedule anddiscount pricing.

Trust services should becharged separately.

Discounts are available.

An overwhelming number of participants believethat trust services should be charged separatelyfrom investment management services.

All but one participant said that they publish afull commission schedule. However, more thantwo-thirds suggested that they are willing tooffer fee discounts or waivers.

Within the no-discount group are fourinvestment counsellors and at least onerepresentative from the other three groups.

In the North American survey, 93% said theyoffered discounts and the average fee discountwas 15%.

That survey also found that 59% of participantswaive or discount fees on 15% of theiraccounts.

In 2002, they concluded that wealth managershave increased the frequency with which theyoffer a discount, and they have also increasedthe size of the discount.

No

Yes

Do you believe trust services

should be charged separately?

Do you publish a fee and

commission schedule?

Do you offer fee

discounts/waivers?

Q. Where is the fee trendmoving?

Trend towards wrap fees, basis-point fees, and tiered fees.

The fee trend appears to be moving stronglytoward wrap fees, basis-point fees, and tiered fees.

The banks and other direct distributors stronglysupported wrap fees, while the latter group alsobelieved there was a move toward tieredaccounts (based on the level of relationship, e.g.platinum, gold, etc.). The investment counsellorsemphasized basis-point pricing.

However, as organizations focus more on value-added service, it would seemcontradictory to add a higher quality service

and still maintain a basis-point fee structure.CRM technology will help organizations tobetter understand the time breadth of a client’srelationship and, therefore, pave the way to“relationship pricing.”

A per-plan fee is popular with the specialistfinancial planning firms, but charging an hourlyrate for advice did not seem to be a direction inwhich the market is moving.


Fee trends

0

5

10

15

20

Hourly

fees

for

advic

e plan

ning

Per-p

lan ba

sis

Flat fe

e

(Bas

ed on

size

of re

lation

ship)

Tiered

fee

Basis-

point

fees

Wrap

fees



informationtechnology

IT plays a pivotal role in both enabling revenue generation andachieving operational efficiencies. This section records how recently IT strategy has been reviewed by participants and examines the IT budgets for 2002. It highlights participants’ future IT usage withparticular emphasis on the Internet.

Q. When did you lastundertake a full strategyreview of IT and theInternet?

Most have reviewed theirInternet strategy in the lasttwelve months.

Over 70% of the participants indicated that ITstrategy and Internet strategy had been reviewedin the past twelve months. This suggests thatboth IT and the Internet continue to forcecareful scrutiny by wealth management firms.

The North American survey found that twentyparticipants are undertaking approximatelythirty-eight Internet projects, and that sixteenparticipants were involved in twenty-fourprojects associated with CRM.

Both of these types of initiatives were seen asmethods to enhance client focus capability.


IT review

0

5

10

15

20

Internet strategy

IT strategy

Never5 years3-4 years1-2 years12 months


The “Never” response in relation to Internet strategy was madeby two investment counsellors.


Although several firms predicted significantincreases in their capital expenditure in 2002 (to100%), the majority were clustered in the 20%or less category.

A further six firms recorded a decrease in bothcapital expenditure and operating costs.

As the chart shows, while two other directdistributors forecast significant capitalexpenditure in 2002, three are spending lessthis year than last year. One life insurancecompany predicts a 100% increase, while all ofthe banks and investment counsellors fall intothe +/- 25% circle.

IT budget for 2002

Q. By approximately whatpercentage do you expectyour IT budget to changein 2002?

A number of firms have scaledback IT expenditure while afew “outliers” will double theirspending in 2002.

-80 -60 -40 -20 0 20 40 60 80 100

100

80

60

40

20

-20

-40

Capital expenditure

Operating costs

BanksLife insurance companiesInvestment counsellorsOther direct distributors

The most widely used technology tools arecustomer relationship management technologyand aggregated client information (on aninternal basis). Here, the technology has 100%usage at the banks, one life insurance companyreported 40% usage by relationship managers(RM) and one other direct distributor recorded ascore of just 20%.

The external aggregation of client information willbe greatly enhanced over the next three years.

However, the tools expected to see the greatest improvement are in the area of client profitability.

It is forecast that tools to measure clientprofitability will improve dramatically at theorganizational level and significantly at therelationship manager level.

For example, of the six banks that responded tothis question, only one claims to measure clientprofitability at the organizational level, whereasby 2005, six banks will.


