Wealth managers’ revenue stagnated last year even as firms boosted assets by almost 4 percent, highlighting how the pressure on fees is increasingly spreading to the lucrative business of managing rich people’s money.
Companies responded by cutting expenses to bring the cost-income ratio, a measure of profitability, below 80 percent for the first time since 2012, according to a report published Monday by Scorpio Partnership. Deutsche Bank AG and Credit Suisse Group AG, two banks in the middle of a turnaround plan, fell behind competitors last year, the study also showed.
The report underscores how the forces reshaping traditional asset management — such as the rise of low-cost index investing and the resulting pressure on fees — are increasingly impacting the world of private banking. A study of more than 1,000 money managers published in April showed most expect money will continue to flow into passive products, profit margins will decline and the industry will be forced to consolidate.
“As advanced technology continues to reshape the wealth management industry, firms will be able to recognize cost savings through process optimization,” Caroline Burkart, director at Scorpio, said in a statement. “The challenge going forward will be managing the revenue side.”
Credit Suisse Group AG, which is focusing on wealth management as part of Chief Executive Officer Tidjane Thiam’s turnaround plan, saw assets from rich clients grow 4.7 percent in dollar terms last year. The bank still slid one position to sixth place in the study, as Royal Bank of Canada surpassed it with a 17 percent jump in assets.
Passive investing has accelerated this year in response to a new U.S. rule requiring financial advisers to act in the best interest of clients, said Craig Siegenthaler, a senior equity analyst at Credit Suisse.
Many brokers and retirement plan sponsors are “scared if they don’t choose the product with the lowest fee, which is a passive product, they’re going to get sued,” he said Monday in a Bloomberg TV interview.
Credit Suisse expects the flow of money to passive products to slow next year, not least because much of the shift has already happened. A move by U.S. President Donald Trump to repeal the rule or weaken it could also act as a brake, he said.
Deutsche Bank slid five positions to 16th place as assets under management dropped 28 percent in dollar terms. The bank sold its U.S. private-client services unit, a unit with some 200 advisers and about $50 billion of assets that was once part of Alex. Brown. Deutsche Bank also struggled late last year amid concern misconduct fines may hurt its financial strength. The bank has since settled several cases and raised fresh capital.
UBS Group AG, Bank of America Corp., Morgan Stanley and Wells Fargo & Co. retained their places in the top four of the Scorpio report, which is based on publicly available information from more than 200 wealth institutions.