The affluent segment is usually the most profitable
segment for a retail bank; hence the focus on this group by banks
across the world, from emerging economies such as China to mature
ones such as the US. A new report from VRL KnowledgeBank* looks at,
among other things, the profit benchmarks for affluent

How profitable is affluent banking? The relative lack of
comparable data across the affluent sector can be attributed
largely to the complexity of the variables which drive affluent
profitability. Thus an algorithm for affluent client profitability
might include:

Product mix. A major portion – estimated by some
analysts at more than one half – of affluent revenues is composed
of traditional commercial banking products. Deposits – especially
demand or other low-cost products – are a key component, as well as
retail lending. Many basic retail banking profit models use the sum
of loans and deposits as a proxy for client attractiveness.
Advisory or other fees are usually a relatively minor element in
the total, except in the case of an ad valorem fee based
on the total of assets under management. Paying such a management
fee for a discretionary account is not standard practice for many
national markets and the actual fee levels indicated by case study
banks are a nominal one of several hundred euros or dollars per

Client mix and profile. The size of a client’s
assets under management is understandably a central element of the
profit equation. A benchmark of 1 percent of assets under
management is often used as a proxy for client profitability. Yet
clients differ widely in their requirements, ranging from a
concierge-type service to a simple discretionary account. Arguably
an inactive client with a large deposit balance can be more
profitable than one with a much larger asset base, but a client who
demands a number of cost intensive services and attention from the
relationship manager can be a serious loss-maker.


National market. Fee levels and profitability
also vary across national markets. Thus, consultancy McKinsey’s
research indicates that the average profitability of a private
banking client in Germany is 55 basis points against 22 points in
Italy. The relative popularity of highly profitable capital
guaranteed products in some markets is also a major contributor to

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Level of service. One of the few standard
indicators of service level is the number of clients per
relationship manager. A client survey by Davis International
Banking Consultants in 2001 indicates a wide range – from 100 at
the bottom up to 1,000.

Most of the case study banks reviewed (in VRL’s report) allocate
between 200 and 300 clients per relationship manager, with 250
being a rough median. Yet, as indicated, much depends on the
demands of the particular clients and the skills of the
relationship manager, and the median figure often raises more
questions than it answers. Several case study banks pointed out
that a median, say, of 250 clients allows in theory for one day per
year per client, enough potentially for two meetings and a
follow-up each year.

Business model. Research by McKinsey, financial
services firm Pricewaterhouse-Coopers (PwC) and other consultants
identifies a wide range of operational effectiveness in the
business model used to service the affluent client. Thus, the
extent of offshoring and outsourcing can vary widely across the
retail banking world. Retail banks in particular have been
criticised for not introducing the most effective technology for
their affluent clients, essentially by using high cost legacy
retail systems for such accounts. Such differences are perceived by
the consultants to account for a major portion of the difference
between the top quartile performance in McKinsey’s 2006 European
Private Banking survey (which includes major retail banks as well
as others) of 68 basis points in pre-tax profit against only 14
basis points for the bottom quartile.

This wide performance differential is confirmed by a study from
researchers Finalta and the European Financial Management &
Marketing Association, which indicates that the best performing
European bank advisers sell four times as many products as the
lowest ones.

Market volatility. The level of, and activity
in, financial markets, in particular the equity segment, have
historically had a major impact on affluent client profitability.
The collapse of the equity markets globally after the dotcom crash
in 2000-2001 significantly reduced for many years the level of
advisory fees and trading commissions. Perhaps more significantly,
it turned many affluent investors off the equity markets entirely
for a period of years, with a disastrous impact on overall wealth
management profitability.

Because of the number of variables involved, the diverse nature of
the affluent universe, and the limited comparability of data across
banking institutions, it is extraordinarily difficult to draw
useful conclusions on affluent profitability. PwC’s annual survey
of global wealth management provides some useful data on the
relative profitability of the affluent segment. Over 250 providers
were asked to weight the relative profitability of each of the five
size bands, scoring five points for the most and one for the least
profitable. But the affluent group, with only 361 points, ranks the
lowest of the five, with the profit honours being garnered by the
high net worth and very high net worth categories with over 600

A number of surveys on major national markets prepared by
consulting or research firms provide some perspective on the
absolute and relative profitability of the affluent segment. While
often focusing on a broader universe such as private banking or
wealth management in general, they do give some useful indicators
of trend and level of profitability.