Technology usage

5

10

15

20

25

2005

2002

Client profitability information

(at the RM level)

Client profitability information

(at the organizational level)

CRM technology

Aggregated client information

(external)

Aggregated client information (internal)

5

10

15

20

25

Q. What technology tools arein place to support therelationship managementprocess? How will thischange over the nextthree years?

A much wider use of clientprofitability information isexpected.

Q. What financial planningtools are in place tosupport the relationshipmanagement process?How will this change overthe next three years?

Financial planning tools arewidely used.

Wealth management firms are already widelyusing six different types of financial planningtools. In order of level of usage they are:investment advice and analysis, meetingplanning, education planning, retirementplanning, estate planning, and tax planning.

To fulfill their mandate of providing value-addedadvice, all wealth management firms will berequired to use these types of tools.

However, there was little improvement in theadoption of these tools over the next three years,suggesting a shortfall will occur in some firms.


Financial planning tools

5

10

15

20

25

2005

2002

Meeting planning (e.g. Outlook)

Education planning

Retirement planning

Estate planning

Tax planning

Investment advice and analysis

5

10

15

20

25

Q. What are the majortechnology issues thatmost impact yourorganization today and inthree years’ time?

Links to third-party systemsand client reporting are keyissues.

The top three issues that are of concern torespondents are links to third-party systems,client reporting, and limited funding. Limitedfunding is predicted to be the most importantissue in three years’ time.

However, needs vary by group. The banksranked limited funding, data aggregation,straightthrough processing, and user-friendlinessas most important.

The life insurance companies selected Internetfunctionality and limited funding, while theinvestment counsellors chose client reporting,responsiveness, and regulatory change.

Finally, the other direct distributors respondedthat technology priorities centred on client

reporting, data aggregation, and limited fundingwere priorities.

In previous sections of this report, the need toprovide third-party products through a moreopen architecture and to improve client focushave been highlighted.

These findings confirm that IT will be deployedto assist in these key areas. Allied to clientreporting and in fourth position is dataaggregation.

IT will be used here to allow relationshipmanagers to offer value-added advice to clients.


Technology issues

0

5

10

15

2005

2002

Keepin

g pac

e with

Inter

net fu

nctio

nality

Respo

nsive

ness

Lack

of in

tegrat

ed pa

ckag

es

New te

chno

logy

User-f

riend

lines

s

Links

to th

ird-p

arty s

ystem

s

Flexib

ility

Data ag

grega

tion

Limite

d rep

ortin

g

Client

repor

ting

Number ofparticipants


Many participants have invested heavily inInternet technology and use it widely todisseminate general marketing information onproducts offered.

A smaller number use it to distribute researchmaterial and about half of the group has passivelinks to other intermediaries.

A two-year time horizon shows modestincreases in usage for links and service requests.

The passive link to intermediaries/gatekeeperswas less important to banks and investmentcounsellors but very important to the otherdirect distributor group.

Clearly the Internet is used less widely forchannel integration than for enhancement (as above).

The most widely used function here is forplanning capability (such as asset allocation tools).

Order entry for securities and payments will seeincreased usage in two years’ time.

Almost half of the sample expect cell phonesand PDAs to be linked in two years, suggestinggreater acceptance of wireless communication.

As expected, this increase for links topagers/mobile/PDAs is fuelled by the banks and other direct distributors.

Clients’ use of the Internet

0

5

10

15

20

25

2004

2002

Servi

ce re

ques

ts (e.

g. br

ochu

res)

Passi

ve lin

k to i

nterm

ediar

ies/

gatek

eepe

rs

Resea

rch di

ssemina

tion

Genera

l mark

eting


0

5

10

15

20

2004

2002

Real-t

ime o

rder

book

(e.g.

tran

sacti

on m

onito

ring)

Plann

ing ca

pabil

ities (

e.g. a

sset a

lloca

tion t

ools,

profi

ler)

Links

to pa

gers/

mobile

/PDAs (

e.g. W

AP, Pa

lm Pi

lot, e

tc.)

Active

, mult

i-clie

nt lin

k for

exter

nal a

sset m

anag

ers

Clients

’ acc

ess f

or or

der e

ntry (

other)

Clients

’ acc

ess f

or or

der e

ntry (

paym

ents)

Clients

’ acc

ess f

or or

der e

ntry (

secu

rities

)


Channel enhancement

The Internet is used primarilyfor marketing support.

Channel integration

More usage for integration intwo years’ time.

