New returns: banks move back into wealth management

As the tra­di­tion­al banks grap­ple with dis­rup­tors and an endur­ing envi­ron­ment of low inter­est rates, a grow­ing num­ber are pil­ing resources into a new busi­ness oppor­tu­ni­ty – wealth man­age­ment.  

Many banks stopped pro­vid­ing finan­cial advice to clients around a decade ago, after the Retail Dis­tri­b­u­tion Review (RDR) led to a ban on com­mis­sions. They still some­times pro­vide these ser­vices to the very wealth­i­est, who can afford to pay fees for the work. How­ev­er, much of the sec­tor is now dom­i­nat­ed by spe­cial­ist wealth man­age­ment firms like Har­g­reaves Lans­down and St. James’s Place.

How­ev­er, at a time when robo-advice options have grown pop­u­lar among mass mar­ket cus­tomers, the banks see a new oppor­tu­ni­ty: com­bin­ing tech­nol­o­gy with their tra­di­tion­al strengths in pro­vid­ing more per­son­al advice. While tech­nol­o­gy han­dles sim­ple, repet­i­tive trans­ac­tions, cus­tomer rep­re­sen­ta­tives have more time to help with more com­plex, nuanced enquiries or com­plaints. Tech­nol­o­gy also pro­vides them with more rel­e­vant infor­ma­tion in more acces­si­ble for­mats. The banks would still earn fees for such ser­vices, but automa­tion means they can be low­er, ben­e­fit­ing cus­tomers. 

Predictable earnings 

There are finan­cial advan­tages for the banks. Wealth man­age­ment avoids many of the cycli­cal risks and unpre­dictabil­i­ty of cor­po­rate and invest­ment bank­ing. Instead, it pro­vides a more pre­dictable earn­ings pat­tern that ben­e­fits from a low­er cap­i­tal inten­si­ty, while deliv­er­ing attrac­tive recur­ring rev­enue streams.

This is par­tic­u­lar­ly impor­tant in today’s low-inter­est envi­ron­ment. For exam­ple, each quar­ter per­cent­age point reduc­tion in inter­est rates removes almost £150m from Lloyds’ annu­al net inter­est income. In addi­tion, ana­lysts spec­u­late that con­cerns about the bank’s reliance on con­sumer bank­ing have prompt­ed it to announce the expan­sion of its wealth man­age­ment arm under the Scot­tish Wid­ows brand. 

Cred­it Suisse recent­ly announced plans to dial down its invest­ment bank­ing oper­a­tions and invest more in its wealth man­age­ment busi­ness, where it’s seen as hav­ing a strong glob­al fran­chise. Chi­na is expect­ed to be a tar­get region for Cred­it Suisse’s wealth man­age­ment roll out. Like­wise, Black­Rock has won approval to launch a wealth man­age­ment busi­ness in Chi­na, in col­lab­o­ra­tion with Chi­na Con­struc­tion Bank and Singapore’s state fund Temasek. 

Black­Rock is also work­ing with Coutts to expand the latter’s wealth man­age­ment offer­ing. Novem­ber saw the launch of six new exclu­sive funds for the 12.5 mil­lion clients Coutts ser­vices across the wider NatWest Group, its par­ent com­pa­ny.  These com­prise three active funds and three index funds with the objec­tive of fur­ther reduc­ing the costs of invest­ing, build­ing effi­cien­cies in how Coutts man­ages client assets. 

The move is the lat­est devel­op­ment in Coutts’s wealth enhance­ment strat­e­gy, enabling it to meet more client needs at scale, accord­ing to the bank. It’s part of Coutts’s assets under man­age­ment (AUM) growth strat­e­gy and is a key ele­ment of NatWest Group’s plans for its wealth busi­ness­es.

Strength in numbers

The appeal of such activ­i­ty is demon­strat­ed by the suc­cess of UBS’s Wealth Man­age­ment divi­sion, which post­ed a remark­able 43% jump in pre-tax prof­its in Octo­ber and fresh fee-gen­er­at­ing inflows of £18.8bn. The bank plans to expand its US wealth oper­a­tions with a dig­i­tal­ly scal­able advice mod­el.

