Wealth management firms in the USA operate in a highly competitive environment where maximizing efficiency and profitability is paramount. These firms face the challenge of managing diverse service products, each with varying sales engagement cycles and associated costs. Not all service products yield the same returns, and the time invested in each can significantly impact overall profitability. Factors such as the maturity of the service product and the client’s cultural and educational background further complicate the engagement process. To stay ahead, wealth management firms must continuously evaluate their sales activities, ensuring that their sales, account, and engagement managers utilize their time effectively to drive revenue and profit.

Time-Driven Activity-Based Costing (TDABC) offers a transformative solution for these firms. By providing precise insights into the time and costs associated with each service product, TDABC enables firms to identify inefficiencies and optimize their sales processes. This innovative approach dispels the myth that highly profitable products always require extensive engagement, allowing firms to allocate resources where they generate the most value. By leveraging TDABC, wealth management firms can make informed decisions based on actionable data, empowering their teams to tailor their approaches to meet the unique demands of each client. Ultimately, TDABC equips wealth management firms with the tools they need to enhance efficiency, boost profitability, and ensure every interaction contributes to their success.

The Power of Time-Driven Activity-Based Costing (TDABC)

TDABC enables wealth management companies to assign expenses about actual time taken in working with a client activity and not about arbitrary costing factors. TDABC operates on two primary principles:

1. Time as the Key Cost Driver: Every service or interaction with a client is measured in terms of the time required to deliver it, ensuring a clear understanding of resource utilization.
2. Precision in Cost Attribution: TDABC assigns costs based on the time each advisor, research analyst, or support staff spends on specific activities such as portfolio reviews, financial planning, and client meetings.

By implementing TDABC, wealth management firms can overcome traditional allocation challenges and achieve a more transparent view of client profitability.

TDABC also enables wealth management firms to analyze operational efficiency in near real-time. Unlike traditional costing methodologies, TDABC helps companies track the consumption of assets in near real-time, not in retrospective financial statements. With a real-time mechanism, companies can make service models, manpower, and investment planning in terms of desired profitability targets.

Moreover, TDABC helps wealth management firms allocate costs at a micro level, enabling them to assess not only the cost of serving different client types but also the impact of specific services, interactions, and even advisor-client touchpoints. For Example, a firm may find that high-net-worth individuals consume significant advisor time due to in-depth estate planning, while younger clients require more automated digital tools for portfolio rebalancing. These insights help firms structure their offerings and allocate resources more effectively.

Identifying Profitable Client Segments

TDABC allows firms to segment their clients based on the true cost of servicing them. By analyzing different client groups, wealth managers can determine which segments yield the highest profitability and which ones consume excessive resources.

Key insights from TDABC include:

• Understanding Cost-to-Revenue Ratios: Firms can assess the cost of servicing different segments, such as high-net-worth investors (HNWIs) and institutional investors.
• Profitability of Service Offerings: By breaking down a range of expenses (e.g., investment management, estate planning, guidance for retirement), companies can identify the most lucrative services.
• Resource Allocation Optimization: Identifying clients with high-touch requirements and customized solutions but generating low yield helps companies maximize service level and pricing strategies.

TDABC also reveals inefficiencies in service delivery that may not be apparent with traditional cost analysis. For example, some clients may require extensive back-office support due to complex investment strategies, while others may rely heavily on personal interactions with advisors. By quantifying these service demands, firms can align client fees with actual resource consumption.

Additionally, wealth management firms can use TDABC insights to segment clients into different service tiers. Instead of offering a uniform pricing model, firms can introduce tiered pricing structures where clients who require premium services pay accordingly. This approach ensures that high-touch services remain profitable while still providing cost-effective solutions for clients with simpler financial needs.

Optimizing Service Delivery and Pricing

Once firms have determined their most profitable segments of clients, then, through TDABC, they can use insights to streamline service offerings and pricing structures.

      1. Enhancing Efficiency in Service Delivery

TDABC helps firms streamline operations by reallocating resources to high-value clients. This may involve:

• Automating routine administrative tasks to free up advisor time.
• Reducing unnecessary interactions that do not contribute to client satisfaction or profitability.
• Investing in AI-facilitated financial planning tools for providing personalized yet automated insights to clients

Firms can apply TDABC insights in an attempt to standardize certain service offerings, not wasting assets in over-customized, low-value engagements. For instance, a firm may discover that estate planning services require significant legal and advisory hours but generate limited revenue. In response, they could offer standardized estate planning packages that minimize excessive resource consumption.

2. Developing Targeted Pricing Strategies

Wealth management firms can use TDABC-driven insights to develop pricing models that reflect the true cost of service. Some potential approaches include:

• Implementing tiered pricing based on service complexity and advisor engagement.
• Introducing premium pricing models for clients who require extensive research and customization.
• Offering bundled financial planning and investment management packages tailored to different client needs.

By shifting toward value-based pricing, firms can ensure that their most time-intensive services remain financially viable while offering lower-cost digital solutions for less demanding client segments.

3. Enhancing Client Experience Without Sacrificing Profitability

By aligning service models with profitability insights, firms can enhance the client experience while maintaining financial sustainability. This could involve:

• Delivering personalized financial guidance to top-tier clients.
• Using digital tools and AI-driven solutions to provide cost-effective advisory services to lower-revenue segments.
• Providing strategic educational resources that empower clients to make informed financial decisions independently.

Consultants and wealth management firms adopting TDABC

Gartner has published reports on the use of ABC/TDABC in financial services, emphasizing its role in improving profitability and operational efficiency. IDC has identified trends in cost management software adoption, including ABC/TDABC, among wealth management firms.

Given their demonstrated history of adopting advanced cost management techniques like Activity-Based Costing (ABC), it’s highly likely that Charles Schwab, Merrill Lynch, and Fidelity Investments have also explored or implemented Time-Driven Activity-Based Costing (TDABC).

All three companies’ interest in TDABC demonstrates its potential to streamline cost allocation and provide even more granular insights into operational efficiency and profitability.  The companies’ data-driven approaches and emphasis on cost management further suggest the power of TDABC.

How Pro~Active Solutech Can Add Value

Pro~Active Solutech specializes in providing fact-based solutions for driving cost improvement and financial decision-making for wealth management firms. With state-of-the-art analysis and automation technology, Pro~Active Solutech can make it possible for companies to:

• Implement TDABC Systems: Streamline the adoption of TDABC by integrating cost-tracking and time-management software into existing wealth management platforms.
• Enhance Data Accuracy: Leverage AI-driven insights to track service utilization and cost attribution in real time.
• Optimize Business Strategies: Provide actionable recommendations on resource allocation, pricing strategies, and profitability enhancement.

By partnering with Pro~ActiveSolutech, wealth management firms can become competitive with an awareness of their cost structures, optimized service delivery, and maximized client profitability. Cost management is key to wealth management firms’ success, and with it, companies can target and serve profitable segments of their clients effectively. Traditional cost distribution techniques are lacking in today’s environment, and new methodologies such as TDABC become a necessity. With TDABC information, companies can maximize service delivery, develop effective pricing models, and maximize client relations with no loss in terms of profitability.

Pro~ActiveSolutech stands as a key partner in this transformation, offering cutting-edge solutions to refine cost management practices and drive sustainable growth in the wealth management sector.