Large trust banks could be among the beneficiaries as consolidation continues in the private banking and wealth management sector.
Analysts and executives said that they expect smaller financial services companies to continue to divest ancillary wealth management businesses as costs continue to escalate.
C. Steven Crosby, the U.S. leader of PricewaterhouseCoopers LLP's private banking and wealth management practice, said that companies willing to adapt to changing market conditions will eventually have the largest wealth management businesses.
"Firms that embrace transparency, refine their operating models to be more tactically nimble and embrace different technology to help financial advisers stand to benefit," he said during a webcast this week. "Some of the smaller firms that have motored for years will have a hard time making the necessary investments to transform their businesses, and they will become acquisition opportunities going forward."
David F. Lamere, the chief executive officer of Bank of New York Mellon Wealth Management, said that the Boston unit of Bank of New York Mellon Corp. could buy a private banking company or a wealth manager if the right deal came along. "We are really agnostic on the size of the firm we'd buy. We are focused on quality," he said in an interview. "If there are bigger opportunities, we think that we are a firm that has the capabilities and the capital to make a deal that could scale if we saw a deal that had the right advantages for us."
Ronald Logue, State Street Corp.'s president and chief executive officer, has said that the Boston company is interested in arming itself with enough capital so that it can make acquisitions next year. He said in an interview last month that State Street wants to acquire in Europe next year and add business in the Asia-Pacific region.
Lamere said he does not expect the revenue pool for wealth management to continue to grow at the pace it has over the past few years and that will "spur a lot of companies to rethink" whether or not they will to continue to invest in wealth management. "Companies are apt to realize that asset management is not core to what they do," he said. "They are going to discover that they have capital needs for other things and consolidation is the likely outcome."
Costs are increasing rapidly for wealth managers, and Crosby said "the elephant in the room" is regulatory expense. He said the higher cost of risk management "will force wealth managers to refine their approach" or force them out of business. "We think that this will herald consolidation and change in the industry because some organizations can't keep pace and retain clients or keep up with new regulatory demands," he said.
Analysts said large trust banks won't be the only beneficiary. Large insurance companies and even the independent channel will gain customers.
"The breakaway broker can still succeed," said J. Gibson Watson, president of Prima Capital Holdings Inc. of Denver. "By using an open architecture array of products, advisers can still succeed in the independent channel."
According to PricewaterhouseCoopers' annual report on private banking and wealth management that was released Monday, 60% of financial advisers have "embraced" open architecture and only 4% think that all product sales should be proprietary.
PricewaterhouseCoopers projects "single-digit" growth for financial advisers in the United States, but a 24% decline in financial advisers globally in the next year. Crosby said retaining the right financial advisers will be critical, but according to PricewaterhouseCoopers' survey of 400 wealth management and private banking executives less than 20% of advisers are considered "high caliber."
For wealth managers to remain competitive, Crosby said it is critical to retain experienced advisers.