How Much is Your Client Really Costing?

Phil Sturmer looks at ways capital markets firms can cut operating costs by off-boarding non-active clients.

Phil Sturmer, associate partner, Crossbridge.

Coming up with an accurate cost-saving figure is challenging because it is difficult to understand the true cost of bringing in and maintaining clients. Most firms traditionally look at numbers offered up by the front office, but this is often just a one-dimensional view that is centered on projected client profitability.

Financial institutions have always been concerned with client risk and trading revenues, but for many, the models simply do not accurately represent the "total cost of client (TCC)." As a result, while financial institutions expect to achieve significant cost savings by off-boarding non-profitable clients, few struggle to articulate the numbers.

Improving the understanding of TCC for each client relative to revenue generation allows financial institutions to make better informed off-boarding decisions. TTC models vary across the industry, from the relatively basic (which are predominantly focused on the costs associated with AML/KYC on-boarding and screening), to more sophisticated and mature models that factor in the wider organizational and multiple process touch-points across operations, the front office, credit, legal, and tax.

Crossbridge estimates that an average client requires at least 13 touch points during the initial on-boarding process. Once maintenance activities such as ongoing KYC and account servicing are added to this activity, costs begin to escalate quickly.

A recent survey found that on average, financial institutions consider their TCC to range from £5,000 to £17,000 depending on their risk attributes. In addition to the qualitative and quantitative measurements, some financial institutions are applying fairly rudimentary processes in building their TCC models. These range from having an effort-grading system based on levels of straight-through processing and manual interaction to including regulatory fines in their TCC model.

It is not surprising that the call to off-board non-profitable clients is being driven by operations, since this department is faced with the burden of providing services to increasing client volumes. All clients require a certain level of maintenance, regardless of their level of activity. As a result, costs continue to increase year on year.

Driving Demand
It is not surprising that the call to off-board non-profitable clients is being driven by operations, since this department is faced with the burden of providing services to increasing client volumes. All clients require a certain level of maintenance, regardless of their level of activity. As a result, costs continue to increase year on year.

Regulation such as Fatca, EMIR, Dodd-Frank, Mifid and the 4th Money Laundering Directive have also contributed to the significant increase in the cost of bringing in and maintaining clients, in part due to the stringent requirements for heightened processing controls.

When Fatca was first introduced, for example, the cost of adding a single field to capture client tax domicile amounted to a 40 percent increase in operations' budget for one financial institution. And financial institutions are still working on Fatca!

Utilities ─ A Possible Solution?
The emergence of client data utilities is seen by many as a route to achieving operational savings. Indeed many financial institutions are either piloting or are in the discovery stage with one or more utilities, which offer a range of services that could provide operational savings for some of the more standardized data gathering and screening activities.

Utilities are unlikely to be the silver bullet that some hope for, however. Financial institutions will still need to maintain their operations and infrastructure to handle the more high risk and complex client-screening processes. Many financial institutions are also increasingly concerned at the lack of interoperability between the utilities and the potential implication for their clients, who would have to sign up to multiple utilities in cases where the client holds many financial institution relationships. Any potential savings, which some predict could be as high as 30 percent, are therefore some way down the road, if achievable at all.

Gaining Momentum
In more general terms, the idea of off-boarding non-profitable clients is fast gaining momentum across the community as many financial institutions realize that they can make significant cost savings by operating a reduced client footprint. By targeting the relatively low hanging fruit (where accounts are effectively dormant by virtue of inactivity and lack of positions), some financial institutions have been able to close out hundreds of thousands of accounts.

More complex clients will definitely take time to assess, but the notable point is that a paradigm shift has taken place. Operations is now driving the agenda and challenging the front-office business heads to better justify the retention of clients; operations' strong understanding of TCC makes this possible.

For many, the natural end point of TTC is to be able to model cost for different client dimensions such as client type, sector or country. Many financial institutions have set up dedicated data labs for this purpose. The aim here is to align predicted cost with revenue expectation at the client on-boarding decision-making stage, as well as the client periodic reviews, thus avoiding the possibility of entering into unprofitable client relationships in the first place, or allowing a client relationship to carry on longer than it should.

The outcome will hopefully result in financial institutions having leaner client populations that are both risk and revenue optimized, and which reflect the true cost of maintaining and servicing clients throughout the lifetime of the relationship. Some will be more successful in achieving savings than others, but one thing is for sure, financial institutions are now taking TCC seriously.

Phil Sturmer is an associate partner at Crossbridge, a financial services consultancy with offices in London, New York and Singapore. 

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