- LONDON (Reuters) - Rich investors
on both sides of the Atlantic lost $2.6 trillion -- or six percent of their
wealth -- in 2001's plunging markets, according to a survey.
- The mountain of assets wiped off in just one year is
roughly the size of the entire private banking industry in Switzerland,
where wealthy client assets managed by banks are estimated at between $2
trillion and $3 trillion.
"Few investors or regions were untouched by the destruction,"
said the benchmark industry survey published by global management consultants
Boston Consulting Group (BCG).
The survey gave no year-earlier comparisons, but said the drop in private
banking profitability was unprecedented in 2001, with 69 percent in the
United States and 34 percent in Europe, and there was no sign of recovery
in 2002.
The downturn has exposed some inefficiencies in a crowded industry full
of newcomers lured to the promise of easy profitability in a fragmented
market where the top 20 players account for only around 10 percent of managed
assets.
Brokerages were hit worst while larger banks that rely on fee income fared
better. Small, independent private banks including many in Switzerland
hurt more than their European counterparts with an average fall in profits
of 43 percent in 2001.
A wave of consolidation has already hit the Swiss scene, in particular
mid-tier institutions that have found it tough to go it alone and have
been forced into mergers or alliances.
Geneva private banks Lombard Odier and Darier have announced plans to merge,
as have family-owned Union Bancaire Privee and the Discount Bank and Trust
Company, a secretive Geneva private bank controlled by an Israeli family.
And unlisted Rabobank of the Netherlands recently bought a strategic stake
in Bank Sarasin after the Swiss bank's profits fell sharply.
RICH FALL ON HARD TIMES
The BCG, which surveyed more than 60 leading private banking firms representing
total assets of $3 trillion, said 2.3 million households around the world
slipped below a wealth threshold of $250,000 in net assets last year.
The rich are alarmed by the wealth destruction and are becoming risk averse,
shifting to cash and money market funds, it said.
The survey said costs in the industry rose by an average two percent in
2001 despite staff cuts and belt-tightening. The average cost to income
ratio for European wealth management firms deteriorated to 76 percent in
2001 from 2000's 67 percent.
"Most wealth managers have so far done surprisingly little to address
costs given their reduced revenues," the survey said.
"Many competitors are still assuming unrealistic levels of growth...Institutions
must actively manage their costs instead of focusing too narrowly on revenue
and asset growth," it said.
It said 2001 industry revenues fell an average 11 percent, commission income
21 percent and asset fee income eight percent while compensation costs
climbed one percent, marketing expenditure five percent and operational
costs two percent.
As many banks managing money for the rich scale back ambitious expansion
plans, bankers expect more job cuts.
Barclays Plc , Britain's fourth largest bank, has said it is mulling cuts
to private bank staff costs due to tough market conditions which banking
sources say could affect up to 15 percent of jobs in the international
business in London.
Coutts & Co, private bankers to the Britain's Queen Elizabeth, says
it is restructuring its London business to focus on profitable domestic
clients.
In May, Britain's loss-making Schroders Plc shed top private banking executives
and axed 19 jobs just a year after creating a private bank.
Citigroup Inc , the world's largest financial services firm, has recently
announced cuts in European private banking jobs. Germany's largest Deutsche
Bank has also taken the knife to its loss-making London private banking
unit.
The survey said many banks were pursuing unprofitable low-balance accounts.
On average, half of client accounts at most firms held balances below stated
minimums, it added.
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