Regulators have forced wealth managers to disclose their fees more clearly and raised protection levels for investors © Reuters
Wealth managers’ profit margins have fallen by nearly a third over the past decade, as clients’ demands for reductions in fees and commissions have offset a rise in the amount of wealth held by individuals and families.
Pre-tax margins at global wealth managers have fallen from 33 basis points in 2007 to 22.4bp in 2016, according to a Boston Consulting Group survey of more than 125 providers.
That has forced wealth managers and private banks to cut costs and jettison unprofitable customers, despite private wealth swelling by more than 5 per cent to an estimated $166.5tn.
Margins have been squeezed because regulators have forced wealth managers to disclose their fees more clearly and raised protection levels for investors, analysts said.
“Margins remain very compressed,” said Lee Goggin, co-founder of Findawealthmanager.com. “Competition from low-cost providers combined with the new transparency standards being imposed by regulators mean that wealth management is no longer anything like the high-margin, low-maintenance business it used it be.
“Competition is really heating up,” he added.
Boris Collardi, chief executive of Swiss private bank Julius Baer, said his institution had seen pressure on margins because of a “decline in clients’ transaction and trading volumes as well as increased regulatory and compliance costs”.
Swiss banks have also suffered because of the significant strengthening of the Swiss Franc against the euro.
“The way to mitigate the decline is by increasing scale through consolidation, selective hiring and improved front-office productivity,” he said. “Therefore we see a clear trend towards larger and fitter players as compared to a decade ago.”
Wealth managers have been moving out of high-risk business lines and increasingly implementing performance-related pay, the BCG report revealed.
Unprofitable customers have also been dropped as many wealth managers look to concentrate on and attract super-rich clients. A raft of low-cost online “robo-advisers” — offering automated wealth management advice — have emerged to cater to the growing mass affluent market.
Kinner Lakhani, banks’ analyst at Deutsche Bank, said wealth managers “face further challenges ahead despite benefiting from rising US interest rates”. “As well as reducing costs to protect margins, wealth managers should invest for growth, whether in alternative assets, building onshore franchises or enhancing digital capabilities,” he added.
In 2015, FT research revealed that the minimum amount for customers to access wealth management services in the UK had risen to almost £1m.
The £1.8tn industry has also seen a wave of consolidation in recent years, with a particular focus on midsized wealth managers with between £5bn and £10bn of assets under management.
‘’Scale really matters in this business. It gives you the operating leverage needed be successful. Wealth is growing at two times GDP, so for large players that have invested in common platforms and technology the industry is extremely attractive,’’ said Markus Habbel, chief financial officer of UBS wealth management.
Last year, Liechtenstein’s LGT Group acquired a majority stake in London-based boutique Vestra Wealth, and Société Générale scooped up City stalwart Kleinwort Benson.
A few months later, Cazenove Capital Management, owned by Schroders, moved to buy the £2.2bn wealth management business of Hoare & Co, founded in 1672 and the UK’s oldest bank.
Sebastian Dovey, co-founder of Scorpio Partnership, a wealth management consultancy, said that wealth managers needed to focus more on service. “Many of the top-tier global wealth institutions recognise that to remain competitive they need to undertake a full ‘makeover’ of their client experience,” he said.