The front office may be the revenue-generating part of the UK’s wealth management industry, but it is also the most costly aspect. Last year, the industry’s costs totalled £4.3bn and more than half of that, £2.47bn, was accounted for by the front office and related support functions, according to research firm ComPeer.

Balancing those costs and the revenues they help to generate is a critical issue for every firm that wants to make a healthy profit. The latest research shows some interesting trends in how the industry is managing the costs and highlights some useful pointers for firms that may be struggling.
Thrifty technologyIn part, the management of costs is being helped by the rollout of ever more sophisticated technology, which allows for more standardised services to be offered to customers at a cheaper rate. Such trends alter firms’ employee requirements, offering opportunities to reduce the number of high-earning professionals while allowing less expensive staff to take on more responsibility. 

57%
The amount front office functions make up of the UK wealth management industry's total costs Many firms are taking advantage of cost-cutting opportunities provided by technological advances. The number of investment managers – the most expensive employees – fell last year to 4,732, compared to 4,807 at the end of 2014. At the same time, there was a significant rise in the number of front office support staff, from 5,018 in December 2014 to 5,479 by the end of 2015. 

“With some firms offering more standardised services, especially to their low value clients, the support teams can take on a more significant role,” explains James Brown, Head of Client Services at ComPeer.

“And that frees the qualified professionals to concentrate more on winning new business and generating additional revenues. It also has cost benefits – the average cost of a support individual is less than a third of that of a qualified front office professional,” said Brown, speaking at the firm’s annual review of the wealth management industry in London.

Even so, investment managers remain the second largest group of employees in the industry, behind front office support staff. Other qualified front office personnel account for a further 4,406 staff, covering areas such as sales, relationship management, research and other product specialisms, such as mortgages and tax advice. Their numbers collectively rose slightly over the past year, from 4,361 at the end of 2015.
Top heavyBut it is investment and portfolio managers who are likely to remain the focus of cost-cutting in the future. 

“Front office portfolio managers probably represent the largest area of cost within a wealth management business,” said Graham Dow, Head of Private Client Partnerships at Standard Life, speaking at the ComPeer event in June.

The cost these professionals represent to a firm varies widely around the UK. Basic pay for an investment manager starts at around £40,000 a year on average in East Anglia and the Midlands, the cheapest areas of the country, but rises as high as £137,000 in London. Once you include other elements, such as bonuses, car allowances and long-term incentive plans, the average rises to £250,000 in the North East of England, Yorkshire and Humberside and to £261,000 in London.
"Front office portfolio managers probably represent the largest area of cost within a wealth management business"Given their high cost, firms need to make sure that they only employ as many investment managers as they need. But making that judgment isn’t always easy. Smaller firms may decide to hire more investment managers to grow their business, but the extra revenues may not come through quickly enough to offset the costs. On the other hand, having too few investment managers can weaken a firm. 
Striking a balanceComPeer’s research finds that firms in which the cost of front office professionals is equivalent to 20% to 40% of managed revenues tend to make a healthy profit, regardless of the size of the firm. If the costs are more than 40%, it often leads to a loss. At the other end of the spectrum, if the costs are less than 20% it may lead to higher short-term profits, but the firm risks losing qualified staff to competitor firms, says ComPeer.

Firms also need to grapple with whether to employ relationship managers to work alongside investment managers, and this is not a straightforward decision. Around half of the UK’s wealth management firms do so, with private banks particularly keen. Advocates of this model say it can improve the service provided to clients while allowing investment managers to focus on their most important task. 

However, while clients and staff may benefit from this, ComPeer’s research shows it is not always beneficial to a firm overall. It found that businesses that employed relationship managers generated less revenue per staff member in the front office, required a larger pool of support staff and made slightly lower profits. On the other hand, the average value of assets managed by staff members was higher.
A numbers gameJust how many support staff a company needs for all these front office professionals is another critical issue, and the answer again varies according to the size of the firm. According to ComPeer, the ideal for small and mid-sized wealth managers (those with less than £3bn, and between £3bn and £10bn in investment assets respectively) is to have between 1 and 1.25 support staff for every qualified front office professional. If there are too few, the qualified professionals end up getting involved in a lot of administrative tasks, which distracts them from their main job of generating business. If there are too many, the qualified professionals end up spending too much time managing their colleagues.


Source: ComPeer and IRESS 'Optimising the Front Office', 2016

Larger firms, looking after more than £10bn in investment assets, require relatively fewer support staff as they can take advantage of economies of scale. ComPeer suggests 0.75–1 support staff for every front office professional in these big firms.

Perhaps unsurprisingly, the type of client a firm has can also have a big impact on profitability. The worst performing firms (based on profit levels over the past five years) have 96% of their assets in portfolios larger than £250,000. That suggests they have a relatively large proportion of big clients who, in turn, will have strong negotiating power and may be able to drive down fees. 

In contrast, the best performing firms only had 85% of assets in portfolios worth at least £250,000 and the medium-performing firms had just 77% of their assets in such large portfolios.
Money marketingThere are some other noteworthy differences revealed in ComPeer’s research. Marketing spend across the industry was up last year, but higher spending in this area is not correlated with a stronger performance. The worst performing firms tend to spend the most on marketing, for example. It seems that, while it may help to bring in more new business, it doesn’t always translate into higher profits. The marketing costs per front office professional were £33,120 a year for the worst firms, compared to £22,040 for the middle-performers and £18,271 for the top performers.

On the other hand, the worst performers actually did better at hanging on to clients, losing just 3.7% of their investment assets in a year, compared to 6.3% for the top firms. That, suggests ComPeer, may be because they charge lower fees.

What emerges from all this research is that there is no magic formula for maximising profits and performance in the wealth management industry, and no one-size-fits-all answer as to how to structure a front office. Size does matter though, and how many people a firm has in different positions needs to adjust as it grows or shrinks. The task of balancing those costs and revenues is a continuous one. 

“Costs are at the forefront of strategic decisions,” says Brown. “Cost control has been a key feature for the sector.”