Survival of the Biggest in Wealth Management




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WSJ article by Helen Thomas
Banks usually welcome the rich with open arms. But lenders on both sides of the Atlantic are pruning their wealth-management businesses: Morgan Stanley last month sold its European arm to Credit Suisse, while Lloyds Banking Group said to be considering selling some international wealth operations. Increased regulation is making the business harder work. Not everyone has the requisite muscle.
Managing investments for the well-to-do should be a business in favor. Overall, the market is set to expand, as the ultrarich become richer. More emerging-market households are also clambering from affluent to truly wealthy. And wealth management makes few demands on banks' overstretched balance sheets, offering higher returns on equity than investment-banking divisions. More stable earnings and cash flows suggest that wealth-management divisions should be valued in line with large U.S. asset managers, at forward earnings multiples in the low teens, rather than like banks in the single digits, argues J.P. Morgan.
Banks on both sides of the Atlantic are pruning their wealth-management units. Morgan Stanley last month sold its European arm to Credit Suisse.
So why sell? There are two problems. First, the rich have become more demanding, no longer prepared to hand over fees in return for subpar performance. More clients, even those with portfolios in the millions, have wrested investment decisions away from managers, requiring new platforms enabling clients to retain control while paying for periodic advice.
Second, the costs and hassles of keeping subscale operations have increased because of regulation. Clampdowns on money laundering and tax avoidance increase the complexity, and risks, of catering to the largest international and offshore accounts. New rules in the U.K. and the Netherlands require formal training of advisers and transparency on fees.
So wealth managers are bulking up or getting out. Scale is becoming as important in Europe's relationship-based model as it has been in the U.S. brokerage business, where average client assets tend to be lower and cost-income ratios much higher. There is plenty of scope to consolidate. Barclays is the U.K.'s largest wealth manager, with about 4% of assets. Even the biggest wealth managers, UBS and Credit Suisse in Europe or Morgan Stanley and Bank of America in the U.S., have less than a 10% share globally.
True, niche brands or disruptive technology may woo away assets from traditional outfits, particularly among smaller accounts. But as smaller managers suffer and banks prune, the biggest look set to thrive.
Posted by Steven Maimes, The Trust Advisor


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