As growth in core banking products has generally been “tepid” and net interest margins compressed, endeavors by US firms to pursue wealth management have paid off, Fitch Ratings said yesterday.

As growth in core banking products has been “tepid” and net interest margins compressed, endeavors by US firms to pursue wealth management have - generally speaking - paid off, Fitch Ratings said yesterday.

“Wealth management, including advisor-based guidance and asset management, provides recurring sources of income and requires less capital usage than traditional bank loan products,” the global ratings agency posted on Fitch Wire. “Wealth management services can strengthen and make stickier relationships with good customers, which tend to provide additional deposit funding, as well as opportunities for cross-selling a bank's core products, such as mortgage lending.”

Indeed, according to the inaugural Fidelity Bank Wealth Management Study, the fee-based nature of wealth management, among other factors, is causing many banks who are “repositioning for growth” to view the sector as a compelling business line. Over half (55 per cent) of the 140 senior bank executives surveyed anticipated the revenue contribution from their wealth management practices to grow by at least 25 per cent over the next five years (see more on that here).

“Regardless of which market segment may be targeted, we see wealth management as diversifying a bank's revenues away from its core interest rate-sensitive loan products,” Fitch said. “Some banks are also using wealth management to help subsidize traditional banking products.”

It added: “While compensation costs tend to be higher in the high net worth segment, banks are focused on having teams service clients in order to reduce their reliance on one advisor. To the extent that banks are successful with the shift, this strategy may help insulate performance over time.”

The distribution force of wealth management could be a “key competitive advantage,” it said, particularly for larger firms. “One risk, however, is the possibility that, as competition for advisors and wealthier clients heats up further, profitability may be marginalized.”