The aggregation of financial information acrossorganizations through the Internet will expandfrom five participants to twelve participants injust two years.

All of the other areas of the Internet related to transformation will also be impactedsignificantly.

The construction of a detached Internet bank(which is not applicable to the mainstream banksin this survey) has already been embraced by acouple of participants, but four more participantshave plans to transform their organizations in thisdirection over the next two years.

Less interest was expressed in the convergencewith nonfinancial services (FS) applications ofthe Internet.

However, five participants are currentlyinterested in introducing their financial servicesthrough other financial services portals, and thiswill increase to nine participants by 2005.

Only one participant showed an interest inproviding nonfinancial services such as logisticsprocurement to portals.


Transformation

Aggregation will be morewidespread in two years.

Convergence

Little interest in convergencewith non-financial servicesportals.

Clients’ use of the Internet

0

5

10

15

2004

2002

Build d

etach

ed In

terne

t ban

k

Finan

cial p

ortal

func

tion f

or cl

ients

Chattin

g/com

munity

rese

arch

Web

colla

borat

ion, r

eal-t

ime a

cces

s to R

M

Aggreg

ate fin

ancia

l infor

mation

Number of responses

0

5

10

15

2005

2002

Prov

ide ow

n non

-FS se

rvice

s

(e.g.

logist

ics, p

rocu

remen

t,

real e

state)

to po

rtals

Run po

rtals

with no

n-FS

and F

S pro

ducts

Run po

rtals

with FS

prod

ucts

only

Bundle

own s

ervice

s and

intro

duce

in no

n-FS

porta

ls

Bundle

own s

ervice

s and

intro

duce

in oth

er fin

ancia

l serv

ices p

ortal

s

Number of responses


profitabilityand performance

metrics

Controlling costs and measuring profitability are vital functions in today’s wealth management market. This section reveals the most widelyused MIS tools and examines the nature of different profitability bands.It also discusses business development goals, sales cycles, andcompensation weightings.

Q. In controlling your costbase, what are your mainareas of concern?

An over-proportional rise incosts due to growth.

Pressure from personnel costs.

The most critical concern related to anexpanded cost base centred on business growthand an over-proportional increase in overheadcaused by that growth. That cost concern holdsfor the next three years.

The need to hire and retain good people werealso concerns. Although a marginal scalingback was predicted by 2005, this was an areaof cost pressure.

However, it was in this area that the banks andinvestment counsellors recorded their strongestareas of concern.

The banks and other direct distributors alsothought there was a cost pressure associatedwith the “need to invest in step change ahead of capacity.”

In addition, the other direct distributors alsohighlighted the effect of strategic investment andan over-proportional increase in overheadcaused by growth.

The impact of product proliferation on middleand back-office infrastructure—and in turnregulatory compliance—was also seen as anadded cost pressure.

One investment counsellor mentioned that theneed to accommodate the regulator with state-of-the-art compliance-monitoring technologyhad resulted in a huge increase in technologycosts over the next twelve months.


Controlling costs

0 1 2 3 4 5

20052002

Effect of strategic investment

Increased complexity and transparency

Increasing bonus requirements

Need to invest in step-changecapacity ahead of volumes

Impact of rapid product developmenton middle/back-office infrastructure

and regulatory compliance

Pressure from the labour market (base salaries)

Over-proportional increase in overhead

due to rapid business growth

Based on 24 participants, using the score-ranking method

Q. How do you measureprofitability today? Howwould you like to measureit in the future?

Big increase in measuringprofitability at the relationshiplevel.

The chart indicates that the most common wayof measuring profitability today is by distributionchannel, followed by at the relationshipmanager level and by product.

Major improvement is predicted in measuringprofitability at the overall relationship level inthe future.

The chart shows that the number of participantsusing this method in the future will grow fromfive to fourteen. The players adding this measurewill include two banks, two life insurancecompanies, two investment counsellors, andthree other direct distributors.

There is less interest in capturing profitability ateither a household or multi-family level.


Measuring profitability

5

10

15

20

Future

Today

By distribution channel

By product

At relationship manager level

At multi-family level

At relationship level

At household level

Q. What are your mostimportant MIS decisiontools now and what willthey be in three years’time?

Profit centre reporting veryimportant, but clientprofitability becoming moreimportant.

Q. What do you consider tobe your principal financialmeasures and externalindicators of performance?

Profit before taxes, growth andEBITDA.

