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Western EuropeOctober 1 2013

The wealth management revolution

With clients demanding more clarity on their investments, and new regulations putting pressure on margins, wealth managers have their work cut out to remain profitable and relevant. Can they rise to the challenge?
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The wealth management revolution

Wealth managers face two major issues: complying with regulation and adjusting their business model to a changing investment culture. While managing people’s money is generally still profitable, firms need to reassess their strengths as deteriorating economic conditions, heavier banking regulation and client demand put pressure on margins.

And as established firms try to find a new identity and often need to justify their existence to customers, new and nimble players are seducing clients and gaining business from both the highly wealthy and the middle classes.

Taking on the establishment

“Not many wealth managers are getting young customers. Clients are becoming more interested in what happens to their money and their returns. More incumbents are looking to find a suitable solution, but it hasn’t quite happened yet,” says Nick Hungerford, co-founder and chief executive of new online wealth manager Nutmeg. “If banks do not improve in various segments of their business, slowly but surely newcomers such as Nutmeg will come and steal their profits. We’re revolutionising wealth management [just like] new companies are revolutionising payments services and the transfer of money.”

Nutmeg launched in October 2012 in the UK and plans to expand abroad. Since January this year it has gained 15,000 registered users. Similar online wealth managers are popping up across Europe, as well as in the US. Aimed at clients disillusioned with bank services, they all share a similar business model allowing users to make small investments with contained costs. “We don’t have any fancy offices, any expensive sales people. We’ve invested all our money in [investment capability and customer service],” says Mr Hungerford.

In Germany, Vaamo will launch at the end of this year and, as with Nutmeg, it aims to provide investment services at prices cheaper than traditional institutions, according to its co-founder, Yassin Hankir. In Italy, MoneyFarm started operations in March 2012 and has 7000 registered users (700 of which are active investors), while as of January this year, New York-based Betterment had $135m in assets under management on behalf of 30,000 clients.

Alongside lower fees and smaller investment minimums – it is possible to invest as little as £1000 through Nutmeg, or even €1 on Vaamo’s future platform, according to Mr Hankir – new firms compete on transparency too.

Cost clarity

Indeed, London-headquartered SCM Private has made the issue of cost clarity its warhorse. The company, founded in 2009 by husband-and-wife team Alan and Gina Miller, created a fee calculator and the True and Fair campaign, which aims to improve transparency in the investment management industry, and which received support from Sharon Bowles, a UK Liberal Democrat politician and a member of the European Parliament. The European Securities and Markets Authority is considering the feasibility of a calculator such as SCM’s, says Ms Bowles, but concerns around gathering data and running the platform independently of private sector firms need to be considered.

Ms Miller points out that the US Securities and Exchange Commission already provides such a calculator on its website, where investors can compare fees and costs of mutual funds and exchange-traded funds, among others. She thinks the main problem lies with the industry not wanting to expose the total amounts charged to clients.

“In the past, the banking sector has been doing very nicely, making 30% returns on average. The average-size business makes only about 10% or 12%,” says Ms Miller. “A big fund manager was publishing its fees to be 1.75%; we calculated its fees were closer to 4.5%.”

The UK Investment Management Association (IMA) recognises that transparency and justifying the need for a wealth management sector is crucial. “Just like 20 years ago we gave up believing that just because a doctor gave you his opinion you had to follow it, in the same way investors question and challenge [wealth managers] and don’t take stuff at face value,” says Guy Sears, a director at the IMA. “You have to be clearer and comprehensive in how you communicate with your clients.” At the same time, Mr Sears says that there are some practical challenges in coming to a single, upfront price for the purchase of investment services: “If you’re talking about a fund, you can’t predict on January 1 how much trading you’ll need to do on that fund to keep it well positioned,” he says.

Nonetheless, gaining clarity on fees and costs would benefit firms too, allowing them to manage their business more effectively, according to Stephan Zimmermann, chief operating officer of UBS’s wealth management division. He says: “The level of transparency is very different from the old days. Clients want to understand fee structures and we have an interest in understanding if our costs are covered by the fees we are getting.”

Getting the picture

Clarity on hidden charges, including performance fees and dealing costs, is also the object of MiFID II, the second iteration of the EU’s Markets in Financial Instruments Directive, which may come into effect in 2015. Clarity is also important to the Retail Distribution Review (RDR), UK legislation introduced at the end of December 2012 aimed at raising the level of professional qualification within wealth management firms.

Still, a survey by research firm NMG Consulting on behalf of the UK Financial Conduct Authority earlier this year found that while retail investors are no less likely to use an adviser, nearly two-thirds of them still do not have a good understanding of what it costs them.

“Certainly in the UK, we are getting the point [that regulators are making],” says Mr Sears. “The IMA announced [in August] it was consulting on changing the accounting rules, or at least the way in which accounting statements are presented to people in order to be much clearer on total costs involved.”

Most wealth managers, however, say that higher fees are simply a reflection of specific work done for investors, particularly at the high end of the market. Two years ago, Citi Private Bank restructured its business to cater for only the wealthiest client segment, where it had the biggest penetration. Luigi Pigorini, the bank’s chief executive for Europe, the Middle East and Africa, says that clients do understand what is behind the bank’s fees and are willing to pay for its advice. However, Mr Pigorini underlines the pressure that new rules have put on the business, forcing bankers to significantly reduce time spent with clients: “I had bankers last year that were out two or three months, just studying for their RDR exams.” However, Mr Pigorini says that things have gone back to normal now.

Citi is not the only player to have restructured its wealth management operations. Tougher capital constraints and other regulatory pressures have pushed many players to focus on their product or geographical strengths.

Last year, Bank of America Merrill Lynch sold its non-US wealth management business, which was unprofitable in 2011, to Swiss private bank Julius Baer. Earlier this year, Morgan Stanley sold its wealth division in Europe, the Middle East and Africa to Credit Suisse, while Lloyds' international private banking arm will also have new Swiss owners as it has been sold to Union Bancaire Privée after having disposed of its Miami operations to Spain’s Banco Sabadell and closed offices in Dubai and South Africa, leaving the bailed-out UK lender to focus on its home market. 

Begin the soul searching

“This soul searching period has just started,” says Mr Pigorini. “There will be plenty of firms that will be getting out of specific sections of the market. People think that private banking is an easy business to manage, but it’s very complex. There will be consolidation, but for a lot of banks it will just mean shutting down unprofitable operations for which they wouldn’t find a buyer anyway.”

This soul searching has also meant that while Citi has decided to focus on the high-end client segment, the once exclusive JPMorgan has moved the other way and stretched to serve less wealthy individuals. But providing investment solutions to this segment comes with its own challenges. If the ultra-high-net-worth individuals have a higher tolerance to investment charges, cost is key to clients with much smaller disposable assets. Firms that intend to service them need to provide advice and customer care through a less expensive business machine, as well as supplying products that are specifically relevant to this segment.

This may be easier said than done. Many accuse the traditional wealth management sector of lacking appeal to untapped client segments, including young investors and those that are retired. But in tougher economic circumstances, with forced cuts on public spending, savings and investment options are more important then ever.

“Those in the 55 to 65 age group that are ready to retire but also active, do not have many products available to them. We are not developing new products that fit new target markets,” says Ms Miller at SCM Private. “Wealth management is a necessary industry, because people live longer and are not saving enough for their retirement. As a society, we can’t afford to fund people in retirement, so we need to find a way to do that.”

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Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
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