Rich no more Asset managers see margins drop as competition bites

Traditional wealth managers, faced with growing competition from fintechs and cost-cutting by rich clients, are moving ever further away from pre-2008 profit levels.
Deutsche Bank's DWS: In no position to throw stones.

It’s a little-known fact that Germany is home to the third-highest number of dollar millionaires in the world. And according to a forecast by Swiss bank Credit Suisse, 2.2 million millionaires will live in Germany in five years' time — a 14 percent increase from today.

You’d think that’s good news for asset managers. Unfortunately, it doesn’t necessarily make for rich pickings. A new study shows that while the German market is worth around €740 billion ($912 billion) and growing by 5 percent a year, fierce competition is continuing to bite into profits.

"The profit margin will shrink to 10 basis points in 2018, marking the lowest level since 2007," predicts Felix Germann, a junior partner at McKinsey, which conducted the study. By way of comparison, the margin was 30 points before the outbreak of the financial crisis in 2008, and 17 points in 2015. No one is expecting a return to growing margins anytime soon.

That will make worrying reading for the bosses of Deutsche Bank, which is listing a 25 percent stake in its asset management arm DWS this month. It hopes to raise up to €2 billion.

Tobias Wolf, head of banking at Capgemini Consulting in Switzerland, blames customer behavior for the continuing pressure. "They act cost-consciously and above all, ask for products with low margins," he said.

The situation is aggravated by competition with fintechs. These new disruptors offer asset management products that are cheaply managed by algorithms rather than people, require low margins and force traditional banks to invest in similar digital products. And they’re popular: Fintech Liqid reached a volume of €200 million after just 18 months. To make matters worse, the cost burden on established banks could worsen in the face of increasing regulation.

The traditional German market is highly fragmented. The biggest commercial lender is Deutsche Bank, followed by Commerzbank, which according to McKinsey have €135 billion and €75 billion in assets under management, respectively. Next are privately held banks such as M.M. Warburg, Bethmann Bank, Berenberg and Metzler, all with less than €50 billion under management.

Figures show a tiny 1.8 percent average increase in the value of assets under management between 2006 and 2016.

With €10 billion about the limit for a profitable conventional operation, the number of players in Europe is set to contract. "The wave of consolidation among traditional private banks with subcritical sizes will continue, and we also expect fintechs to be acquired by traditional banks, as well as growing competition from new non-traditional competitors," said Mr. Wolf.

According to Markus Strietzel, a partner with consulting firm Roland Berger, financial institutions often go digital purely due to cost considerations. The systematic development of new revenue potential through disruptive elements is still of secondary importance.

Asset managers have certainly got their work cut out to attract more funds. Figures show a tiny 1.8 percent average increase in the value of assets under management between 2006 and 2016, meaning there’s plenty of scope for future improvement.

That’s particularly true in Germany. US and other European asset managers have long relied on "alternative investments" such as in private equity, hedge funds, real estate and infrastructure. In Europe overall, for example, these assets account for 8 percent of private banks' assets, but the number is half as much in Germany. Equities account for around one-third of the wealth managers' assets in their home market, fixed-income securities for 19 percent and cash or overnight money for 26 percent.

Peter Köhler is a Handelsblatt editor in Frankfurt, reporting on banks, private equity firms, venture capital and corporate funding. To contact the author: [email protected]