The current focus of MIS tools is on providingbudget and reporting by profit centre. This isfollowed by cost allocation andmodelling/forecasting.

The MIS tool that is anticipated to increase mostin usage over the next three years is clientprofitability. This factor was recognized by the

other direct distributors, banks, and investmentcounsellors but not by the life insurancecompanies.

If this tool is successfully deployed at therelationship manager level, it will significantlyhelp relationship managers control the resourcesallocated to clients.


MIS tools

The most important financial measure andindication of performance was considered to beprofit before taxes followed by growth in assetsunder management, and EBITDA.

Revenue growth came in fifth place and thiscontrasts with its first place in the NorthAmerican Survey.

Although customer growth has been mentionedas a key objective in other parts of this report, itis surprising that little importance was attachedto the cost of customer acquisition.

0 5 10 15 20

2005

2002

Strategic measurement tools

Activity-based costing

Balanced scorecard

Client profitability


Profit centre profitability

Modelling/forecasting

Cost allocation

Budget and reporting by profit centre


0

1

2

3

4

5

6

20052002

Cost o

f cus

tomer

acqu

isitio

n

Return

on as

sets

(ROA)

Others

Reven

ue gr

owth

Cost/r

even

ue ra

tio

EBITD

A

Growth/

size (

AUM)

Profi

t befo

re tax

targe

ts

Based on 21 participants and using rank weighting

Q. How would you assess therelative net profitabilitygenerated by each clientband currently, and how doyou expect this to changein three years’ time?

Profitability grows as clients’asset size increases.

The adjacent charts indicate that the perceivednet profitability increases with the level of clients’assets held by the wealth management firm.

Although some participants described aprofitability inversion (where profits declined inthe greater than $1 million category), the overallresults suggest that profits increase with clients’asset size.

The $100,000–$500,000 band suggests thatprofitability will come under pressure in thenext three years.

This finding reinforces the need to use newtechnology successfully in addressing thisgrowing mid-market sector.

Mass market: less than $100,000

Mid-market: $100,000 to $500,000

Emerging affluent: $0.5 million to $1.0 million

Affluent: Greater than $1 million


Profitability bands

LowLow

MediumMedium

High

20052002

LowLow

MediumMedium

High

High

20052002

LowLow

MediumMedium

HighHigh

20052002

LowLow

MediumMediumHighHigh

20052002

Q. What is the average salescycle time to acquire a newclient?

Sales cycle varies by groupwith investment counsellorstaking the longest time.

Q. What is your annual staffturnover (i.e. staff who leave)as a percentage of total staffacross the following broadoperational areas?

Staff turnover in the front officeis 6.7%.

While three months appears to be the mostcommon sales cycle time for client acquisition,the time frames vary across the type of firm.

As expected, the longest sales cycle wasenvisioned by investment counsellors and the shortest by the banks and other directdistributors.


Sales cycle and staff turnover

Staff turnover increases in wealth managementfirms as you move from front to back office. Inthe front office, it was calculated at around6.7%, while at the support level it was 9.5%.

The percentage of respondents with a turnoverof 10% or higher was 43% in the front officeand 57% in the back office.

In the North American survey, staff turnover in the front office was 7.4%, rising to almost14.0% in the back office.

> 1 year1 year6 months3 months1 month




Banks

6.7% 7.3% 8.4% 9.5%

43% 48% 11%57% 52%Percentage of respondentswith turnover in excess of 10%

Average annual staff turnover

Front office Middle office Back office Support

Q. With regards to businessdevelopment, do you havespecific revenue goals forrelationship managers?

The closer to the mass market, the more prevalent the revenue goals.

Q. Approximately what ofyour relationshipmanager’s remuneration is represented by salaryand bonus now and inthree years’ time?

About a quarter of theparticipants are 100%variable.

The two types of organizations that seem to bemost focused on requiring revenue goals forrelationship managers are banks and otherdirect distributors.

Two of the three life insurance companies saidthey did not have revenue goals while theinvestment counsellor group unanimouslyrecorded no goals.

The North American Wealth ManagementSurvey revealed that 74% of participants have

specific revenue goals for new businessdevelopment and that these goals are tied tolength of service and experience.

That survey noted that while AUM (assets undermanagement), revenue targets, and new clientassets are vital metrics, greater emphasis is nowbeing placed on cross-selling success, clientsatisfaction and retention levels as key measuresof relationship manager performance.


