Big Banks Give Funds Another Shot, But Will They Fail Again?
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Tuesday, December 04, 2012

Big Banks Give Funds Another Shot, But Will They Fail Again?

Too-big-to-fail banks and mutual funds have had a troubled marriage over the years, but it looks like the banks are trying to make it work one more time.

Yesterday, Bloomberg reporter Sree Vidya Bhaktavatsalam published a comprehensive look at global banks' efforts to get back into asset management. He pieces together the recent news from banks' asset management business to tell a convincing story: with trading profit declining, banks are turning to their funds businesses to reap profits.

Deutsche Bank is hanging on to DWS [profile], and UBS [profile] is cutting back its investment banking efforts in favor of wealth management, while Goldman Sachs [profile], JPMorgan Chase & Co. [profile], and Wells Fargo [profile] "are considering expanding asset-management divisions as they seek to grab market share from companies such as Fidelity Investments [profile].

Money management fees account for a growing proportion of banks' revenue, as combined investment banking and trading revenue has fallen at least 17 percent in each of the last two years, according to Bloomberg. Hence the bankers' hunger for the steady fees that managing funds brings in.

Asset management is a "terrific business," as a banker tells Bloomberg, but much of Bhaktavasalam's story is a reminder of why so many banks failed out of it in the first place. The banks' exit from asset management over the last decade-plus "reflects a combination of poor performance, the rise of mutual-fund sales through fee-only independent advisors rather than bank-owned brokerages and the impact of a mutual-fund trading scandal uncovered by then-New York attorney Elliot Spitzer in 2003," he writes.

So what are the odds that large banks that have spent the last decade selling off their funds businesses can make a comeback?

The story quotes Simon Adamson, an analyst with CreditSights Ltd, on Deutsche's chances.

"Deutsche's asset and wealth-management business has historically underperformed and not added a lot to profit," he said. "It won't be easy to convince people that Deutsche now really has a long-term strategy for the business in place."

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