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UBS will find plentiful opportunities in US digital wealth management push

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UBS will find plentiful opportunities in US digital wealth management push

UBS Group AG's plan to launch a digital wealth management service for mass affluent clients in the U.S. will present the Swiss bank with a highly promising growth opportunity in a market that is both rapidly expanding and increasingly competitive, analysts said.

The bank will offer "a scalable investment advice model for affluent clients," CEO Ralph Hamers said during a third-quarter earnings call. CFO Kirt Gardner was quoted by Bloomberg News as saying the move will target clients with assets of between $250,000 and $2 million.

Globally, the wealth management market is expected to reach $3.43 trillion by 2030, equivalent to a 10.7% CAGR, and North America accounts for more than half of this, said Firdaus Ibrahim of CFRA Research, citing data from Allied Market Research. Digital wealth management targeted at the mass affluent market is projected to be the fastest-growing segment at an annual rate of 16.8% over the same period.

A generational shift in wealth and a host of large-scale, acquisitive competitors are fueling rapid growth in the market. UBS' vast experience in catering to ultra-high net worth individuals, along with its CEO's track record of driving digitalization, means it is well positioned to tap into the opportunity, analysts said.

"We believe UBS's focus on digital wealth management is spot on," said Ibrahim. "UBS's franchise strength and good historical performance will also give comfort to clients who are going digital."

UBS declined a request for comment.

Solid foundations

As the world's largest wealth manager, UBS sees the U.S. as an already important market and its is one that has delivered strong growth in recent years. Its fee-generating assets in the Americas rose to $848 billion at the end of September from just $690 billion a year before.

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The Americas region is the biggest contributor to UBS' global wealth management operating profit. In the third quarter alone, the bank generated $559 million of operating income from the region, more than a third of the division's total $1.52 billion operating income.

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Compared to other major European banks with business in the U.S., UBS's also contributes more to its group-wide operating income.

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However, UBS faces a stern challenge in taking on established U.S. wealth managers. The size of its business in the U.S. pales in comparison to that of leading incumbents such as Morgan Stanley or Bank of America Corp., which are driving consolidation in an effort to build scale, said Nicolas Payen, an equity research analyst with Kepler Cheuvreux. Last year, Morgan Stanley took over E*TRADE Financial LLC and Eaton Vance Corp. in a move to target millennial investors.

The plan to launch a full-service digital offering from scratch will allow UBS to boost scale in the U.S. at a lower cost as it may not have the financial firepower for sizeable acquisitions of digital brokers, Payen said. "UBS also knows very well how to serve entrepreneurs, so it can build on that skill set to be successful," he said.

The move should complement the bank's strategy in the Asia-Pacific region, where wealth management is expected to deliver superior growth due to more favorable demographics, Ibrahim said. The U.S. market provides stability, due to its more robust economic structure, and also better growth prospects than Europe, he said.

Digital first

With an estimated $30 trillion of wealth set to transfer from baby boomers to millennials and Gen X, and the retirement of smaller wealth managers fueling consolidation, the U.S. market presents "fantastic opportunities," according to Sean McKee, national practice leader for public investment management with KPMG in the U.S. The boom in retail trading spurred by the proliferation of zero commission trading for equities and exchange-traded funds is also stimulating growth, Payen said.

These factors mean wealth managers will require full-service digital offerings and scale in order to compete in the future, McKee said. Expanding into new product areas such as environmental, social and governance and cryptocurrencies, and offering automated models, portfolio construction advice and other educational tools will also be key, McKee added.

"The mass affluent market is growing but it has strong needs and demands. It focuses on: 'I want it now, I want it reasonably priced and I better be able to handle most engagement on my phone and that engagement better be user friendly,'" McKee said. "Winners in this area have been the institutions and retail brokers that are reasonably priced, have broad solutions and great digital engagement."

The influence of CEO Ralph Hamers could be vital in this area. In his previous role as chief executive of ING Groep NV, Hamers was credited with leading a digital transformation of the Dutch bank. Mobile interactions accounted for about 82% of ING's 4.5 billion total interactions in 2019, compared with 52% of the roughly 2.5 billion interactions in 2016.

"We believe Ralph has done exceptionally well in terms of digitalization initiatives during his time at ING. ... [T]his bodes well from the infrastructure side," said Ibrahim.