PwC's report earlier today - as reported by this publication - set out challenges for the wealth industry. One issue is consolidation; yet despite expectations, M&A has not been as strong as some predicted. What has happened?
With all the turmoil since the 2008 credit crunch, it might be surprising to focus on what did not as well as what did happen as expected in that extraordinary period: namely, the failure of an predicted wave of wealth management mergers and acquisitions to materialise.
Yet at PricewaterhouseCoopers, the consultancy that earlier today issued its statement on its bi-annual survey on the global wealth management sector, its findings indicate a wide and persistent expectations gap between firms’ predictions of industry consolidation, and a far less dramatic reality. (To see the main report about the PwC findings, click here).
For example, in 2009, 34 per cent of wealth management executives questioned by PwC said there would be significant consolidation in this notoriously fractured business over the ensuing two years. Two years on, that confidence has waned only slightly: 30 per cent expect significant M&A.
Certainly, when the credit crisis exploded in 2008, there were a spate of fraught shotgun marriages, such as Bank of America’s purchase of Merrill Lynch, Wells Fargo’s takeover of Wachovia or Commerzbank’s forced sale of Kleinwort Benson (under the conditions of German state aid for Commerzbank). Jeffries Putnam Lovell, the US investment firm, said 2008 witnessed the second highest amount of M&A deals, with 217 compared with 242 in 2007, with assets under management transacted of $1.99 trillion. 2008 was poor for deal value, however, at $16.1 billion, tumbling from $52.1 billion in 2007. Scorpio Partnership, the wealth management consultants, reported in March last year last year that deal activity - mainly on European and Asia-Pacific – amounted to $20.2 billion in value in the fourth quarter of 2009. And there have been a number of boutique-size independent advisory firms merging in the run-up to the UK regulatory programme known as the Retail Distribution Review.
But over the past two years, there has not been anything like the heavy M&A activity that some predictions implied.
Some recent potential deals simply ran out of steam, such as the much-reported talks between Liechtenstein’s LGT to buy BHF from Deutsche Bank, which wanted to spin off that business following Deutsche’s purchase of Sal Oppenheim a year ago. Part state-owned Royal Bank of Scotland and Lloyds Banking Group in the UK have wealth management arms, but these institutions have so far squashed suggestions of any wealth unit sales.
Harder than it appears
Getting wealth management marriages to work is much harder than some people may assume, Jeremy Jensen, PwC Global Private Banking and Wealth Management, EMEA leader, told this publication. (The full document will be made available first to PwC clients from Thursday this week).
“It [wealth management] is a people business. There are legacy processes to consider; getting consolidation right in this sector is a challenge,” Jensen said. The 57-page report adds: “More than 60 per cent of our respondents told us they had observed moderate consolidation over the past two years. Going forward more than 30 per cent of our respondents felt that there would be significant consolidation over the coming two years.”
It added: “The challenge of post acquisition change in a people-oriented relationship business should not be underestimated.”
An issue that can arise is ensuring staff whose firm is taken over can be retained if the corporate culture changes. Another factor is that firms are more focused on internal issues such as costs and managing books of business than looking to spend money on acquisitions with all the associated intregration costs. And many studies of M&A, not just in financial services, conclude that such corporate activity destroys rather than builds shareholder value.
Wealth managers expect their industry to be more profitable in future. ”While our respondents earn an average gross margin of 72 gross basis points on their assets under management, they expect this will increase to 78 bps over the next two years,” the report said.
A notable finding of the report, Jensen said, is that the most efficient, profitable and client-friendly wealth management firms came from a variety of business model: one in ten firms achieved 10 per cent-plus revenue growth and nine per cent had a cost-income ratio of under 60 per cent.