CEOs of top private banks and wealth managers expect that their future revenue and profit growth will not meet the double digit growth expectations set in 2000, according to the latest North American Private Banking/Wealth Management Survey by PricewaterhouseCoopers.

The research also reveals that slower growth and shrinking profit margins will limit industry expansion over the short term to approximately 7%, with a modest 10% annual growth rate predicted by 2004. These numbers pale in comparison to the projected five-year compound annual growth rates of 12% to 15% detailed in PwC’s previous survey published in 2000.

According to the research, the slowing economy and turbulent stock market are forcing wealth management firms to focus on profitability rather than revenue. Through mergers and acquisitions, technology, an increased focus on client service and a strong focus on cost management, the survey respondents aim to reverse the negative trend that has seen pre-tax profit margins shrink from approximately 35% in 2000 to approximately 24% in 2002. Profitability was found to have a direct correlation to fee mix, client segmentation and staffing ratios. However, only one-third currently have the necessary tools to provide profitability information at the client or relationship level. Moreover, cost containment measures are expected to slow the deployment of technologies needed to track this critical information.

The most profitable clients prove to be “new money” investors who are actively involved in their finances. However, the authors predict that actively involved investors will decrease across all “old money” and “new money” segments. Wealth managers believe the continued importance of “old money” will also require them to re-think their current fee structures to be more aligned with an advisory-based model in order to drive relationships and product profitability.

“After a decade of strong growth and high margins, many wealth managers are starting to focus on getting their house in order. Through strategic partnerships and technology decisions, it will be imperative for financial institutions to achieve economies of scale on the back-end,” said John Fletcher, North American leader of global wealth management services for PwC..”

Institutions are increasingly banking on mergers and acquisitions as a means of acquiring clients and achieving economies of scale. More than 50% of the organizations participating in the survey are currently planning or executing a merger or acquisition. Meanwhile, large organizations that have multiple mergers and acquisitions are now grappling with the integration challenges posed by those activities.

The key to developing profitable, long-term customers continues to focus on client service and the ability for wealth managers is to become a “trusted advisor.” Survey respondents see the top three critical success factors to becoming a trusted advisor as the ability to: offer a comprehensive range of products and services, provide access to best-in-class third-party products, and, offer proactive/objective advice based on in-depth financial planning.

However, wealth managers admit to not fully understanding the motivations of their clients. Only 33% felt they could understand and anticipate the future needs of their customers and less than half were more than 75% sure of their clients’ goals and needs.

Survey results are based on detailed responses from 29 wealth management organizations with approximately US$2.4 trillion in assets under control, representing nearly one-third of the North American wealth management market.