PRESS RELEASE The Scorpio Partnership Private Banking Benchmark 2012 shows the wealth management industry performing well in spite of growing regulatory pressure and economic instability WEALTH MANAGEMENT RESULTS SHOW INCREASING POLARISATION BETWEEN GLOBAL AND BOUTIQUE FIRMS LONDON Scorpio Partnership s annual Private Banking Benchmark of the global wealth management industry released today shows international providers weathered the storms of 2011 more successfully than smaller players. Firms in the top half of the Benchmark performed better than lower tier wealth management firms in terms of net new money, assets under management, income and pre-tax profit growth. However, large firms had higher expenses linked to increasing levels of global regulation and expansion into new markets. For these firms, expansion is a double-edged sword fuelling growth on the one hand but also increasing expenditure and exposing firms to the growing complexity of international regulation. Wealth managers that lack global reach also faced difficult operating conditions. Their net new money flows more than halved and margin pressure reduced overall levels of income. Many of these firms responded with cuts in order to maintain their profitability. The smaller Swiss private banks were particularly prone to these challenges. They face the additional pressure of heightened global scrutiny on tax issues. In spite of their different challenges, large and small wealth management firms navigated the complex economic and regulatory environment successfully, reporting solid growth in profitability. This suggests wealth managers are adapting to the structural changes taking places in the financial services industry and the rapidly evolving economic and market conditions. Figure 1: Key performance indicators for the upper and lower tier of Benchmark wealth management firms Key Performance Indicator Average percentage change Upper tier Lower tier Assets under management (AUM) 0.87% 0.82% Net new money 16.07% -137.33% Income 3.81% -8.53% Expenses 3.47% -3.39% Ordinary pre-tax profits 17.91% 11.70% Average gross margin on AUM 101bps 120bps Page 1 of 5
These are the main findings of The Scorpio Partnership Private Banking Benchmark 2012, which is an annual assessment of the efficiency and effectiveness of wealth management as a business model servicing high-net-worth clients. This year s analysis of the industry s key performance indicators covers 201 wealth management entities around the world. Since the financial crisis began in 2008, the operating environment has been changing rapidly for wealth managers. This year s analysis shows some firms are reacting better than others to the new reality of changing economic patterns and extensive compliance, says Sebastian Dovey, managing partner at Scorpio Partnership. ASSETS UNDER MANAGEMENT HELD FIRM IN SPITE OF MARKET TURMOIL The report finds assets under management for the sector as a whole held level. The average percentage change was up 0.61% versus the previous year. This marks a solid result given the onslaught of the Eurozone crisis, US deficit problems and sluggish growth in Asia in the latter half of the year. However, it means there was little movement among the top 20 wealth management providers by assets under management. Figure 2: Top 20 global private banks by assets under management (AUM in US dollars) Page 2 of 5
Citigroup has moved from 20 to 13 in the ranking as this year Citi has reported assets under management for all feebased accounts greater than USD1 million for the first time since the joint venture deal between Smith Barney and Morgan Stanley. In line, we have also reported results for Morgan Stanley that relate to accounts greater than USD1 million. As a result, Morgan Stanley has slipped two places down the ranking, which moves UBS back into second place from third place last year. In this context, it is important to note that Bank of America reports for its Global Wealth & Investment Management division, which includes Merrill Lynch Global Wealth Management, US Trust, Bank of America Private Wealth Management and its Retirement Services business. Wells Fargo has also included Retirement Services within its data this year. Costs spike due to regulation and the pressure to expand The comparative success of the international wealth management players reflects their reach into growth markets, particularly Asia. These markets present a significant opportunity to attract new client business. Plus, the financial services in these markets are often commission-based and therefore generate higher margins. However, growth in these markets comes at a price and the research also highlights the growing costs associated with wealth management. Among the upper tier wealth management firms, the average percentage change in expenses was 3.47%. However, the very largest banks saw much larger increases in expenses. In fact, if we take the mean expenses for the upper tier wealth management firms we find a hike of 18% from USD1.76 billion at the end of 2010 to USD2.08 billion at the end of 2011. This increase in costs for these firms also reflects the changing global regulatory framework for financial services. Enhanced regulation is a strong feature of the post-2008 financial services landscape. From cross-border initiatives such as FATCA, Mifid and Basel III, through to localised regulation such as Switzerland s too big to fail rules, the UK s Retail Distribution Review, or the US s Dodd Frank reforms, all of these initiatives have implications for how firms run their wealth management operations in isolation or as part of a larger financial services group. Smaller firms are not immune to these regulatory changes, but depending on the scope of their business they may be less affected. Some smaller firms are also looking to build scale and also reported increases in their expenditure due to these trends. However, in the main, the challenges for smaller firms were weakening net new money flows and falling income. And, while many smaller firms sought to cut costs, the cost income ratios for large and small wealth management firms alike crept up last year. Indeed, the market trends pose the question whether cost income ratios in the region of 78% - 85% are the new reality for wealth management in the post-2008 era. The wealth management model of the future will need either global scale or a high degree of specialism. With this in mind, we would expect to see consolidation, particularly among mid-tier firms. Larger firms may also examine their international books to determine if they have the right scale, reach and margin to justify the enhanced regulatory risk, remarked Cath Tillotson, head of research and managing partner at Scorpio Partnership. Page 3 of 5
Figure 3: Cost income ratios by wealth manager type The Scorpio Partnership Private Banking Benchmark has been tracking the performance of the international wealth management industry since 2002. The report aims to cover the main performance indicators to monitor the success of the industry as a whole and its constituent parts. In the 2012 report, the data covers 201 wealth management institutions headquartered in Europe, the Americas, the Asia Pacific markets and the Middle East. ENDS For more information please contact: Sebastian Dovey Managing Partner Scorpio Partnership T: +44 20 7811 0120 E: seb@scorpiopartnership.com Catherine Tillotson Managing Partner Scorpio Partnership T: +44 20 7811 0120 E: cath@scorpiopartnership.com To download the full report please call us or visit www.scorpiopartnership.com Page 4 of 5
Embargoed to TK on TK Notes to the editors: 1. Scorpio Partnership is a London-based strategy and research specialist focused on the global wealth management industry. Over 15 years, the firm has gained international renown for creating innovative solutions to strategic industry issues. In addition to its industry benchmarking, Scorpio Partnership s unparalleled insight into this market is based on over 11,000 interviews with millionaires and billionaires and 14,000 professional advisors across 35 global wealth centres. 2. The Scorpio Partnership Private Banking Benchmark is the leading analysis of the international wealth management industry. Drawing on financial data from 201 wealth management entities worldwide, this year s study provides data by segment on key performance indicators: Assets under management Market share Distribution of international offices Net new money Income breakdown Deposits and loans as a percentage of assets under management Gross margins on asset management and banking business Expenses breakdown Cost income ratios Ordinary profits before tax 3. The upper tier wealth management firms have assets under management greater than USD20 billion and account for the top 50% of firms included in the Private Banking Benchmark. The lower tier firms are in the bottom 50%. 4. The report is available for purchase at a cost starting at GBP1,950 from Scorpio Partnership. For more information please visit our website www.scorpiopartnership.com. Page 5 of 5