Business development

At present and in 2005, five participants have100% variable compensation.

The trend over the next three years is towardsgreater emphasis on variable compensation.Only one participant had 100% fixed (i.e. salary)compensation.

NoYes



Banks Investment counsellors

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100% Variable compensation

20052002

100%100%

70%70%

60%

50%

50%

40%

40%

30%

30%

20%

0%0%


r iskmanagement

Participants’ approaches to risk management are revealed in thissection. This review looks at their transition along the riskmanagement continuum and describes their policies to identify,monitor, and report risk.

Q. How would you currentlydescribe your approach torisk management? Wherewould you place yourorganization on the riskcontinuum today and inthree years?

Participants will movesignificantly up the riskcontinuum in three years’ time.

Risk management

Risk management is the process by which an organization seeks to understand its risks, take informeddecisions to help achieve its strategic objectives, reduce its likelihood of failure, and decrease theuncertainty of overall business performance.

The management of risk is not just about preventing financial loss. It is also about managingopportunity risk to achieve positive gains on behalf of clients, shareholders, and other stakeholders.*


* European Private Banking/Wealth Management Survey 2000/2001, p. 66.

Respondents were asked to describe theirapproach to risk management using the riskcontinuum diagram below. The majority (67%)have a risk management approach at either level3 or level 4, where risk management is seen as

important to achieve operational performanceand to manage the hazards within the business.Around 20% of participants record an interest inthe strategic aspects of risk management.

A major transition is predicted in three years’time when more than half of the participants(54%) believe they will be at level 5 and usingrisk management from a strategic perspective.

The highest scores on the risk continuum inthree years are recorded by the other directdistributors (4.8) and banks (4.4).

0%

1

2

3

4

5

13%

38%

29%

21%

Now

Compliance and prevention

Operating performance

Strategic initiatives

Opportunity

AverageHazard

3.7

3

4

13%

29%

54%Opportunity

Average

4.5

2002 2005Banks 3.9 4.4Life insurance companies 3.0 4.0Investment counsellors 3.2 3.8Other direct distributors 3.8 4.8

Q. What is the relativeimportance of riskmanagement within thefollowing managementprocesses?

Risk management is importantin consideration of strategyimplementation, analysis andtargeting.

Over 80% of the participants indicated that riskmanagement played either a significant or verysignificant role in strategy implementation.

Furthermore, 70% or more participants recordedsimilar levels of importance for analysis andtargeting, project management, performanceevaluation, and strategic planning.

Less than half of the respondents thought riskmanagement had a significant or very significantrole to play in business unit planning and SWOT(strengths, weaknesses, opportunities, threats)analysis.


Importance of risk management

0

10

20

30

40

50

60

70

80

90

100

Very significantSignificant

SWOT a

nalys

is

Busine

ss un

it plan

ning

Strate

gic pl

annin

g

Perfo

rman

ce ev

aluati

on

Proje

ct man

agem

ent

Analys

is an

d targ

eting

Strate

gy

imple

mentat

ion


Q. Do you have policies inplace to identify risk?

Q. Do you have procedures inplace to monitor andreport risk?

All but one of the survey’s respondents hadpolicies in place to identify risk. While close to90% felt that they had appropriate controls inplace designed to control risk, this total fell to70% when it came to measuring risk.

The percentage dropped again when it came tocalculating the maximum expected costs.

Since all risks, whether financial or operational,carry a financial cost, it is revealing that only60% of participants claim to be able to measurethe maximum cost effect.


Identify, monitor, report risk

No

Yes

No

Yes

0

10

20

30

40

50

60

70

80

90

100

Max

imum

costs

asse

ssed

Risks m

easu

red

Impa

ct lik

eliho

od as

sesse

d

Appro

priat

e

contr

ols de

signe

d


Q. What are the key areas ofrisk to be addressed withinyour risk managementprocedures and how willthese change over the nextthree years?

Key areas vary by group.

Banks and other directdistributors are worried aboutregulatory risk.

Client relationship will be themost critical issue by 2005.

Topping the list of key areas to be addressedwas regulatory risk, followed by processingerrors and the client relationship.

The banks and other direct distributors had highscores for regulatory risks. All six of the otherdirect distributors highlighted regulatory risk andmis-selling risks.

Most investment counsellors saw risk attachedto processing errors and client relationships. The investment counsellors identified investmentperformance as a key risk, and the life insurancecompanies and banks also rated this area as a risk.

