Wealth management profitability is being squeezed on a number of fronts and the industry faces some of the pressures hitting the mass market for overseeing client money, according to Deloitte. Risk-shy investors, rising regulatory costs and growing demand for low-margin, passive fund vehicles has the asset management sector in a vice, requiring big changes on how firms do business to survive, Deloitte says. On current trends, fees will be under downward pressure, it says. And these points also apply to wealth management, Deloitte argues.
While there are clear differences between the financial dynamics of wealth and asset management, Deloitte said its comments, issued a few days ago, to an extent apply not just to the mass market in funds, but also to firms serving high and ultra high net worth individuals.
“I have always found it interesting that this [fund management] service is a market in some ways that is retail, and yet a shopkeeper can understand the profit he or she makes, say, on every tin of beans on the shelf that gets sold, but wealth and asset managers may have far less idea of the profit they make in their market,” Eliza Dungworth, lead investment manager partner at Deloitte, told this publication.
A number of firms have already squeezed their fees; more may do so, Deloitte citing the example of Schroders, which is launching a Z share class for its UK-domiciled funds, carrying a management charge but no fees for platforms or advisor rebates. Another example is Vinculum, a new UK investment house started last year that charges no management fees at all.
Deloitte predicts that the big regulatory development sweeping the UK market – the Retail Distribution Review – will, on its own, drive down fees. It will reduce the management fee paid to investment managers by between 50 to 75 basis points. (The RDR is designed to stamp out sales commissions and raise the quality of professional advice, which is seen as driving up barriers to entry into the advisory market). Other regulatory forces include the European Union’s Alternative Investment Fund Managers Directive and legislation such as FATCA, the US measure to crack down on cross-border tax evasion.
Lipper, the fund research company, made a similar point last year: “Today the RDR looms large over the industry and the change expected to impact on the way intermediaries are remunerated being one of the key elements on which the initiative is based. The proposed changes to the way funds are distributed are such that the previously glacial pace at which apparent price wars had been fought over the previous twelve years has begun to quicken, with US low-cost giant Vanguard – 10 years after it entered the European industry – setting up UK-domiciled funds in 2009.”
But while the overall impression is one of tight, or tighter, margins, precise data for the industry as a whole can be hard to find, especially in wealth management. A lack of clear data on how much profit is made on specific service offerings is only one aspect of a problem in wealth management. Information about fees and what rival firms charge for specific services is often unobtainable.
Profits under pressure
The urgency of the profitability problem was underscored by a number of industry reports last year. PricewaterhouseCoopers’ biannual report on global wealth management found that the average cost-to-income ratio is 71 per cent: only 28 per cent of respondents reported cost-to-income ratios of less than 60 per cent, while only nine per cent also achieved revenue growth in excess of 10 per cent.
Scorpio Partnership, in its 2011 survey, had a higher average cost/income ratio figure of almost 80 per cent, a record figure, it said. (Some differences in the type of answers to questions may explain some of the cost-income ratio differences between the PwC and Scorpio figures.)
In some parts of the world, such as Switzerland, the older, lower cost/income ratio business of handling secret bank accounts and doing relatively little work for it is being edged out by a more expensive, labour-intensive model as Swiss bank secrecy comes under international assault.
With asset management, cost/income ratios, or, to put it another way, margins, can on average be lower than for some wealth management offerings, depending on whether the funds carry high fees (as in the cast of hedge funds with their classic “2 and 20” management and performance fee structures), or very low ones, as in exchange-traded funds. Each end of the market – those seeking “Alpha” or capturing market “Beta” – resemble what Morgan Stanley analyst Huw van Steenis has dubbed the asset management “barbell” . One end of the barbell is a low-margin business, the other is a higher-margin one.
By WealthBriefing (modified by Louay Al-Doory)
