Wealth Firms Face Reckoning in Coronavirus Outbreak–Report
The coronavirus crisis will erode wealth managers’ profit margins and test client loyalty, but resilient advisors with strong marketing skills and good technology can make inroads amid the chaos, according to Boston-based consulting firm Aite Group.
“Investors will broadly re-examine their portfolios, probably experience frustration in this market, and there will be a lot of assets in play for advisors to capture from those who are disenfranchised,” he said.
O’Gara, who coauthored a new Aite report titled “COVID-19: Challenges and Opportunities in Financial Services,” warned, however, that firms and advisors that have migrated to fee-based rather than transactional commission models will inevitably be hammered by the sharp market declines of the last two weeks. Advisors at smaller firms that are more high-touch with less liquidity “to carry on through the crisis” are most vulnerable, he said.
The scenario for financial companies is further undercut by the Federal Reserve Board’s dramatic series of rate cuts that squeeze spreads they can earn from customer deposits.
In the short term, to be sure, some large financial institutions may appear untouched. Credit Suisse said in a regulatory filing Thursday that “private banking revenues so far this quarter are up compared to the same period last year, benefiting from higher transaction revenues.”
Thomas Gottstein, the Swiss bank’s new chief executive, added during a virtual Morgan Stanley European Financials Conference on Thursday that pretax income throughout the Swiss bank is about $1.1 billion in January and February from a year earlier, according to a Reuters report.
But Credit Suisse warned in its regulator filing that “ the impact of the pandemic on our financial results going forward remains difficult to assess at this stage and we continue to monitor our credit exposures prudently in light of these conditions.
Brian Bedell, a financial services analyst at Deutsche Bank, warned in a report this week that so-called e-brokers like TD Ameritrade, E*Trade and Charles Schwab are the most vulnerable companies among the asset management and brokerage stocks that he follows because of their dependence on interest spreads and revenue. He reduced his earnings per share estimates for the group short- and long-term, noting that lower bond portfolio reinvestment yields and the need to again waive money-market fees will have long-lasting implications.
Just as O’Gara offered a ray of hope for flexible advisors, Bedell said the electronic brokers fortuitously negotiated merger agreements late last year that should “generate significant synergies in expense saves, and possibly in revenue ‘cross-sale’” that could lead them out of the crisis,
“We think these mergers are now more valuable within a challenging macro backdrop that could adversely impact stand-alone business models that don’t have the benefit of merger synergies,” wrote Bedell. “While we remain Hold- rated across the group, we now see the downside revision risk vs. our new EPS estimates as being much less severe for the pro-forma combined Charles Schwab and TD Ameritrade.”
He also reduced his estimates for E*Trade as a standalone firm, but said its valuation should be tied to its proposed acquisition by Morgan Stanley.
