Barclays’ revelation this week that it would consider buying a US wealth management company has provided the latest indication of how highly sought after such operations are in the current financial turmoil. However, despite the lure of wealth, profiting from high net worth clients is not easy, and success will depend on good strategies and excelling at the basics.
Barclays’ president Bob Diamond said this week that the bank would consider buying a US wealth management company to kick-start its growth plans in the country. Barclays has a large wealth management business in Europe and Asia, and its latest revelation underlines how highly prized wealth management operations are in today’s banking environment, particularly in light of the problems within investment banking and outflows from asset management.
It will be interesting to see whether Barclays and other potential buyers find willing sellers for wealth management businesses. Datamonitor’s tracking of M&A activity shows precious few deals in wealth management during the first half of 2008, and the banks at the forefront of the sub-prime write-downs seem firmly attached to their wealth management arms. Even UBS, which last week announced the separation of its businesses into three autonomous units amid a rethink on the universal model, was at pains to stress that its wealth management business is a core part of its operations.
However, potential buyers in the market must be aware of the realities of the wealth management market. “While private banking may not be exposed to the risks and wild fluctuations of the investment banking and asset management businesses, it is not an easy area in which to make money”, says Stuart Rutherford, senior financial services analyst at Datamonitor. “Indeed, wealth management is a competitive market which goes through cycles, and its relationship-based nature means that those active in the space can suffer serious client withdrawals – as UBS has found out.” The good historic performances of the private banks were due, in large part, to the excellent market conditions that prevailed, but the market has now changed significantly.
Those that are to succeed in this changed market must have clear plans for mitigating the effects of the negative market cycle. Critically, they must understand that wealth management is a service business, and that they need to excel at the basics, like retaining staff and communicating with clients. Communication is particularly crucial in times of market volatility, and where this is not part of the bank’s DNA, structured communication processes need to be put in place.