Case

Wealth Management network set-up

Difficulty: Intermediate

Type: Candidate-led

Topics:

Case prompt

RBS (Rich Bank of Spain) is a medium-size commercial bank operating in Spain nation-wide.

Considering the current positive trend in Spain economy, eventually recovering from the financial crisis, RBS is planning to expand its network of wealth management services.

The bank sets the goal to reach €12Bn of new AUM (assets under management, i.e. client’s financial assets administrated and/or managed by the bank) over the next 3 years.

To achieve this goal the bank has two main options, developing a network of Private Bankers or Financial Advisors:

Private Bankers are direct employees of the bank with a specific mandate to target High Net Worth individuals (HWNI) (> €1M of net worth per client) through tailor made solutions
Financial Advisors, are independent agents who do not receive a fixed salary from the bank but earn a percentage on the AUM they bring. In contrast to Private Bankers they target Affluent customers (€200K – €1M of net worth per client)

RBS would like to know which one between Private Bankers and Financial Advisors would be the best channel to achieve its goal of expansion in the wealth management business.

Detailed solution

Paragraphs highlighted in orange indicate hints for you on how to guide the interviewee through the case.

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.

Suggested case structure

Key question: Which channel will ensure the required level of AUM? Which one is the most profitable?

Exhibit 1

Suggested steps ranked by priority:

Market Size: Estimate the market size for each segment and relate the AUM target in term of required market share. Is it the target feasible?
Portfolio Estimate: Identify the size of the average portfolio for both PB and FA and thus calculate the required number of PB / FA
Profitability

Revenue stream: calculate for both segments the revenue streams (assuming a given fee structure)
Cost base: calculate the costs associated with each network choice (fixed vs variable costs)

Make sure the interviewee builds a solid structure that includes all the above 3 elements

If needed, share Exhibit 1 with the candidate

1. Market Size

The interviewee is encouraged to estimate the market size on her own.

If needed the following data can be shared

Share Exhibit 2 (if requested) with the candidate to estimate market size

Exhibit 2

The total AUM available on the market is:

𝐴𝑈𝑀=𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 ×% 𝑤𝑖𝑡ℎ 𝑎 𝑔𝑖𝑣𝑒𝑛 𝑤𝑒𝑎𝑙𝑡ℎ × 𝑤𝑖𝑡ℎ 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑤𝑒𝑎𝑙𝑡ℎ

In order to estimate the market potential for Private Bankers and Financial Advisors we need to distinguish between the two different segments.

For the affluent segment we estimate the average wealth of the segment as the average between the lower bound (€200K) and the upper bound €1M, namely €600K = average (€200k, €1M). Obviously we should keep the top 1% of the population outside of the equation, as they belong to the HNWI segment.

AUM Affluent segment = 40 M × (10% - 1%) × average (€200k, €1M)* = €2,160Bn

Since we don’t have an upper bound for the top 1% of the population we assume the same ratio to the lower bound as per the Affluent segment , i.e. €3M = €1M × €600K / €200K: the actual average value may be higher because of wealth concentration, however for the purpose of this case it is important just to recognize that the average wealth of the HNWI is larger than the lower bound

AUM HNWI segment = 40 M × 1% × €3M = €1,200Bn

Key business insight

The market size looks large enough to continue the analysis: €12Bn of AUM seems definitely a small amount of total market regardless from the current level of competition.
The market for Financial Advisors is bigger nearly twice the market for Private Bankers

2. Portfolio size estimate

If needed, help the candidate to think about the feasibility of €12Bn AUM target in terms of implementation: how many Private Bankers / Financial Advisors are needed to reach the target?

The candidate should estimate the size of the average portfolio managed by each Private Banker and Financial Advisor as:

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝐴𝑈𝑀=𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑙𝑖𝑒𝑛𝑡𝑠×𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑈𝑀 𝑝𝑒𝑟 𝑐𝑙𝑖𝑒𝑛𝑡

From the previous point we already know the average AUM per client segment:

Affluent Clients -> Avg AUM = €600K
HNWI Clients -> Avg AUM = €3M

Candidate is encouraged to estimate by its own the number of clients that can be managed by Private Bankers vs Financial Advisors, if asked respond that:

Average number of clients for Private Bankers = 20 (rationale -> each client would require 1 full day of work per day)
Average number of clients for Financial Advisors = 40 (rationale -> each client would require half day of work per day)

Thus:

Average AUM for Private Bankers = 20 × €3M = €60M
Average AUM for Financial Advisors = 40 × €600K = €24M

Thus, in order to achieve the goal of AUM = €12Bn, we will need either:

200 Private Bankers = €12Bn / €60M
500 Financial Advisors = €12Bn / €24M

Key business insight

Private Bankers bring in significantly bigger portfolios although managing less clients thus a smaller number of Private Bankers is required compared to Financial Advisors to achieve the same AUM target

3. Segment profitability

At this point the interviewee should make the last step of estimating the profitability of the different channels by identifying revenue streams and cost associated to each channels.

