Smaller wealth managers will be all the more vulnerable after the crisis

Stefan Wagstyl

Wealth managers have been kept profitably busy helping their rich clients negotiate the coronavirus market shock.

A surge in volatility has created opportunities: lossmaking positions that need to be liquidated and a rising demand for emergency loans. Some clients have taken the approach of trading actively, betting on the violent price swings.

“Some folks have made a lot of money and some folks who were leveraged have lost a lot of money,” said one private banker in London. “We had a record level of trading in March.”

But it won’t last long. Even if the crisis temporarily boosts revenues, the overall impact on private banking will be disruptive.

Because many banks charge clients based on assets under management (AUM), every drop in portfolio values brings a drop in fees. If markets stay down the impact will be felt in this year’s results, never mind 2021 and after.

Worse, many private banks have gone into the crisis with bloated budgets, especially on the staffing side. Recruitment has surged, partly to cope with increased regulation, and there are now simply too many private banks, with too many employees, sitting around an evaporating client pool.

“Outsiders might think that the wealth management industry, after a 10-year bull market, should be in good shape to weather the storm,” writes Anna Zakrzewski in a Boston Consulting Group report on the industry. “But this is not what we find.”

The authors say that while the investable wealth of high net-worth people was 75 per cent higher in 2018 than before the 2008 financial crisis, wealth managers’ profits are still far short of pre-2008 levels. Together, they made an estimated $108bn pre-tax in 2018, compared to $130bn in 2007.

At 77 per cent, the industry’s 2018 cost-income ratio was also 17 percentage points higher than it was in 2007. Even allowing for improvement in 2019, a profitable year, shock-absorbing capacities are low, says BCG.

The authors argue that the long bull market has lulled many wealth managers into a false sense of security, so they postponed restructuring, especially automating certain types of work. Ms Zakrzewski tells the Financial Times: “Relationship managers in the past saw digitalisation as a threat. Now it’s the only way to do the job.”

She says there is a growing gap between industry leaders, who invest more than the sector average in IT, and the rest.

This is one reason why mergers and acquisitions look likely, especially in Europe, where there are still many small and medium-sized private banks. More than a few regional wealth managers in the US may also lose their independence. Ms Zakrzewski says: “I think we will see quite a lot of institutional consolidation happening. Not in 2020. Not in 2021, but starting in two years.” 

She doesn’t name names, but the leading US wealth managers — JPMorgan, Goldman Sachs and Citigroup — are known as big spenders on IT. So are the Swiss giants: Credit Suisse and UBS — which is the world’s largest private bank with $903bn under management.

Some smaller banks have also invested heavily in technology, for example, Swiss-based Lombard Odier (AUM SFr287bn), which sells IT services to other banks. But there is a tail of minuscule wealth managers, with as little as $10bn under management. Ms Zakrzewski says that last year the cost-income ratio of smaller private banks in Germany was 105 per cent. They operated at a loss.

At this level, there will now be a struggle for survival. While there is always room for the unique boutique, many run-of-the-mill advisers are vulnerable.