Money management may be dull, but it’s a coveted kind of dull. UBS (UBS) is cutting back on investment banking as it focuses on overseeing wealthy clients’ assets. Goldman Sachs (GS), JPMorgan Chase (JPM), and Wells Fargo (WFC), three of the five biggest U.S. banks, say they’re considering expanding their asset-management divisions. They’re looking to grab market share from fund companies such as Fidelity Investments. “Asset management is a terrific business,” says Ralph Schlosstein, chief executive officer of Evercore Partners (EVR), a New York-based boutique investment bank that last month agreed to buy wealth manager Mt. Eden Investment Advisors. “Asset managers earn fees consistently without risking capital. Compare that to other businesses in the financial services.”
Investment banking and trading revenue at the 10 largest global investment banks fell at least 17 percent in each of the past two years, according to data from analytics firm Coalition. The total money overseen globally by banks has consistently hovered at about $58 trillion for the last five years, meaning managing investor money accounted for a greater percentage of fees. The median share of net revenue from asset and wealth management for a sample group of banks tracked by consulting firm Johnson Associates increased to 28 percent in 2012 from 23 percent five years ago. The share contributed by trading declined to 43 percent from 49 percent over the period, and investment banking fell to 14 percent from 15 percent.
Even if banks attract new wealth-management clients, they may not mitigate the impact of upcoming Basel III capital requirements, which will cut into the profits firms make from leveraged trading. It’s also unlikely to replace revenue lost once the Volcker Rule, which limits proprietary trading, is in place. Money management does have advantages: Funds produce steady fees, with most of the risk assumed by investors. “It’s not hard to see the appeal,” says Neel Kashkari, formerly a Goldman Sachs investment banker and U.S. Treasury assistant secretary who now heads global equities at Pimco. “But some banks have struggled in the business because of a short-term view,” he adds, referring to banks’ tendencies to prioritize quarterly returns over long-term interests.
To attract investors, banks will need to improve their middle-of-the-pack performance as fund managers and overcome the perception that they push their own funds at clients’ expense. “Culturally, asset managers have not been a good fit within banks,” says Jay Horgen, chief financial officer of Affiliated Managers Group (AMG), a Beverly (Mass.)-based firm that holds stakes in more than two dozen money managers. “It’s a business model that requires an investment structure which recognizes value creation and operates across generations of existing and future partners, and banks just don’t have that in their tool kit.”
As investors have turned away from stock funds in recent years, they’ve deposited about $1 trillion into fixed-income investments since 2007, according to data from the Investment Company Institute. Most money is going to passively managed funds, largely those that track indexes, and top performers. Shrinking the pool of funds available to actively manage poses a challenge for banks seeking to expand.
Still, it’s a tempting business. The Standard & Poor’s (MHP) index of asset managers and custody banks has a return on equity of 13.1 percent. That compares with an average return on equity of 8.3 percent for firms in Keefe, Bruyette & Woods’s (KBW) benchmark bank index, half of what it was in 2006 before the onset of the credit crisis, according to data compiled by Bloomberg. JPMorgan Chase, which last year became the first bank to crack the list of the 10 largest U.S. stock and bond mutual fund managers after more than doubling long-term assets since 2008, had planned to spend more money on sales and marketing in 2012. In February, Mary Erdoes, CEO of JPMorgan’s $1.4 trillion asset-management division, said at the firm’s annual investors’ day conference that it has “heavily invested in this business in order to set ourselves up for much future growth in the years to come.”