Picture: ISTOCK
Picture: ISTOCK

Operating income across 200 global wealth managers grew by an average of just 0.04% in 2016, despite assets under management increasing 4%.

According to the Global Private Banking Benchmark, published by Scorpio Partnership, a wealth management consultancy, cost-to-income ratios also fell below 80% for the first time since 2012, as private banks and wealth managers moved to cut costs despite growing regulatory and compliance pressures.

Of the top 25 global private banks by assets under management, Deutsche Bank’s funds fell just less than 26% to almost $230bn during the 12-month period, as the bank sold its private client services business in the US in a move to become a "simpler and more efficient organisation", according to Fabrizio Campelli, head of Deutsche Bank Wealth Management.

At the opposite end of the spectrum, China Merchant Bank saw its private banking assets under management swell by almost a third to just less than $240bn.

Overall, the top 25 institutions held $13.3-trillion worth of private banking funds, representing almost two-thirds of the entire market share. UBS’s private banking arm ranked top with $2.1-trillion worth of assets, followed by Bank of America and Morgan Stanley, both with just less than $2-trillion. Of the top 10, seven were focused on North America.

However, while assets grew at 22 of the top 25 private banks listed, pressure remained on profitability, industry experts said.

"Wealth managers’ margins have been compressed for years now and this trend only looks set to continue," said Lee Goggin, co-founder of findawealthmanager.com.

"One big reason profitability is down is of course mounting compliance costs. Firms are dealing with a maelstrom of national, regional and supranational regulations, and spending enormous amounts on technology upgrades and increasingly expensive compliance staff to cope." Smaller firms could be spending as much as 10% of revenues on compliance, compared with 3% for larger institutions which have greater economies of scale, Goggin added. "[This] is also acting as a shake-out in many markets." Wealth managers and private banks also face the growing threat of the increased popularity of robo-advisers, offering low-cost automated advice, rather than expensive face-to-face meetings.

Interest in passive investing and exchange traded funds is also expected to grow, particularly in the light of a recent review by the Financial Conduct Authority (FCA), the city of London regulator "We find that many active funds offer similar exposure to passive funds, but some charge significantly more for this," the FCA said in its asset management market study.

"We estimate that there is around £109bn in ‘active’ funds that closely mirror the market which are significantly more expensive than passive funds." The challenge now for many wealth institutions was to manage "the revenue side of the profits equation", said Caroline Burkart, director at Scorpio.

"These firms are experiencing pricing pressures, driven by regulations, the trend for passive investing and the wave of lower-fee competitors entering the market," she added.

"Solving the equation will require increased focus on enhancing the proposition with advisory capabilities and improvements to the client experience."

© The Financial Times 2017

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