Private banking

Rising regulation squeezes wealth managers’ profits

Compliance costs now consume a quarter of wealth managers’ budgets, finds a new report.

Ballooning regulation has wealth managers scrambling to keep pace with changes and allocating an ever-growing portion of their budget to cover compliance costs.

Wealth managers in the Americas are now spending a quarter of their operating budgets on compliance costs according to a report by consultancy Capgemini and RBC Wealth Management a unit of Royal Bank of Canada.

In Asia, the regulatory burden has swollen to a similar proportion said RBC Wealth Management’s Asia head Andrew Turczyniak at a conference in Hong Kong on Wednesday.

Hefty compliance costs are partially offsetting the profits to be made from servicing the world’s swelling ranks of millionaires. One million individuals joined the global high net worth population in 2012, which reached 12 million, reflecting an increase of 9.2%.

Wealth management firms will need to invest in compliance for years to come, resulting in continued pressure on already high cost-to-income ratios and constrained profitability, the report said.

In Asia, where wealth managers have to navigate a myriad of regulatory regimes, cost-to-income ratios are often over 80% according to industry professionals. Compliance costs are driven by paying for legal and regulatory expertise as well as building and maintaining technology infrastructure. There is also the hidden cost that time spent on studying the implications of the latest change in rules is time away from building relationships with clients.

Some firms are even opting to exit markets due to the costs or complexity of compliance, while small and mid-size firms are struggling due to lack of scale, according to the report.

Even in the Asia-Pacific region, where wealth is growing at one and a half times the global average at 9.8%, many private banks are rethinking their business models.

Morgan Stanley sold its Indian wealth management business to Standard Chartered; Bank of America Merrill Lynch hived off its wealth management division to Switzerland’s Julius Baer; and HSBC sold its Japanese private banking arm to Credit Suisse.

One bright spot for beleaguered budget managers, the research also showed that clients increasingly want to communicate with their bankers electronically rather than face-to face, which reduces the cost of service. A preference for digital contact was particularly marked in Asia excluding Japan.

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