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Market Woes May Threaten Some Wealth Management Business Models - Industry

Tom Burroughes , Group Editor , London, 8 August 2011

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How concerned should wealth managers be about their own business models if markets don’t find their feet?

The wealth management industry can withstand volatile markets and even prosper as clients seek advice, although some business models will suffer from any slide back into recession, figures in the industry say.

Ironically, fears on the economic front come at a time when wealth managers’ second-quarter/half-year results have shown a general improvement, apart from those Swiss banks contending with a rising domestic currency. Almost without exception, the Swiss franc’s gains since the start of this year, driven in part by its status as a safe haven currency, have proven a curse on Swiss banks as earnings booked abroad have to be converted into the Swiss franc. The Swiss franc has risen by more than 30 per cent against the dollar over the past two years.

This is an industry that already is contending with rising regulatory costs, demands from clients for better service and thin returns from deposits in a low interest rate environment. According to recent research from Scorpio Partnership, the consultants, the average cost/income ratio for wealth managers worldwide was almost 80 per cent last year. 

Stock indices have stoked new fears. Markets fell several days in a row last week due to renewed worries about eurozone debt defaults; Asian bourses also suffered losses today, while the price of gold has risen above $1,700 an ounce. The US debt ceiling wrangles in Congress also hit sentiment last week. The risk of a new recession has increased.

In the words of Jonathan Loynes, chief European economist at Capital Economics: “While we are not minded significantly to redraw our forecasts at this point, there are clear risks of further steep falls which will deepen the downside risks to the global economy.”

Business models

So how concerned should wealth managers be about their own business models and plans if markets don’t find their feet and recover?

"Market movements, even strongly negative ones, are not necessarily calamitous for wealth management firms but an outright recession could severely impact the opportunities for wealth creation in the economy,” Tom Slocock, chief executive of Deutsche Bank PWM UK, told this publication.

“At Deutsche Bank PWM we believe strongly in the importance of diversification of asset classes, tactical asset allocation and active risk management to reduce portfolio volatility in times of market stress," he said.

David Miller, head of alternatives at Cheviot Asset Management, the UK firm, said certain business models could feel the heat if markets don’t improve.

"It will be those firms that have a mismatch between expenses and revenues who come under huge pressure if fees and commissions fall away, particularly if it was for more than a few weeks or months," he said, citing what happened in the 2000-2003 stock market slump. “That is particularly the case in wealth management firms owned by larger corporates. Their fixed costs remain high but revenues are under pressure. This situation will favour smaller and more flexible wealth managers that can be more adaptable around their costs,” he said.

However, the longer term, secular argument for wealth management in many countries remains intact, he argued. “The provision of wealth management remains a growth industry. Nothing that is happening at the moment [market turmoil] will change the fact that the state and companies are backing away from providing financial support to individuals in retirement, and that generates a need for advice."

At UBS, group CEO Oswald Grübel, in his remarks accompanying its results statement, noted that “current economic uncertainty shows little sign of abating” and that “we therefore do not envisage material improvements in market conditions in the third quarter of 2011, particularly given the seasonal decline in activity levels traditionally associated with the summer holiday season, and expect these conditions to continue to constrain our results”. The bank said its target for pre-tax profit set in 2009 is unlikely to be achieved in the original timeframe of three to five years.

Rory Tapner, global head of Royal Bank of Scotland’s wealth business, stressed the need for banks to stay close to clients during difficult times.

"The current market turbulence is unsettling for everyone, and indeed there are some pretty serious economic problems at the heart of the matter. There's no doubt that some of the narrowly focused wealth managers find markets like these a real business challenge, but of course, it's at times like these that the breadth of the Coutts business model, and its underleveraged balance sheet really shows its value. When you don't have to worry about your business you can focus your full attention on keeping in touch with your clients," said Tapner.

 

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