Thursday, December 3, 2009

Which wealth managers have the highest profit margins?

People are always curious about who makes how much money. That's probably why I zeroed in on the profit margin comments made by investment banker Elizabeth Nesvold, managing partner of Silver Lane Advisors, when she spoke about "Trends Amid Turmoil in the Wealth Management Business" to the Boston Security Analysts Society on November 18.

Because multi-family offices (MFOs) deal with wealthier clients than financial planners, I was surprised to learn that their margins are lower than financial planners' in typical market scenarios, ranging from 10%-30% vs. 20%-35% for financial planners and asset allocators. However, the difference made sense when she explained that MFOs get hurt by "scope creep." It's expensive to service a multi-generational family as compared to an entrepreneur who just sold his or her business, Nesvold said.

Here's the hierarchy of margins under typical market scenarios, in descending order, according to Nesvold.
  1. Hedge funds, 50%-70%
  2. Hedge funds of funds, 25%-60%
  3. Traditional institutional, 30%-70%
  4. Investment counsel, 25%-40%
  5. Financial planning/asset allocation, 20%-35%
  6. MFOs, 10%-30%
Do these margins sound realistic to you?


____________________
Susan B. Weiner, CFA
Check out my website at www.InvestmentWriting.com or sign up for my free monthly e-newsletter.
Copyright 2009 by Susan B. Weiner All rights reserved

2 comments:

  1. While financial planning made be lower margin it is what closes the sale and more often it is what keeps the customer wed to us. Everything above financial planning is commodified. Relationships developed through financial planning are sticky and long lasting so you steady revenue over time.

    ReplyDelete
  2. Good point about the value of relationships!

    I think some investment-only managers are good at developing and maintaining relationships.

    ReplyDelete

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