Recent strategic moves by large U.S. banks to expand wealth management franchises highlight the growing focus on revenue and business model diversification, as margins across various segments erode and volume/scale becomes increasingly important, Fitch Ratings says.
Diversified business models with lower earnings volatility are viewed positively; to the extent acquisitions lead to less reliance on volatile capital-markets related revenue and increase the scale of low capital, higher-margin businesses would be supportive of bank credit profiles.
Examples of wealth management expansion include Goldman Sachs (GS) and Morgan Stanley (MS), although with some marked differences in overall approaches. GS is looking to further expand Marcus, its deposit-gathering platform launched in 2016 that offers savings accounts and unsecured personal loans, through Marcus Invest, a low-cost app-based platform targeting customers beyond its historical ultra-high net worth customer base.
It will initially offer checking accounts to gain retail client relationships, as seen with more traditional banks and retail brokers. In 3Q19, GS also acquired United Capital Financial Partners, a U.S.-based private wealth manager with $25 billion in AUM and 220 financial advisors in 90 offices, to broaden its wealth management offerings.
MS’s wealth-related strategy has been maturing for a longer period compared to GS’s, with the firm taking more of a vertical approach through acquisitions in wealth management, such as its 2020 purchase of E*Trade. It will take time to determine the relative success of the E*Trade acquisition and its integration.
However, MS has successfully acquired and integrated wealth-related platforms, such as Smith Barney. In 2019, MS also acquired Solium Capital, an administrator of employee stock plans for 3,000 corporate clients with over one million employees, to further expand its wealth management business.
Over the past several years, other large banks such as JPMorgan (JPM) and Bank of America (BAC) have also built out their tiered wealth platforms from private client segments to more mass/mass affluent customers through the You Invest and Merrill Edge platforms, respectively.
These businesses are platforms to deepen mass/mass affluent client relationships to generate more profitable returns. While explicit data related to these platforms are limited, they are franchise additive and have allowed JPM and BAC to maintain a stronghold on the consumer market in the U.S.
These moves into wealth management are likely meant to counter inroads made by traditional retail brokerage firms over the past several years, as evidenced by dominance in the mass affluent space by firms such as Charles Schwab, which has a target market of $50 trillion, according to the company.
The competition between big banks and traditional retail brokerage firms, such as Charles Schwab, TD Ameritrade and upstarts such as Robinhood, is expected to continue, which will fuel the need for further investment in online/app-based platforms and likely result in further consolidation in the industry as scale plays an increasingly important role.