In particular the interviewee need to identify a high level framework to estimate the profitability of each channel, pinpointing:

Revenue stream for the bank (how the bank generate revenue from the AUM?)
Fixed cost (which are the main fixed cost for each channel?)
Variable cost (which kind of variable cost do we expect?)

The interviewee is encouraged to first estimate the revenue and cost structure for Private Bankers and Financial Advisors by her own. Once a set of hypothesis and assumptions is proposed the next 2 slides scan be shared

Read the following text to the interviewee and share the table of the next slide

Private Bankers

Private Bankers earn a base salary of €80K
Private Banking clients pay an administration fee of 1% of their AUM, of which:

0.75% is retained by the bank
0.25% is given to the Private Banker

If the returns of the client’s portfolio exceed a given threshold the bank earns an extra 0.5% of the AUM as performance fee, out of which:

0.20% is retained by the bank
0.30% is given to the Private Banker
We can assume this performance fee is earned in 50% of the cases

Financial Advisors

Financial Advisors act as selling agents, as such they don’t earn any fixed salary
Affluent clients pay an administration fee of 1% of their AUM, of which:

0.50% is retained by the bank
0.50% is given as compensation to the Financial Advisors

Also in this case a performance fee is earned with the same structure as for Private Bankers

In both case the variable cost associated to the asset management is 0.1%

Share Exhibit 3

Exhibit 3

Given the above information the profitability for each channel can be calculated in the following way

Private Bankers:

Revenue

Management Fee = €12Bn × 0.75% = €90M
Performance Fee = €12Bn × 0.2% × 50% probability = €12M

Cost

Fixed cost of Private Bankers salary = €80K × 200 Private Bankers = €16M
Variable cost due to asset management = €12Bn × 0.1% = €12M

Profit = €74M = 90 + 12 – 16 - 12

Financial Advisors:

Revenue

Management Fee = €12Bn × 0.50% = €60M
Performance Fee = €12Bn × 0.2% × 50% probability = €12M

Cost

No Fixed cost for Financial Advisors salary
Variable cost due to asset management = €12Bn × 0.1% = €12M

Profit = €60M = 60 + 12 – 12

Key insight

Private Bankers provide higher profitability but present a fixed cost
Financial Advisors on the other hand look less profitable but require only variable cost

4. Conclusions

Prompt the candidate to provide a final recommendation to the case, highlighting pros and cons of each option

The case does not lead to a clear one-way solution, both Private Bankers and Financial Advisors are a viable solution. The candidate is expected to recognize this and to highlight pros and cons of each channel.

In particular given the high complementarity of the two channels the best solution is indeed a blended one (i.e. half Private Bankers and half Financial Advisors)

Private Bankers

Pros:

Higher profitability
Smaller number of clients and agents required to reach the target compared to Affluent segment
Develop relationship with High Net Worth customer may be critical for other activities of the bank (e.g. cross selling of lending products to entrepreneurs)
Private Bankers are employees of the bank, thus leading to higher retention rate compared to independent agents

Cons:

Fixed cost associated to the Private Bankers salary, if the AUM target is not reached the profitability can be significantly reduced!
Smaller market compared to Affluent segment -> the bank would need nearly twice the market share on Affluent to reach the AUM goal on Private clients

Financial Advisors

Pros:

Only variable cost, thus in case of smaller level of AUM obtained no extra cost is due
Affluent segment is a larger market compared to HNWI -> the bank would need around half the market share on Affluent to reach the AUM goal

Cons:

Lower profitability
Larger number of clients and agents required to reach the target compared to Private segment

Next steps

The candidate is encouraged to conclude the case suggesting the next steps for the case, e.g.:

Verify the availability of Private Bankers and Financial Advisors: considering that we need to hire them we need to verify availability on the market of such professionals and the hiring cost (e.g. head hunting fee)
Engage the Wealth Management department to prepare suitable products to be sold to clients
Design an adequate organizational structure for the network and the appropriate geographical distribution

Exhibits

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