The UBS decision to focus more is the first move in a new banking game.
Over the past decade, the easiest way to have become a millionaire was to invest your billions in fashionable stocks before one or more of the speculative bubbles we have suffered burst. While some are born wealthy, others have to work for it, and still others have it lottery-handed to them on a plate; no matter how you got it there are certainly some challenges to hanging onto your wealth these days, as there are lots of folk out there who want to take it from you. No wonder then that the wealth management industry is so large, with Trillions of dollars under management, in some form or another.
Wealth management isn’t as easy as it was though: the 2008 crash made people “reconsider their asset class allocations” after getting their fingers burnt, as the capitalist model we all love so much sucked in the naïve and transferred their wealth to someone else. We are now arguably in another wealth management paradigm and things are changing, not least in the banking industry, where wealth management businesses seemed natural bedfellows to other activities, like investment banking, during the good times.
With its famous Swiss private banking credentials few have been as successful at looking after people’s wealth than UBS, once called the Union Bank of Switzerland, but now an agglomeration of many financial institutions; but it is still licking the self-inflicted wounds of various recent setbacks, not least being the biggest unauthorised trading loss in British history, of $2.3Bn, uncovered last year. UBS is now taking a rather big step by deciding to refocus its business on its profitable and highly successful wealth management business and shrink its huge but complex and loss making investment banking arm. This is a bold move and UBS have taken the lead in this scale and clarity of refocusing for a bank of its size and complexity; it’s planning to run down a portfolio of non core assets, valued at $148Bn, as a result.
There is of course a wider discussion in play about the separation of retail banking from investment banking going on as well, so is this a forerunner of what we are now going to see in the over developed banking sector? Banks have become financial pariahs because of their mad enthusiasm for scale and scope, without regard to risk, and now on all fronts, it seems, their rash decisions are coming back to haunt them. This is what speculative bubbles are all about of course, but what about one of the many arguments that lead to this nonsensical behaviour: the need to be a “one stop shop” which in this case meant having investment banking and wealth management under one roof?
Well, we will see if a more focused and specialist wealth management business, with such strong credentials, can reposition itself successfully as the wealth manager of choice in its target segments, particularly ultra-high net worth individuals, by persuading them otherwise. I for one would want a specialist to manage any vast wealth I might find myself burdened with and I would be quite capable of selecting them myself rather then relying on my friendly bank manager’s help.
With any iconic business like UBS there is always a political dimension and it is perhaps not surprising that this decision has not only pumped up its share price but it has won public praise from none other than Switzerland’s president, in spite of the large job losses that will result from this move. With an international struggle going on at the moment over Switzerland’s controversial, and no longer defensible, banking secrecy laws and the likelihood of them changing in the future, what better positioning statement can there be for a Swiss home for your money than “Specialist”. This move by UBS may have a much wider symbolic value to the Swiss economy than it first seems.
I’m impressed with UBS’s move here; it will have to be seen if it works out, but in many ways it has few options. Carrying on isn’t viable because the world has changed and although the wealthy are far more sceptical about what they will allow their wealth managers to do with their money, they still need some help in managing it, so why choose a “generalist” when there is now a “specialist” out there. It’s a big step and I don’t normally advocate big steps, but in this case, the size of the step UBS has taken is hard to avoid as the industry is being restructured and it has little choice. My guess is that it will work out rather well and it will be the just the beginning of increased focus and moves to greater specialisation from the big banks over the coming few years: it’s about time too.
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