In the sum­mer Deutsche Bank poached a team of five wealth man­agers from UBS to devel­op its Swiss-based pri­vate bank­ing busi­ness for wealthy British and north­ern Euro­pean cus­tomers.  

“We’ll see M&A in this space with some small­er wealth man­agers dis­ap­pear­ing alto­geth­er,” says Pro­fes­sor Tapas Mishra, head of bank­ing and finance at the Southamp­ton Busi­ness School. “There­fore, reg­u­la­tors might want to con­sid­er new reg­u­la­tions to ensure that there’s ade­quate com­pe­ti­tion here.”

For the Per­son­al Invest­ment Man­age­ment & Finan­cial Advice Asso­ci­a­tion (PIMFA), which rep­re­sents large and small wealth man­agers, the key con­sid­er­a­tion should be com­pe­ti­tion and the qual­i­ty of advice avail­able to con­sumers. “We need more advice to be avail­able now than ever, espe­cial­ly with devel­op­ments such as pen­sions free­doms,” says its direc­tor of gov­ern­ment rela­tions and pol­i­cy, Tim Fas­sam. “The more play­ers in the mar­ket the bet­ter.” 

Where does this leave small­er play­ers? “They’re more like­ly to focus on bespoke offer­ings and to spe­cialise in their local area,” Fas­sam says. “Peo­ple still want that per­son­al con­tact and that local con­nec­tion.”

As the mar­ket becomes more crowd­ed, banks are already look­ing to dif­fer­en­ti­ate their offer­ings. 

“For Deutsche Bank, when tar­get­ing ultra-high-net-worth clients this includes a focus on our core strengths in lend­ing and invest­ments,” says Michael Mor­ley, CEO of Deutsche Bank UK Ltd. “For exam­ple, bespoke risk man­age­ment strate­gies, access to alter­na­tive invest­ment strate­gies such as ven­ture cap­i­tal or sophis­ti­cat­ed invest­ment solu­tions for pro­fes­sion­al clients, high-end real estate and com­plex lend­ing col­lat­er­al solu­tions, and of course lead­er­ship on sus­tain­abil­i­ty issues.”

Obstacles ahead

But there are chal­lenges. For exam­ple, where will these banks find suf­fi­cient staff with the right skills? Many were let go in the wake of the RDR, mean­ing tal­ent is in short sup­ply. 

Chris­t­ian Scarafia, man­ag­ing direc­tor, head of north­ern Europe bank rat­ings at Fitch Rat­ings, offers some oth­er words of warn­ing. He notes that wealth man­age­ment tends to have a rel­a­tive­ly high cost base as it is per­son­nel inten­sive and requires invest­ments in sol­id com­pli­ance and con­trol frame­works.

“Although wealth man­age­ment rev­enues are gen­er­al­ly seen as rel­a­tive­ly sta­ble, they are linked to con­di­tions in finan­cial mar­kets,” he says. “A cor­rec­tion in asset prices would result in a reduc­tion in assets under man­age­ment and there­fore in fees linked to these vol­umes.”

While riski­er finan­cial assets can gen­er­ate high­er income and finan­cial trans­ac­tions can bring addi­tion­al rev­enue, there’s low­er investor appetite for both. This “would affect the prof­itabil­i­ty of wealth man­age­ment activ­i­ties, which means that the prof­itabil­i­ty of this busi­ness is not insu­lat­ed from finan­cial mar­kets con­di­tions”, Scarafia adds. 

Still, the banks are opti­mistic. “The over­all long-term trend for wealth man­age­ment growth remains incred­i­bly strong as new wealth is cre­at­ed and the over­all num­ber of wealthy indi­vid­u­als increas­es,” says Mor­ley. “How these clients are served and advised will be a fas­ci­nat­ing area to watch as increased use and accep­tance of dig­i­tal chan­nels dri­ves inno­va­tion in ser­vice mod­els.”