Regulatory and processing errors also featuredas the top two concerns in the North AmericanSurvey.

Interestingly, the client relationship is predictedto be the key risk by 2005 as regulatory risk fallsinto second place.

E-business/new technology and privacy wereclassified as low risk areas. Reasons for this lowscore may be that they are deemed to betechnology or legal responsibilities or that theywere simply felt to be well-controlled at present.


Key risk areas

0 10 20 30 40 50 60 70 80

20052002

E-business/new technology

Privacy

Counterparty risk

Liquidity management

Human resources

Supplier failure

Project/change management

IT Risk

Business strategy


Mis-selling

Client relationships

Processing errors

Regulatory


Q. Do you have procedures in place for risk monitoringand reporting? If yes,which of the following are included?

Most participants monitor risk.

Risk monitoring

Over 90% of the participants had riskmonitoring in place, while more than 80% had a defined reporting mechanism and three-quarters had major exception reporting to board level.

Only two of the eight investment counsellorparticipants had root cause analysis in place and the life insurance companies were lackingin monitoring and reporting internal andexternal costs of errors and exceptions.

Approximately half of the group also has fullpositive adherence reporting, internal costs oferrors, and exceptions and root cause analysis.


0

20

40

60

80

100

Exter

nal c

osts

of err

ors a

nd ex

cepti

ons

Root c

ause

analy

sis

Intern

al co

sts of

erro

rs an

d exc

eptio

ns

Full p

ositiv

e adh

erenc

e rep

ortin

g

Majo

r exc

eptio

n rep

ortin

g to b

oard

Define

d rep

ortin

g mec

hanis

m

Contro

ls mon

itorin

g



appendices


The survey results in this report are based on detailed responses from twenty-five wealth management organizations.

Participants in the survey represented a wide variety of firms and industry segments within thefinancial services industry.

The survey was conducted through personal interviews with participants in May, June, and July 2002,in Toronto, Montreal, Vancouver, and Winnipeg.

Participants’ statistics:

Size (Assets under control): In excess of $1.4 trillion

Total combined staff: 36,000

Number of accounts: In excess of $14 million

All data is stated in Canadian dollars.

Methodology and profile data

* At the time interviews took place Altamira had not beenacquired by National Bank.

Wealth managementorganizations polled.

BanksBank of Montreal Private Client GroupCIBCHSBC Asset Management (Canada)National Bank of CanadaRBC Financial GroupScotiabankTD Bank Financial GroupING

Life insurance companiesGreat West LifeManulife FinancialSun Life Financial Advisory Services Inc.

Investment counsellorsBeutel Goodman & CompanyBurgundy Asset Management Ltd.Guardian Capital Advisors Inc.Jarislowsky FraserPhillips Hager & NorthSceptre Investment CounselYMG Capital Management Inc.AGF Private Investment Management

Other direct distributorsAltamira Financial Services Ltd.*Assante CorporationCartier CapitalDundee Bancorp Inc.Investors Group Inc.Investment Planning Counsel of Canada


Wealth management groups

* At the time interviews took place Altamira had not beenacquired by National Bank.


PricewaterhouseCoopers

Barry Myers – Toronto [email protected] 869 2441

Barry Myers is the Canadian Leader ofPricewaterhouseCoopers’ Financial ServicesPractice. Barry has broad knowledge of Canadiansecurities legislation relating to mutual funds,labour sponsored venture capital funds and U.S.SEC mutual fund accounting and regulatoryrequirements. Barry is very actively involved inthe Investment Funds Institute of Canada and hasalso served as Chairman of the Canadian Instituteof Chartered Accountants Task Force on FinancialReporting by Investment Funds.

PricewaterhouseCoopers (www.pwcglobal.com) is the world’s largest professional servicesorganization. Drawing on the knowledge and skills of more than 125,000 people in 142 countries,we build relationships by providing services based on quality and integrity. In Canada,PricewaterhouseCoopers LLP (www.pwcglobal.com/ca) and its related entities have more than 4,400 partners and staff, and offices in 25 locations.

(“PricewaterhouseCoopers” refers to the Canadian firm of PricewaterhouseCoopers LLP and the other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.)

Contact at PricewaterhouseCoopers

Canadian WealthManagement Survey 2002

© 2002 PricewaterhouseCoopers LLP. PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and theother member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

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Canadian Wealth Management Survey 2002

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