Are You Ultrarich, Rich or Merely Affluent? It Makes a Big Difference for Your Bank
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Scale is crucial in the wealth-management business, but it needs to be the right kind of scale.
Managing money for the rich is today’s golden goose in banking, because it generates stable fees and has low capital requirements. Many are eager to ape Morgan Stanley, which has become a wealth mammoth following the acquisition of Smith Barney from Citi in 2009, and later Eaton Vance. Its American wealth business, which now amounts to $4.6 trillion in client assets, is so large that it yields a 29% pretax profit margin, according to estimates by Anke Reingen at RBC Capital Markets.
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Meanwhile, the U.S. wealth arm of its main global competitor, UBS, only has $2 trillion in client assets and a 12% margin, even after merging with Credit Suisse last year. Globally, it has $4.3 trillion in assets and a 21% margin.
The U.S. is a difficult market for outsiders to penetrate. Top banks have a 48% market share, figures by Coalition Greenwich show, compared with a 32% world average. Retaining financial advisers is expensive, because they are increasingly thriving by going independent.
This week, executives at the Swiss bank told staff that the business will be restructured, and that a new division will focus on less-wealthy individuals. Recently, UBS Chairman Colm Kelleher, formerly of Morgan Stanley, opened the door to eventually growing through acquisitions.
Yet catering to the ultra-rich, the rich and the merely well-off are very different propositions.
The financial industry usually places the cutoff between “ultra-high net worth” and “high net worth” or “affluent” at $10 million in investible assets. Below that, in the bracket between $100,000 and $1 million, are the “mass affluent.” According to credit-reporting agency Equifax, 35% of U.S. households count as mass affluent, and 10% are above that. But in terms of assets, the mass affluent account for just 27% of investible wealth, while the top 10% of the population accounts for 70% of it.
Though some mass-market brokers such as Schwab have gone upscale, high net worth remains mostly the turf of the likes of Morgan Stanley, JPMorgan, Citi and UBS. These clients pay big bucks for bespoke, one-to-one services. Of those, 59% are retired or pre-retired, compared with 48% of the mass affluent, and their needs are geared toward tax optimization and inheritance planning.