Wall Street is figuring something out about its clients ? but it should've known this years ago

There is a bit of a mystery on Wall Street, and it goes like this.

A Wall Street bank, lets call it New York Investment Bank (NYIB), has a hedge-fund client.

NYIB's analysts send research to that client. Its sales force calls the fund's portfolio manager constantly.

The fund borrows money from the bank at generous terms.

Then, when the fund is ready to make a trade it pays a commission on a large chunk of shares.

Here is the mystery: Is that trade a profitable one for the bank?

Now, at first blush, it might be.

But then when the bank starts to look at how much it has given that client, in capital or research or client service, the picture might look a little different. Factor in the multiple relationships a client will have with a bank across, lets say, prime brokerage, equities, fixed income and derivatives, and the picture might look different again.

As it turns out, until recently, a lot of Wall Street firms couldn't accurately assess client profitability or returns. The focus was on the number of clients, or total revenue, rather than revenue per client, or even return-on-equity by client relationship.

So even if a client took up a huge amount of time - with calls to multiple analysts and traders - or cost the bank an extraordinary amount in lost revenue from loans that were priced lower than they should've been, it was difficult for firms to know just how unprofitable the relationship was.

A tough environment for sales and trading revenues has put an end to that.

Consider this: Deutsche Bank's Matt O'Connor met with Daniel Pinto, head of the corporate and investment bank at JPMorgan, and set out some of the highlights. Under the head 'Client interactions becoming more strategic,' O'Connor wrote (emphasis ours):

JPM focuses on making an overall client relationship profitable, even though some products in the relationship might be unprofitable. JPM has invested in resource mgmt tools ... that help bankers analyze client relationships and the impact on profitability and capital usage across many constraints.

The recent meeting with Goldman Sachs the note is referring to is this chat with cohead of securities Pablo Salame, where Salame said that Goldman is focused on selling more products to existing clients.

This isn't the first time the topic of resource management tools (broadly known as CRM, or client relationship management, tools) has come up with Pinto at JPMorgan. In a November presentation, he said:

We do a lot of work on client planning. We do a lot of work in really fine-tuning client profitability and ... really you can maximize the wallet or the profitability of those particular clients and really have a smarter dialogue with them.

This is going on across the Street, as banks stop serving clients that don't deliver the returns they are looking for, and prioritize the clients that do.

"Today they have fewer resources to dedicate to client interactions, and client interactions by-in-large are less profitable than they used to be," Kevin McPartland, principal in market structure and technology at Greenwich Associates, told Business Insider. "So more efficiently managing client relationships is now a necessity, whereas pre-2008 it has less impact on the bottom line."

Deutsche Bank for example said last year that it would cut the number of clients that its global markets and corporate and investment-banking units deal with in half. It said in its presentation that 30% of the clients generated 80% of its revenues in 2014.

And some of the clients that remain will find they have a less hands-on service. Capital markets consultancy Greenwich Associates said in a note earlier this year saying that "less sophisticated clients are being directed to e-trading solutions and junior sales traders.

That sort of treatment has long been common in equities (think Michael Lewis' Liars Poker and "equities in Dallas"), but it is now permeating the bond market too.

"The growth of e-trading in fixed income has expanded this form of client tiering considerably," Greenwich said.

At the other end of the scale, you have Wall Street banks prioritizing their best clients. Bloomberg reported last week that the equity research desk at Citigroup for example has a list called the "Focus Five." Other banks have scales, where some clients are designated platinum, gold, silver and bronze.

It is kind of incredible that Wall Street took so long to figure this out.