How can a business of any type, in any location, and however large, kiss goodbye to around USD400 million of annual revenues at one shot? Well, US online brokerage and wealth management giant Charles Schwab Corp. did just that earlier in October when the firm escalated the industry’s ongoing price war by scrapping most of its brokerage fees to zero for regular investor customers on US stocks and ETFs. The bet is evidently that those customers will stay with the firm, bring new funds in and a horde of new customers will also arrive at the turnstiles.
When customers bring new money, or new clients arrive, they bring money, and that money sits on deposit if not invested, meaning that brokerages such as Schwab can earn more interest on those funds. Even with interest rates so abysmally low, a tiny return on hundreds of billions of funds can offset or possibly even outweigh the annual loss of brokerage income. Bloomberg reported at the time of the announcement that over half of Schwab’s net revenue comes from interest earned on its assets, that the firm oversaw USD3.72 trillion of client funds at August 31 and took in almost USD20 billion in net new assets that month alone.
In fact, rival TD Ameritrade Holding Corp quickly reacted with its own brokerage cuts. And Fidelity Investments, the largest US online brokerage, also followed Schwab’s move shortly after, slashing commissions for online trades of US stocks, ETFs and options, also apparently hoping that the ‘race to zero’ will be countered by incremental inflows, greater customer retention, and migrating investors to higher-return products. And Bloomberg reported that Vanguard Group and JPMorgan Chase & Co. had all this year taken steps to eliminate fees and commissions on some offerings.
For Schwab, the move will, reportedly, cut about 7% of its net revenues, but as the move also forces reactions from its competitors, the gamble is clearly that the move is net positive for the future. Moreover, as Bloomberg also reported, the upside is enhanced revenues from securities lending, charging asset managers fees to offer their funds, and advisory services.
Industry insiders argue that Schwab’s actions might be a very clever, defensive move or at best a potential destructive weapon against its direct competitors such as e-Trade, TD Ameritrade and others, who have far larger proportions of their revenues from brokerage.
Looking across to the world of wealth management in Asia, does this move frighten the incumbent private banks? Well, in fact this type of move by Schwab and others is more inevitable in a market that is as homogenous as the US, where local investors can buy local shares that offer global exposure, and also local funds and ETFs that allow them to diversify across the world.
Asia however is very far from homogenous, and HNWI investors in the region are increasingly diversified across all asset classes and across many countries and regions, hence building their portfolios and handling the many cross-border requirements is always going to be more demanding, and therefore require a considerably less commoditised offering, bridging many different regulatory jurisdictions, markets, and currencies.
Experts also note that in Europe or Asia, even at ‘Prime broker’ levels at the upper end of institutional trading, counterparties still charge single digit basis points for custody and trading. And for the retail or HNWI markets, reasonably healthy commissions still prevail. Moreover, there is still a sentiment that amongst HNWIs in Asia, while they are cost-conscious, they are prepared to pay reasonable commissions for a good quality custodian and execution service.
Nevertheless, should such a race to zero infiltrate Asia, there are clearly major dangers, as the wealth management firms, and the private banks do not have either enough AUM or enough critical mass of clients to easily weather that particular storm.
Moreover, the jury will remain out for a good number of years to come on the dangers posed by the new ranks of trading platforms pushing into Asia and the ‘digital’ banks, for example the new ranks of virtual banks in Hong Kong and Singapore. Of course, they will only be able to move into wealth management on permission from a vigilant, some might say protective, Asian regulatory environment, but it is almost inevitable they will do so, eventually.
The backdrop of the brokerage wars in the US will therefore undoubtedly force the hands of the private banks and other wealth management businesses in Asia to accelerate their drive to diversify their revenues.
Insiders estimate that the private banks in Asia earn the majority of their revenue from transaction-based client activity, perhaps 50% or even more, besides lending and deposits. The banks have been working hard – in some cases assiduously and occasionally effectively - to drive their clients more towards discretionary portfolio management and/or advisory, as well as further developing their structuring and estate planning expertise to help retain clients and diversify revenues.
Additionally, technology vendors are seeing an acceleration of the race towards digitalisation, as banks and other firms strive to enhance their HNWI offerings and democratise wealth management to categories of customers that would in the past not have been able to access some of the bespoke solutions that are gradually being offered through the latest digital platforms and AI-enhanced robo-advisories. Witness, for example, what DBS in Singapore has been trying to achieve of late with the digiPortfolio through its digital DBS iWealth platform.
But technology, IT solutions and software vendors and fintech’s also have concerns that the banks are too slow to react and too cumbersome in their management approach, trying to slap solutions on top of ageing core systems, rather than looking more holistically at the requisite steps to truly revolutionise their capabilities.
And away from technology, is the private banking industry in Asia still not dragging its feet in offering their clients access to some of the best funds and best ETFs at lower entry costs? Even today, there are reportedly many HNWIs that are put by their advisers and private banks into the retail stock of mutual funds, rather than the far lower entry points for institutional clients, whereas the private banks could easily aggregate investors to obtain those lower entry costs, or use their global clout to negotiate with the funds.
The danger in Asia is also that many of the international private banks are led by leaders who come out to Asia for a few years, then move back home or to another market, without grasping the medium to long-term nettle of change that is require to dynamically rebalance their businesses for longer-term health. This means that they are not making the necessary investments in either digital, or in building new business line expertise that will help these businesses diversify and expand their markets.
Moreover, there is a continued reluctance even today amongst some of the smaller to medium-sized private banks to use third party solutions, for example external platforms, to offer their clients both a more efficient service and also a lower cost.
These banks appear to believe that building and expanding their own platforms is the way to achieve economies of scale and efficiencies, whereas many vendors argue that optimising the use of capital and manpower through smart third-party offerings is the more advisable way forward for all but the very biggest global banks.
But as many insiders will attest, there are often many resistance points internally at these banks and many vested interests that will continue to impede the transformation of the private banking models. Consequently, they all too often stumble on, knowing perhaps that the inevitable day of reckoning will come, but hoping beyond hope that it is not on their watch when that day comes.
Hubbis is making no attempt to be judgmental. Our role is to act as a filter for the wealth management industry in Asia, to act as an impartial conduit for the many disparate and often conflicting views from the industry experts. Our hope is to encourage a vigorous wealth management industry, well positioned to enjoy the fruits of what is the world’s most dynamic region in terms of private wealth accumulation. And to do so, we have a very strong impression, garnered from our deep insights into this industry and long knowledge of this region, that a more proactive approach and robust thrust towards smart positioning is essential to survive and thrive in the future.