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.
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.”
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.”