Banking Crisis

Market Woes May Threaten Some Wealth Management Business Models - Industry

Tom Burroughes Group Editor London August 8, 2011

Market Woes May Threaten Some Wealth Management Business Models - Industry

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

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

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

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

“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

"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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