The largest wealth managers emerged from the financial storms in 2011 in more profitable shape than their smaller peers, with the 20 largest firms seeing cost-income ratios on average falling slightly from the year before, according to Scorpio Partnership.

The largest international wealth managers emerged from the financial storms of 2011 in more profitable shape than their smaller peers, with the 20 largest firms seeing cost-income ratios on average falling slightly from the year before, new data shows.

The report, by the Scorpio Partnership consultancy, also showed a big jump in the top-20 rankings for Citigroup, moving from 20^th to 13^th. In first place is Bank of America, with UBS in second place and Wells Fargo in third, with Morgan Stanley fourth and Credit Suisse in fifth. The cost-income ratio for the 20 largest firms was 78 per cent, down from 79 per cent in the previous year. For all banks, the average ratio was 79 per cent. Swiss banks had an average ratio of 81 per cent.

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Scorpio produced the results in its annual Private Banking Benchmark of the global wealth management industry. The figures are drawn from 201 financial entities.

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, Scorpio said.

Besides the five firms already mentioned, the others in the list, starting in sixth place and in descending order to 20 were: Royal Bank of Canada; HSBC; Deutsche Bank; BNP Paribas; JPMorgan; Pictet; Goldman Sachs; Citigroup; ABN AMRO; Barclays; Julius Baer; Nothern Trust; BNY Mellon, Crédit Agricole, and Lombard Odier Darier Hentsch.

Profits

Among the upper tier, ordinary pre-tax profits rose 17.91 per cent year-on-year; expenses rose 3.47 per cent; income rose 3.81 per cent; net new money rose 16.07 per cent and assets under management rose by 0.87 per cent. For the lower tier on the Benchmark, AuM rose 0.82 per cent; there were net outflows of 137.3 per cent; income fell 8.53 per cent; expenses fell 3.39 per cent and ordinary pre-tax profits rose 11.7 per cent.

“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,” the report said. “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,” it continued.

“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,” it said.

“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,” said Sebastian Dovey, managing partner at Scorpio Partnership.

Assets under management

Assets under management for the sector as a whole held level, with the average percentage change being up 0.61 per cent versus the previous year. There was little movement among the top 20 wealth management providers by assets under management.

Citigroup has moved from 20 to 13 in the ranking as this year Citi has reported assets under management for all fee-based accounts greater than $1 million for the first time since the joint venture deal between Smith Barney and Morgan Stanley.

In line, Scorpio reported results for Morgan Stanley that relate to accounts greater than $1 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.

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

Among the upper tier wealth management firms, the average percentage change in expenses was 3.47 per cent. 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 per cent from $1.76 billion at the end of 2010 to $2.08 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,” the report said.

“The market trends pose the question whether cost income ratios in the region of 78 per cent – 85 per cent are the new reality for wealth management in the post-2008 era,” it added.