In this context, the annual study of wealth management providers in
the UK by research group Compeer is quite useful as a general
profit indicator. Its 2007 survey covers 155 firms, including the
major retail banks as well as brokers and private banks. The
average pre-tax margin for all firms was 24 percent of revenues,
and total pre-tax profits for 2006 rose an impressive 66 percent.
The average margin for advisory accounts was 53 basis points, with
74 points for discretionary accounts.

Compeer calculates that 4 percent of the UK population falls into
the affluent category (with average liquid assets of
£144,000/$294,000). Only 9.3 percent of their wealth is held with a
wealth manager of any type – an indication of the lack of market
penetration of the sector – whereas 28.5 percent of the high net
worth segment does so.

Compeer notes that scale does not correlate with operating
economies, a confirmation that business model and service offering
may be more relevant as profit drivers. Its research notes that the
growth of the UK retail banks in particular has been limited by the
lack of investment in technology.

Perhaps its most interesting data focuses on the evolution of
costs. While staff costs as a percentage of revenue have declined
to less than 50 percent (from a high of 60 percent in the difficult
year of 2001), in absolute terms average staff costs have risen
steadily since 2002. In particular, front office professional staff
costs have risen 70 percent on average over the past five years,
reflecting the overwhelming competition for experienced
relationship managers. On the other hand, productivity has
increased as a result of more centralised investment processes,
portfolio management tools and more support services. The average
number of managed portfolios per adviser has risen steadily to
about 140, while the average revenue per adviser is approaching


Another useful survey is McKinsey’s annual study of private banking
in Europe, which includes good data on the affluent segment. The
McKinsey 2006 study provides a useful summary of profit trends for
European private banks over the 2003-2005 period – the overall
profit pool had more than doubled over this period, fuelled by
market performance and a healthy increase in new money. Revenue and
cost margins remained reasonably constant, with pre-tax margins
rising slightly to 37 basis points in 2005.

McKinsey’s research indicates that higher margins are available on
affluent rather than high net worth clients. It also confirms the
importance of traditional retail banking products in the overall
revenue mix. It is estimated that retail banking revenues may
account for as much as 80 percent of total private banking

The McKinsey survey also focuses on the wide range of profit levels
across the universe of firms surveyed. The top quartile for the
most recent survey generated a pre-tax margin of 68 basis points
against only 14 for the bottom quartile. As in the case of the
Compeer survey in the UK, this discrepancy is attributed to
differences in business mix and what is termed ‘operational

In conversations with banks, with few exceptions, interviewees were
equally reluctant to quote specific profit numbers. Performance
benchmarks tend to be operational, such as profit per client,
number of clients per adviser, level of client satisfaction, growth
in revenues and share of wallet. Many, if not most, of the banks do
calculate aggregate profitability for the affluent segment but
prefer not to disclose it.

Of ten banks profiled in VRL’s report (ABN AMRO, Citi, UBS, Bank of
America, Wachovia, UniCredit, Standard Chartered, Nordea, KBC and
Swedbank), one stands out in its degree of disclosure as well as
impressiveness of results: Bank of America earned a remarkable 57.5
percent pre-tax profit margin in its Personal Banking and
Investment unit, which services the affluent segment, to account
for 48 percent of total wealth management pre-tax earnings. Margins
in the high net worth unit were lower at 41.8 percent.

* This article is an edited extract from a new report from VRL
KnowledgeBank called Best Practice in Banking the Affluent. Written
by banking consultant Steve Davis, the report looks in
comprehensive detail at the global mass affluent, affluent and
wealth management markets and carries a number of case studies.
Contact Ozi Ayewoh at
for more information