Banks seek ways to cover cost of legislative headwinds

Wealth management revenues have been affected primarily by regularisation aimed at converting non-compliant into compliant assets, through voluntary disclosure, tax amnesties and lastly through automatic exchange of information, says Kinner Lakhani, head of European Financials Research at Deutsche Bank.

Non-tax compliant assets are typically highly profitable, offering between 150 and 200 basis points, explains Mr Lakhani and, as such, regularisation had a “phenomenally high impact” on P&Ls, as emerged from the bank’s recent study on wealth management carried out with Oliver Wyman.

This also explains why the cost-income ratio of Swiss banks, who lost a very profitable pool of client assets, have risen faster, converging with those of US wealth managers, which have traditionally been higher.

Large players have been able to manage their cost income ratios better than smaller or medium-sized players, leading to either “direct consolidation”, where a larger player buys a smaller one, or “shadow consolidation”, where larger players benefit from picking up the most successful financial advisers from smaller firms.

A way for private banks to address challenges has been to sell lending products to clients. “Private banks have increasingly done business on both sides of the client balance sheet, not just focusing on client assets but also client liabilities. This is not just to help their margins but also to meet client demand and provide them with a holistic solution,” says Mr Lakhani.

Disciplined approach

A second trend has been for institutions to adopt a more disciplined investment approach when serving clients, through advisory and discretionary mandates, as opposed to the non-contractual approach of the past. 

“Mandates have been around in Europe but penetration levels are getting higher now, as a strong reaction from the industry post the 2008 crisis,” he says. 

This approach was pioneered by UBS, under the direction of the former CEO of the wealth management business Jürg Zeltner, with the creation of the CIO office, with several other players following to create a more professional mandate offering, he explains. 

Not only does it help to increase revenues, but more importantly is a way of institutionalising the investment approach. It also serves to increase fiduciary standards and survive increased scrutiny from the regulator. 

Digital dividend

The third major trend is digitalisation, with improving relationship manager productivity one of the most important metrics wealth managers are looking at. 

Digitalisation will have a significant impact on both costs and revenues and embracing data analytics is expected to unlock revenue upside of up to 20 per cent, according to the Deutsche Bank and Oliver Wyman study. 

Digitalisation, by increasing automation, also helps identify opportunities across the various businesses of a bank, driving revenues up, states Mr Lakhani.