As traditional offshore private banking business models come under attack from tax-hungry governments looking to play the populist card, wealth managers are increasingly favouring a move into domestic markets.
The business model they are choosing to activate involves hiring or acquiring legions of customer relationship managers (CRMs) servicing high net worth clients from regional hubs. “In the next 18 to 24 months, the focus will be predominantly onshore,” says Brandon Sharrett, head of global wealth services for SEI, the US solutions provider which installs multi-manager investment strategies and administration platforms for advisers and private banks.
In a domestic market such as the UK, SEI has narrowed its focus to 40 wealth management firms, most of which will want to “enhance the capital value of their business” in the belief they will eventually be swallowed up by larger banks. “These are firms that are evolving their proposition for recurring fee income versus transactional revenue,” says Mr Sharrett, talking about groups giving advice, rather than pushing products.
“They are looking for more defined business processes in areas of advice and a more institutionalised investment process,” adds Mr Sharrett, who believes wealth managers must decide exactly what they are offering and to which kind of clients. “Just because a client has money to invest does not mean it is the right client for a particular firm,” he believes. “They need a solid proposition for a client, whether they are a global wealth player like UBS, an asset manager like Investec or an IFA.”
Sourcing profits
According to SEI, it is relatively straightforward for a private client advisory group to source the magic 100 basis points revenue figure they need for profitability from private clients, with the customer actually charged 200 basis points, distributed between bank, underlying asset managers, custodians and other third party service providers.
“Our goal is to encourage efficiency and we are able to help firms support more clients per adviser based on scalability of business, with technology underpinning that,” believes Mr Sharrett. Currently an average domestic CRM might look after 100 to 150 clients, although this varies depending on the firm’s proposition, he adds.
The most dramatic increase of efficiency can be achieved in the middle and back office, where firms like SEI claim they can vastly improve profitability by introducing straight through processing.
But some are rather cynical about claims of tinkering with business models, in the belief that private banking is purely profitable when the volume of assets is large and clients are fully invested in fee paying instruments. At Swiss consultancy Millennium Associates, CEO Ray Soudah says domestic markets around the globe should be viewed over two time periods – the last 12 months and the next 12 months. “We are currently at a fundamental, pivotal point in the wealth management cycle,” reckons Mr Soudah, a specialist in M&A transactions in the financial services sector.
The paralysis in acquisition deals over the last 12 months has been due to major institutions looking internally at capital adequacy regulations and external regulatory pressure. “Smaller firms, on the other hand, have been concerned with placating customers and dealing with complaints from clients about poor performance,” he adds.
But now that the large banks such as UBS, Citigroup and Commerzbank have addressed their balance sheet issues, the outlook has changed. “Many of them are now obliged to shrink, event though they might use the word ‘refocus’,” smiles Mr Soudah, who is expecting to see his business boosted by branches, divisions and whole subsidiaries being offloaded, spun-off or sold to competitors.
He cites the impending disposal of UK wealth manager Kleinwort Benson by Dresdner Bank, the rumoured sale of Coutts by RBS and the acquisition of Fortis by BNP Paribas among examples of this phenomenon. “Now that the market has picked up by 20 to 30 per cent, profitability has partially recovered,” spurring further interest in the sector, believes Mr Soudah, who expects a raft of deals to be signed in the coming months.
“At the end of the day, people need investment advice. This will not disappear and once confidence comes back, clients will return to the market. There are a lot of ‘strategic reviews’ going on. But this is nonsense. There is no need to adapt the business model. The biggest factor influencing the profitability of a business is purely the assets under management. They might hire or fire a few people and find a more efficient outsourcing platform, but these are marginal factors in comparison.”
Renewed interest in acquisitions will no doubt spark further competition in domestic wealth management businesses. Most groups have made decisions in their head office in Zurich, Frankfurt or Paris to make smaller acquisitions and then use them as hubs for regional expansion.
