Wealth Management Is a Risky Gold Rush for Banks

Today’s markets love nothing more than a growth narrative and, with wealth management, banks finally have one. The risk is that they all crowd in at the same time.

Among banks valued above $100 billion, Morgan Stanley and UBS have been the top stock-market performers of the past half-decade. Both companies bet on wealth management and private banking. Morgan Stanley, now the highest-valued big bank in the world, acquired asset manager Eaton Vance and online broker E*Trade with a goal of managing $10 trillion in client assets. UBS incorporated Credit Suisse, creating a wealth-focused behemoth under the “Swiss banking” brand.

Understandably, others are trying to follow in their wake. Goldman Sachs, the emblematic Wall Street trading house, has merged and reshuffled its asset and wealth-management divisions in a push to make them generate a much bigger chunk of the group’s earnings. France’s BNP Paribas is planning “massive growth” in Switzerland to scoop up some of Credit Suisse’s former business, according to an interview with the boss of its Swiss wealth division in trade publication Citywire.

Britain’s HSBC and Lloyds are also moving in this direction. Even Barclays, which in February ruled out a full pivot away from investment banking, aims to strengthen its small Private Bank & Wealth Management arm. Deutsche Bank has hired more relationship and investment managers in Germany even as it has retreated from investment banking.

The industry’s love affair with the rich is a rational one. Post-2008 regulations require banks to hold more capital, which is a bigger problem for investment banking than for relatively capital-light wealth management. Among top banks in the U.S. and Europe, wealth and asset management arms had an average return on tangible equity of 21% in 2023, compared with a paltry 12% for investment banking.

Also, the trading gains made by investment banks, which depend on the gyrations of financial markets, are an unreliable source of income. Even stripping out the 2008 crash and the pandemic, they have been four times more volatile since 2004 than fees and commissions. Moreover, transaction-based fees only made up 15% of wealth-management revenues in 2023, according to Coalition Greenwich. Rich clients, who are usually locked in for years, pay much more in recurring fees, hold large amounts of cash and, crucially, take out loans. This means a lot of stable net interest income, which amounted to almost half of revenues.

To boot, wealth management is poised for growth. The UBS Global Wealth Report anticipates that there will be 86 million millionaires in the world by 2027, up from 59 million in 2022. It is a market served by local relationships, which means the top banks only have a 32% share, Coalition Greenwich research shows. That leaves room for growth. In trading and corporate finance, where economies of scale are strong, top banks’ share rises to 67% and 48%, respectively.

Digital technology, artificial intelligence and greater access to private markets seem likely to make large wealth platforms increasingly attractive to clients as well, especially for the “mass affluent” who have between $250,000 and $1 million in investible assets.

This cohort currently makes up less than a quarter of the wealth revenues of the top players. Providing automated customized recommendations to them as a kind of “Netflix of banking” was one of UBS’s pitches before the Credit Suisse acquisition.

But there are risks as banks all pile into the theme. “High net-worth” individuals—those with more than $1 million—might be able to drive a harder bargain in a more crowded market. Below that line, low-cost robo-advising technology is already squeezing profit margins.

The surge in wealth-management assets in recent years has also been matched by increasing expenses. Cost-to-income ratios average 77%, compared with 68% for investment banking and 56% for other banking lines. The U.S., where financial advisers play a more prominent role, is a particularly high-cost market.

Today’s wealth management is both relationship-based and reliant on hefty technology investments. This means firms find it much easier to grow through acquisitions, which can cost a lot. In 2022, for example, UBS agreed to—and then backed out of—a deal to buy California-based digital platform Wealthfront at a steep valuation, in an attempt to reach out to affluent millennials and Gen Zers. Executives have since shifted their attention to the ultrawealthy and are now trying to penetrate the U.S. by wooing family offices.

The room to grow varies greatly depending on geography. In North America, top banks hold half of the market. In Asia-Pacific, it is only 10%.

UBS this week laid out plans to boost its presence in Asia, which makes sense given that it dominates the market. It is the same for HSBC, which last year bought Citi’s retail wealth-management portfolio in China. Similarly, Deutsche Bank’s focus on rich clients in its domestic market seems wise.

But lenders should be wary of venturing into high-cost areas where they don’t have a strong foothold, whether geographically or in terms of the clients targeted. This is why Goldman’s ambitious wealth-management foray under Marc Nachmann, who comes from a markets and investment-banking background, seems risky—even if so far it is going well.

The bank’s recent retreat from consumer banking came with a broader lesson: Not everybody can do everything.

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