Portfolio Management

Shattered Wealth Dreams

Ferrari car parked in front of the historic Cova coffehouse located in Via Montenapoleone street, Milan, Lombardy, Italy
For wealth management, are the good times gone?
  • Why it matters

    Why it matters

    Faced with dwindling earnings in various aspects of their business, banks are pinning their hopes on wealth management as a source of income. If that changes due to the market environment, there may not be much left.

  • Facts


    • There were approximately 15.4 million millionaires worldwide in 2015, with combined assets of $58.7 trillion.
    • Wealth managers are now paying the price for a lack of cost discipline in the past.
    • While growth markets in Asia remain promising, they also pose unique challenges for foreign companies seeking to differentiate themselves from the local competition.
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It’s been a rough few years for global banks since the financial crisis. Investment banks that made a fortune before 2008, trading on their own accounts and selling complex financial products, have been forced to look elsewhere for profits as regulators cracked down on the riskiest practices that brought the global economy to its knees.

Many have turned to private wealth management; basically, managing the money of the rich. With more millionaires and billionaires around the world than ever before, it seems a no-brainer, the ailing financial sector’s last resort for earning adequate returns.

But according to a study conducted by management consulting firm Oliver Wyman, together with Deutsche Bank’s research department, those good times too are about to come to an end.

Instead, money managers find themselves on the verge of a perfect storm of fee pressures, rising costs and – thanks to increasing regulation and the actions of central banks – declining earnings in light of depressed interest rates around the globe.

“The rosy days are definitely over. Portfolio managers have to do a lot more today to maintain or expand their earnings base,” said Matthias Hübner, a partner at Oliver Wyman in Munich.

The change isn’t happening overnight. Portfolio management is still a profitable business. It boasts an impressive industry-wide profit margin of 23 percent.

But the direction is clear: Unless management at the various firms takes steps to confront the immense challenges facing the industry, margins could shrink to 14 percent by 2020, Mr. Hübner said.

“The rosy days are definitely over. Portfolio managers have to do a lot more today to maintain or expand their earnings base.”

Matthias Hübner, Oliver Wyman

That could pose a serious problem for many of the world’s biggest banks. Portfolio management is seen as one of the last hopes for top bankers, as they see have seen earnings disappear across the board, from investment banking to the retail banking business.

Most banks are still hoping to emulate the path of Switzerland’s UBS, which was the first to gamble on shuttering much of its investment banking operation after 2008. The Swiss powerhouse has now grown to become the world’s largest asset manager.

Take Deutsche Bank, Germany’s largest bank, which is mired in a massive slump that has sent its share price to record lows. Having bet the house on investment banking before the crisis, the bank has struggled to find new ways to grow since. For now, Deutsche Bank’s executives are still betting on strong growth in asset management as a way out of their deep crisis. They even hired UBS’ former chief financial officer John Cryan to spearhead the turnaround.

Yet Deutsche Bank’s own think tank is skeptical when it comes to the industry’s potential. The analysts anticipate slower growth in the coming years, which they expect will tighten competition for market share.

“Assets under management will grow by about 4 percent in Europe and North America in the next five years, with new customer funds accounting for about 2 percent. With some banks still anticipating total growth rates of 8 to 10 percent, we have an expectation gap of about 5 percent,” said Mr. Hübner.

That gap leaves the sector rife for the kind of exaggerations that investment bankers turned to before the 2008 crisis. Regulators are starting to take note, and are increasingly turning their energies to controlling the sector.

The experts, and regulators, too, now hope that banks will not use aggressive pricing or new risks in customer acquisition – like overly lax controls on money laundering – to acquire new business.

“Assets under management will grow by about 4 percent in Europe and North America in the next five years...With some banks still anticipating total growth rates of 8 to 10 percent, we have an expectation gap of about 5 percent.”

Matthias Hübner, Oliver Wyman

According to an analysis by Cap Gemini, in 2015 there were approximately 15.4 million millionaires worldwide, with combined assets of $58.7 trillion (€52.4 trillion). The combined wealth of these so-called high net worth individuals, or HNWI, has quadrupled since 1996.

But as these customers’ assets grow, so do their demands. Many now expect customized solutions, are price sensitive and expect worldwide support. A few figures from the banks’ most recent quarterly financial statements illustrate just how challenging doing business with the wealthy has become.

Deutsche Bank, for example, has seen its earnings in the affluent customer segment decline by 12 percent, to €490 million, in what it calls “a difficult market environment.”

Even Switzerland’s UBS is starting to feel the pinch. The bank has attracted 6 billion Swiss francs, or about €5.5 billion, in net new customer funds to its wealth management division in the first six months of the year. That may sound impressive, but it compares to €8.4 billion in the same period in 2015. Earnings before taxes also declined to CHF 600 million, compared to CHF 769 million in the same period in 2015.

Customers are cautious because of the uncertain outcome of U.S. elections, the lack of certainty over the timing of the next rate hike in the United States, Great Britain’s withdrawal from the European Union and low interest rates. They are also prepared to consider switching to a different portfolio manager in return for minor discounts.

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However, many wealth managers are also paying the price for problems of their own making. Experts say a lack of cost discipline when times were good is now taking its toll.

“The ratio of costs to earnings has deteriorated to 77 percent, compared to 69 percent before the financial crisis. Today it costs 77 cents to earn one euro. This means that investment managers have accumulated a lot of fat,” said Mr. Hübner.

In some cases, Mr. Hübner added, this could be attributed to the higher costs of stricter regulatory requirements, but staff increases in sales also contributed to the problem.

Some banks have started to take notice. Like other banking sectors, wealth management could now be in for a slim down over the coming years: “More attention is being paid to cost management, because expenditures remain constant while pressure on margins is pushing down revenues,” said Markus Strietzel, a partner with consulting firm Roland Berger.

Many have yet to give up their hopes of strong growth, and are pinning their hopes on emerging markets in Asia, especially China. But that, too, is a tricky prospect. Anyone who hopes to be a major player there needs to invest a lot of money and maintain a local presence.

“In Asia, local providers have an enormous initial advantage, because of the access they have to customers from their retail and commercial banking business. For international competitors, it becomes all the more important to differentiate themselves through product competency and quality of service,” said Christian Edelmann, a partner at Oliver Wyman and co-author of the study.

And then there is the digitization challenge, which is hitting wealth managers like it is all other sectors of the financial world.

“This will require large investments in new technology in the coming years. But this is absolutely essential, because there are now many so-called high net worth individuals who have made their fortunes with Internet business models or initial public offerings,” said Roland Berger expert Strietzel.

Clients like these expect to have access to robo-advisers, or automated, online wealth management services. That could put some high-flying wealth managers out of business.


Handelsblatt’s Peter Köhler writes about finance and investment from Frankfurt. To contact the author: koehler@handelsblatt.com

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