In most cases, wealth managers’ credit profiles benefit from resilient assets under management or administration (AUM/AUA), sound profit margins and low leverage, and most rated companies have significant rating headroom, boosted by strong recent performance.
Fitch-rated European wealth managers reported a negative market impact on their AUM of between 5% and 15% in 1H22. Declining asset prices directly reduce the fee-generating capacity of wealth managers as management fees are generally based on net asset values. Financial market volatility is likely to continue in 2023 as high inflation, interest rate rises and the economic slowdown continue to unsettle investors. The pressure on asset values, net inflows and resulting management fees is reflected in Fitch’s ‘deteriorating’ sub-sector outlook for traditional investment managers in 2023. However, Fitch’s sub-sector outlook for alternative investment managers is ‘neutral’ as they are likely to be more resilient given the stability of their fees, long-term closed-end fund structures and growing perpetual capital structures.
Fitch expects a modest fall in fee-generating AUM/AUA in 2023 given the likely decline in net inflows and the prospect of further negative market impacts. However, the impact on credit profiles should be limited due to companies’ generally large scale, diversified business and sound profit margins. Wealth managers focused on the mass retail segment are likely to be more affected given their clients’ greater vulnerability to higher living costs.
Recurring EBITDA, excluding performance fees, is likely to contract in 2023 due to negative market effects on AUM and lower net inflows. The degree of contraction will be influenced by the structure of distribution costs. Firms using third-party distribution networks or internal adviser models where distribution costs are linked to AUM volumes are likely to be less affected, while those that directly employ relationship managers could face rising salary costs despite falling management fees. Ongoing investments in IT systems and increasing investments against cyber risks will also weigh on profitability in the medium term. Most of the productivity gains from IT enhancements will only materialise in the longer term.
Higher interest rates do not significantly increase refinancing risks for European wealth managers. Rated firms have limited funding needs given their low balance-sheet utilisation. For banks, utilisation is generally well below the volume of client deposits; for other firms it is generally well below their liquid assets. For wealth managers that take deposits, higher interest rates should support earnings as customer deposits are rarely remunerated.
Regulatory and reputational risks are key vulnerabilities for wealth managers. Regulatory breaches can lead to sizeable fines and have the potential to severely impair firms’ franchises, and, consequently, their ability to attract and retain AUM. Product suitability is attracting increasing attention from regulators in most developed markets, due to new EU regulation linked to clients’ ESG preferences and high retail appetite for non-traditional financial products in recent years, including illiquid and digital assets.
The European wealth and asset management industry had about USD26 trillion in AUM at end-2021 (according to a Boston Consulting Group estimate), with the UK, France, Germany and Switzerland accounting for around three-quarters of the total. Fitch rates several European wealth managers, including private banks, traditional investment managers and wealth management-focused insurance companies.
