Wall Street is racing to manage your wealth. That is a good thing
The Economist: Leaders / 2023-09-07 10:59165
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"Where are the customers' yachts?" asks a wide-eyed visitor to Manhattan, after his host points out the bankers' and brokers' boats, bobbing by the pier. The scene, from a book published in 1940, reflects a healthy scepticism of the advice peddled by financiers. Somehow they always seemed to get rich, regardless of how their clients fared.
In the decades that followed, ordinary investors evened the score. They poured money into low-cost index funds, which passively track a market benchmark, and shunned the fee-charging stockpicker. BlackRock and Vanguard, two index-fund providers, oversee $8trn-9trn in assets apiece. In 2019 the volume of passively managed assets in America eclipsed those overseen by active funds for the first time. Today, however, another shift is under way. The hottest thing on Wall Street is wealth management, which helps clients allocate assets, minimise tax bills and plan for retirement—typically for an annual fee of 1% of invested assets. Firms are piling into the business, spurred by the prospect of profits that will only become juicier as the world gets richer. Could it be good for clients, too?
The wealth industry has long been highly fragmented. The über-rich often sought advice from the big banks, typically the Swiss ones—UBS claims to bank every second billionaire—or the elite American firms, like JPMorgan Chase and Morgan Stanley. In America and Europe many of the comfortably well-off long relied on defined-benefit pension funds. Others were often served by retail outfits that sold them expensive mutual funds on commission or picked stocks through brokerage accounts. Across Asia and Latin America, domestic banks often managed local millionaires' wealth.
Several of these firms are now being knitted together. That is in large part because the prize has become more tantalising. For the past 20 years global wealth has grown faster than economic output. Much of that has been fuelled by younger customers and those in Asia. According to a survey by ubs, there were 849,000 dollar millionaires in India last year, for instance, nearly 23 times as many as in 2000. The number of millionaires in Africa has risen more than tenfold. Worldwide, the amount of liquid assets for advisers to salivate over is expected to rise to $230trn by 2030, from $130trn today.
The emergence of slick platforms for managing wealth and the automation of basic advice have also expanded the pool of potential clients. By lowering the cost of managing wealth, technology has enabled advisers who once served only the über-rich to help the merely affluent, too. At the same time, regulatory requirements for banks to hold vast capital buffers in order to make loans or trade securities have reduced the appeal of the activities that commercial and investment banks once prized. The steady, low-capital business of offering wealth advice, meanwhile, has become more attractive.
The consequence of all this has been a frenetic rush into wealth management. Morgan Stanley, which snapped up the wealth arm of Citigroup during the global financial crisis, has since acquired E*TRADE, a brokerage platform, through which it now offers the masses access to its advisers. Citi, in a bid to rebuild what it sold, is poaching talent from rival firms. Consolidation is only hastening the trend. After its shotgun marriage to Credit Suisse, the new-look UBS is now head and shoulders above its rivals in Asia. Executives at JPMorgan Chase have said that their acquisition in May of the crisis-stricken First Republic, a bank that targeted the wealthy, will accelerate plans to expand their wealth-management arm.
For the firms and their shareholders, the future looks exhilarating. If revenues keep pace and margins in wealth management remain in the region of 25-30%, the industry would generate $75bn of profits a year. The total market capitalisation of global banks is around $8trn, and has barely budged for a decade; capturing the enormous opportunity in wealth would add around a seventh to their value. The biggest winners are likely to be those that have already achieved scale, such as Morgan Stanley and ubs.
Regulators, for their part, may see the shift into wealth as a relief. Bolting a steady growth business on to the boom-and-bust cycles of lending and capital-markets intermediation should help stabilise banks—even if it is a little disquieting that the most appealing business in finance is managing wealth that has already been amassed, not assisting the creation of fresh riches through loan-making or issuing equity.
That leaves a nagging question. Does the bonanza for financiers, and a safer financial system, come at the expense of clients' returns? The fees associated with wealth management might make you think that Wall Street is set to make a fortune while clients are ripped off once again. Yet there is an important distinction between a wealth adviser and an active manager.
The allure of stockpickers rests on their promise to beat the market, something that the vast majority simply cannot do on a sustained basis. Wealth managers, by contrast, act as "fiduciaries"—caretakers who are supposed to act in your best interest when offering financial advice. They make suggestions about asset allocation, but are also responsible for making sure their clients are using tax-advantaged funds and that they get into and out of investments in the most cost-effective way. Whereas returns from active investing, after fees, cannot beat passive returns on average, using a wealth manager does not appear to dent returns. Even Vanguard, that giant of index investing, thinks that fiduciaries could add a little to the total lifetime return of an average investor, after fees are paid.
Rich pickings
The investing experience is strewn with pitfalls, even aside from the vagaries of the markets. When left entirely to their own devices people tend to hold too much cash, and to be too hasty to sell up when markets dip. Barely anyone has the time or inclination to work their way through the mind-boggling complexities of a tax code. This is what makes advice useful to the clients who want to preserve and grow their hard-earned fortunes. Some day, customers' yachts may bob by the pier, too. ■
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