A global wealth management study paints a sobering picture of the sector: It is growing, but profits are stagnating. UBS is a prime example of this development.

Since British consultants Scorpio Partnership published their first Global Private Banking Benchmark in 2013, the top spot has been reserved for UBS. In subsequent years, UBS remained the largest global wealth manager.

This year UBS again retains top spot with managed assets of $2.1 billion dollars, according to the latest report. For the first time, three Chinese banks cracked the top-25: China Merchants Bank, ICBC, and Bank of China.

Credit Suisse and Deutsche Bank Demoted

The rankings show two noticeable changes: Credit Suisse has been overtaken by the Royal Bank of Canada, slipping to 6th spot. Deutsche Bank meanwhile has slid from 10th to 16th place.

The rankings show what finews.asia has already hinted at, for example here: A strong US presence ist the key to size in wealth management. Following UBS in the rankings are the Bank of America, Morgan Stanley und Wells Fargo.

Minimal Profit Increases

Still, the crux of the Scorpio study, doesn’t lie in the size comparisons, but rather in the examination of profit growth among the 200 largest wealth managers.

This is next to zero. The report shows pretax profits rose on average by only 0.04 percent. This cannot lie with the growth in managed assets, since these have climbed an average 4 percent.

Difficult Profitization of New Money

The Scorpio results mirror in some respects the recent developments at UBS – as well as the Swiss private banking sector. The Zurich consultants IFBC also found in a recent study that profitability of Swiss private banks is steadily declining. 

The bottom line: banks are able to attract new money, but fail to invest them profitably.

UBS has only managed in recent quarters to increase pretax profits in wealth management. Previously one of its most important pillars had suffered a steady erosion in profits.

Costs for Compliance and Regulation

The main excuse in the sector for poor profits was the ever increasing cost of compliance. Globally active wealth managers especially were required to meet both national and supranational regulations.

Size however can also be an advantage. While smaller private banks have to shell out up to 10 percent of their earnings to meet compliance costs, the amount for large banks was clearly lower at around 3 percent.

Another large cost factor is the investment needed in modernizing information technology systems. At UBS these run to around 3 billion Swiss francs a year, or 10 percent of earnings.

DBS, which doesn't figure in Scorpio's top-25, is an example in Asia of heavy infrastructure spending under CEO Piyush Gupta only now beginning to pay off.

Focus on Advice and Clients

As these costs eat away at profitability, established private banks now face a fresh danger from digital wealth manager and robo-advisers. Their noticeably cheaper propositions are pressuring private banking fees considerably.

Scorpio director Caroline Burkart told the «Financial Times» (behind paywall) the challenge for most wealth managers is to clearly improve their profitability. This can be achieved through investment in the quality of advisors and improved customer experience.