London - Banking giants hold high hopes for their wealth
management arms as a means to keep the ship steady in volatile times, but many
have found themselves pouring money into a sector that is stuck in neutral,
buffeted by shrinking profits and wary investors.
Costs are up, revenues are down and with the global economy
threatening to lurch once more into recession, a growing supply of newly-minted
Asian millionaires may not be enough to recharge the profit base in the coming
months.
The struggle to boost profit in this environment will be a
key topic next week as the industry's top executives gather in Singapore,
Geneva and New York for the annual Reuters Global Wealth Management Summit.
Since the 2008-2009 financial crisis, many wealth managers
have suffered a double whammy of rising regulatory costs and increasingly
cautious clients keeping more money in low risk - and low margin - investments
or cash.
Cost-to-income ratios across the industry stood at nearly 80% in 2010, according to specialist consultancy Scorpio Partnership, from less than 70% before the crisis hit.
"Houses are realising that the cost of doing this business is rising, and rising systemically rather than having a spike and then reverting back," said James Fleming, head of international private banking at Coutts, part of Royal Bank of Scotland.
"It's rising in terms of IT, staff, regulation, and
these things aren't going to go away."
Private banks and wealth managers are also finding it hard to persuade their clients to put money to work in ways that generate a decent profit after many clients lost faith in their advisers during the last crisis.
Many rich investors lost money after they were advised to
invest in complex, illiquid instruments that suffered in the market crash.
Others merely saw their wealth put at risk from bank collapses as institutions
were exposed to losses accumulated by investment banking arms.
Much of the damage repair since that time has recently been
undone by UBS' alleged rogue trading scandal, calling into question the future
for banking groups that have private client arms sitting side by side with
investment banks.
Go East?
To compensate for the challenges, many private banks have
started to focus efforts on the burgeoning wealth of Asia, fuelled by the
economic booms of India and China.
Singapore is now viewed by many as a potential rival to
established financial hubs like Geneva and London, as the banking industry
migrates east in search of the wealth creation largely absent in the stagnating
European and North American markets.
Perceptions that financial services in the West are being
regulated out of business have also made bankers look more favourably at the
East.
"It always comes back to Singapore. The point is it's
well regulated. Not less regulated," said Catherine Tillotson, managing
partner at Scorpio.
But booking new business in Asia is not translating into
higher profits as the focus on the region has resulted in cutthroat competition
between institutions to recruit the best bankers, pushing up staff costs.
"The war for talent is very strong (in Asia),"
Fleming said.
Some private bankers see in the latest bout of financial
crisis a chance for the industry to redeem itself and regain the trust of
clients by steering them through the turmoil without losing them money.
Luigi Pigorini, head of the Europe, Middle East and Africa
region at Citi Private Bank said investment advisers learnt from their past
mistakes after many were caught out by events surrounding the Lehman Brothers
collapse in 2008.
"Customers are very much aware of the reputational
issues of the past. They always keep that in mind," he said.
"All of the big boys we deal with know exactly what
they are doing... They are not pointing fingers. I've not seen our customers
saying they are today being offered products by the wealth management industry
that are not appropriate."