CHICAGO--(BUSINESS WIRE)--Efforts by many US banks to offer more wealth-management capabilities are generally positive for diversifying earnings and increasing revenue per customer, as growth in core bank products remains tepid and net interest margins compressed, according to Fitch Ratings.
Wealth management, including advisor-based guidance and asset management, provides recurring sources of income and requires less capital usage than traditional bank loan products. Wealth management services can strengthen and make stickier relationships with good customers, which tend to provide additional deposit funding, as well as opportunities for cross-selling a bank's core products, such as mortgage lending.
Not surprisingly, many banks, as well as other financial institutions such as retail brokers and asset managers, have been bolstering their wealth management platforms over the last few years. This has included poaching financial advisory teams, boosting the hiring of financial advisors and acquiring wealth-management firms. One example of the trend is Chase Private Client, where Chase has re-formatted its branches with a focus on attracting wealthier customers through dedicated service teams and premium banking services.
Wealth management strategies tend to segment customers by investable assets or net worth. While banks tend to seek out the mass affluent and high net-worth market segments, many wealth management services are accessible to mass market banking customers.
We have also noted that several banks are investing in technology and tools to allow customers to track investments and make investment decisions through the bank's interface. Technology platforms and brokerage services are scalable and can help grow both assets under management and transaction fees. One example is Merrill Edge, Bank of America's platform to sell investment management services to the bank's mass affluent and mass market customers.
Regardless of which market segment may be targeted, we see wealth management as diversifying a bank's revenues away from its core interest rate-sensitive loan products. Some banks are also using wealth management to help subsidize traditional banking products.
While compensation costs tend to be higher in the high net-worth segment, banks are focused on having teams service clients in order to reduce their reliance on one advisor. To the extent that banks are successful with the shift, this strategy may help insulate performance over time.
With appropriate control of costs and management of the many compliance issues, wealth management businesses can help support a company's ratings. We believe the distribution force of wealth management can be a key competitive advantage, especially for larger firms. One risk, however, is the possibility that, as competition for advisors and wealthier clients heats up further, profitability may be marginalized.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.