Fleeing clients are a grim reality in banks' push to manage wealth

London

MANAGING money for the wealthy - once touted as a panacea for banks burned by investment banking's cutthroat rivalry and lenders' smothering capital requirements - is proving to be anything but. UBS Group AG, the world's largest wealth manager, predicted lower revenue from its asset management and wealth divisions in coming weeks after seeing US$13 billion yanked during the final months of 2018. Credit Suisse Group AG signalled that its assets under management were resilient during the recent equities meltdown, but warned it's been a "very difficult quarter."

The news stunned investors used to steady results from UBS, which was the first European bank to pivot away from volatile investment banking after the financial crisis, and towards the business of wealth management. The Swiss bank has since become a model for rivals lured by a steady business that allows them to put less of their capital at risk. But that promise has given way to the grim reality that they're not immune to violent market swings.

Even before the market meltdown, the competition for managing fortunes had been fierce. The uber-wealthy are increasingly turning to family offices to manage their billions, while on the lower end of the spectrum, clients have turned to the same types of cheaper products that have chipped away at the profits of traditional money managers.

Those shifts have made the richest clients the most prized targets. But while the pool of billionaires has roughly doubled from a decade ago to more than 2,000 worldwide in 2017, according to data from UBS and PwC Billionaires Insights reports, that swelling cohort is still a relatively small universe, adding to the rivalry between wealth managers.

The changing landscape is making it harder for financial firms in the business. "When I look at net new money dynamics - make no mistake - it's a disappointing outcome," UBS chief executive officer Sergio Ermotti told reporters in Zurich on Tuesday. Even the world's biggest money manager hasn't been insulated from changing investor preferences.

Clients abandoned actively managed funds at BlackRock Inc, the world's biggest money manager, and instead poured a record US$81 billion into less expensive passive products at the iShares division during the market rout. The swing in fortunes appears to have prompted the New York-based firm to re-evaluate its business: BlackRock last week announced plans to cut 3 per cent of its workforce.

In the US, the world's largest market for asset management, investors pulled US$174 billion out of active equity funds last year as stock pickers struggled to outperform their benchmarks, extending a rout that saw US$207 billion in withdrawals the previous year.

Meanwhile passive mutual funds drew US$207 billion in 2018, according to a Morningstar report last week. Mr Ermotti, who oversaw UBS's shift away from investment banking following the global financial crisis to focus on managing money for the rich, last year pledged to drive up wealth-management profit. But the firm for now remains vulnerable to market volatility, with clients withdrawing almost US$8 billion at a key global wealth unit in the fourth quarter, and another US$5 billion from asset management.

That's likely to have made crosstown rival Credit Suisse a little nervous. Under CEO Tidjane Thiam, the smaller firm has shifted its focus in recent years from more volatile trading in favour of wealth management, slashing thousands of jobs and tapping shareholders for billions of Swiss francs of funding during the restructuring. The firm is planning to sell more equity derivatives to wealth-management clients and has hired more than 50 additional staff in that area, according to an investor presentation on Dec 12.

Mr Thiam on Tuesday said in an interview from Davos that assets at his firm have been "resilient". Private banking has been a bright spot of his turnaround, with new money and higher profitability helping offset weaker returns at its main trading unit.

Still, investors will be watching closely when his firm reports fourth-quarter earnings next month. The bank continues to attract inflows at a healthy clip in wealth management, adding about 100 billion Swiss francs (S$136 billion) since the beginning of the restructuring, it told investors in December. It now manages about 785 billion Swiss francs, profiting as global wealth nearly doubled in the past decade. BLOOMBERG