Clients' Returns Cut As Wealth Managers Fail To Shrink Costs - RBS Study

Tom Burroughes Group Editor London 27 September 2010

Clients' Returns Cut As Wealth Managers Fail To Shrink Costs - RBS Study

An “unsustainable” 40 per cent of wealthy investors’ expected portfolio returns are being swallowed up by fees and other charges, highlighting the need for wealth managers to squeeze costs, the Financial Times reported, citing a study by Royal Bank of Scotland.

Client returns have been eroded because the cost base of private banks and other wealth management institutions have not shrunk despite the drop in returns over the past few years, the report said. The expected annual return of the average private bank client had fallen from around 6.4 per cent before the financial crisis erupted, to just 3.9 per cent now, it said.

The report echoes studies made earlier this year stating that the failure to curb costs, against a background of weaker investment returns, was squeezing margins in the industry. For example, McKinsey, the consultants, said in July that the wealth management industry is operating at its lowest recorded profit margin levels, and while assets under management rose last year, client inflows accounted for a small fraction of the increase. In that report, it found that profit margins went down to 20 basis points of assets under management in 2009 from a previous figure of 26, and the cost-income ratio rose to 76 per cent from 71 per cent in 2008. Industry-wide operating profits declined 25 per cent and reached half of the pre-crisis level of 2007.

In the RBS report, which was based on analysis of 12 wealth managers, RBS calculated that clients typically incurred charges equivalent to 1.68 per cent of their portfolio, once all hidden expenses were taken into account, which is equal to 43 per cent of expected portfolio returns. In contrast, just 26 per cent of expected gross returns were eaten up by costs in 2007.

“In a world where expected returns on a typical investment portfolio may have dropped 40 per cent compared with prior to the crisis, paying 1 per cent or more each year to a wealth manager is increasingly uneconomical,” said RBS.

Because of the failure to cut costs, the industry cost-income ratio rose from 66.1 per cent in 2008 to 76.5 per cent in the first six months of this year.

The figures may also suggest that there remains considerable scope for industry consolidation; it may also imply that private banks have considerable further work to do in convincing actual or potential clients that their business model represents value for money.

In a separate report today on WealthBriefing, a survey has found that in Germany, for example, almost half of private bank clients polled said they would be willing to sack their bank and move to another firm.

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