Assets grow but profits are down

Q3 2010 witnessed encouraging asset value growth for both wealth managers and execution only stockbrokers. Total investment assets rose by 9.0%, outpacing the 7.9% market growth, as measured by the FTSE APCIMS Balanced Index. However, this is yet to be reflected in similar growth in revenue.

Investment management fees is the revenue stream most linked to asset value, and for wealth managers it increased quarter on quarter by 1.6%. However, it is evident that this growth has not matched the rise in asset values, possibly due to the time span required for new assets to generate additional fee income. With net interest income remaining low for the majority of firms and commissions under pressure from a reduction in market activity, many firms have seen quarter on quarter reductions in total revenue. As costs remained stable (rising by 0.3% for wealth managers), Q3 2010 has shown reductions in pre-tax profit margin across the sector.

Although execution only stockbrokers saw a significant squeeze in pre-tax profits from 33.6% to 28.7%, they remain slightly better positioned in comparison to wealth managers (pre-tax profit margin of 23.2%). However, there is a great reliance on trade volumes for these firms, and Q3 2010 showed reductions in this area, especially in terms of derivative trading. The challenge that lies ahead for execution only stockbrokers is how to encourage greater trade activity when market volatility eases.