Wealth managers around the world have learnt the hard way that they need to become more transparent but this will push up costs, prompting further consolidation in the crisis-hit sector.
In the year following the collapse of Lehman Brothers, volatile financial markets, a crisis of confidence sparked by the $65 billion Madoff fraud of mainly rich investors and the sudden erosion of bank secrecy have wreaked havoc on cozy private banker-client relationships.
The biggest impact for the wealth management industry has been the shattering of confidence in financial services providers, said Catherine Tillotson, Scorpio Partnership Head of Research. Clients really want to know what is going into their portfolios.
What this increase in client demands and the need for better transparency mean for the industry in terms of competition, costs and consolidation will be among the issues addressed by bankers speaking at the Reuters Global Wealth Management Summit, which kicks off in Geneva, Singapore and New York on October 5.
Private banks will have to give clients better and more detailed investment advice and tighten internal tax compliance rules, if they are to capture expected growth in global wealth.
There is a sea change, a fundamental shift in the private banking industry, which revolves around transparency, said Steve Crosby of PricewaterhouseCoopers in New York. This includes access to information, understanding the location of assets, role and visibility of custodians and local agents.
Rich clients, many of whom had paid little interest to the day-to-day fluctuations of their fortunes previously, are now demanding to know more about how their money is invested and how quickly they can liquidate investments if necessary.
All this requires wealth managers to spend more on research, knowledge and advice at a time when clients are shying away from complex products and looking to pay lower fees.
Compounding this, clients have pulled out money at alarming rates or transferred it from actively managed funds to low-risk but low-margin assets like treasuries or cash.
And stricter regulation, particularly of tax avoidance, is placing an additional burden on already compressed bank margins.
Formerly the world's largest wealth manager, UBS lost its crown to the merged Bank of America/Merrill Lynch following massive outflows after it lost billions of dollars in the subprime crisis and a tax and client secrecy dispute with U.S. authorities dented its reputation.
The recent public debate has narrowed down cross-border to just one topic: taxes, said Walter Berchtold, who heads Credit Suisse's wealth management arm. There are increasing costs from new regulation. We have to take a lot of measures to implement them, which impacts our net margins.
Scorpio's Tillotson said better transparency would be expensive and that she expected gross margins, excluding bank lending, to fall to an industry average of 104 basis points from 107 at the end of 2007.
There will be a lot more focus on investor education, that comes at a cost, Tillotson said.
Further challenges will come from expected consolidation of the sector, with large financial institutions that received state aid in the crisis already starting to sell their wealth management arms.
This is the case of ING, which is negotiating the sale of Swiss and Asian private banking assets, and of Commerzbank, which sold two Swiss units, and now smaller wealth managers could end up as takeover targets.
A coordinated attack by G20 nations has forced offshore financial centers to agree to share more bank client data with foreign tax authorities, making life even more difficult for some smaller players already struggling with thinner margins and increased transparency expectations from clients post-crisis.
Some institutions -- especially smaller ones -- may not be able to offer declarations that exceed a simple overview of assets and that meet the requirements of tax authorities, said Boston Consulting Group (BCG) experts in a recent study.
The erosion of bank secrecy is also forcing banks to review their business models for offshore clients and refocus on growth in emerging markets instead of stashing away money for U.S. and most European clients.
Wealth managers in traditional offshore centers will only be able to attract these new clients with high-quality service and expertise, backed by political and financial stability.
Institutions in established offshore centers such as Switzerland will also need to accentuate the strengths of their home markets -- and not simply as a destination for offshore assets under management, the BCG report said.
(Additional reporting by Martin de Sa'Pinto; Editing by Hans Peters)