If you want a job in finance now, you're advised to avoid investment banking and to cast your net further afield - to wealth management. JPMorgan Cazenove analysts Kian Abouhossein and Amit Ranjan think the global wealth management industry is the most promising area of financial services.
"We believe that private banking is the most attractive segment, with the largest growth potential, with significant undiscounted upside from equity market pickup and limited regulatory impact. We view offshore banking concerns as overdone and believe they are already discounted within the Swiss banks, with newsflow expected to slow," write Abouhossein and Ranjan.
Out of all the different areas of banking (retail banking, investment banking and wealth management), wealth management will be the only one to experience structural growth, say the two analysts. By comparison, they say investment banks are far too over-exposed to the slow-growing fixed income currencies and commodities sector, upon which they've become reliant for around 50% of their revenues.
However, as the thumbnail chart below shows (click to expand), Abouhossein and Ranjan don't think wealth management revenues will grow everywhere: European and US revenues are expected to be static. Latin America and APAC will experience the fastest growth. Overall, they think the fastest growing segment of the industry will be 'ultra high net worth' wealth management - usually defined as people with $30m or more in liquid assets.
While returns on equity (ROE) in investment banking are being assailed by the new Basel III capital rules, the same cannot be said for wealth management.
"We estimate average ROE for 2015E in Wealth Management at 35% compared to average 13% for IB divisions, declining to 7% post full regulation including Dodd-Frank," write Abouhossein and Ranjan.
Falling ROE in investment banks is squeezing costs and leading banks to cut both headcount and compensation. Wealth managers do not have this problem.
Ranjan and Abouhossein point out that the wealth management industry remains highly fragmented. As the industry expands and evolves, they think the biggest wealth managers will be the biggest beneficiaries. Big global players like UBS and Credit Suisse will thrive. The larger wealth managers are best able to invest in the technology and global 'booking centres' required to thrive in the growth markets of Asia and Latin America, say the analysts. UBS, for example, has 13 domestic wealth management locations in Asia Pac. Julius Baer has seven.
While there are signs that investment banks are dumping senior people to make way for cheaper juniors, the same can't be said for wealth managers.
Abouhossein and Ranjan say it makes sense for wealth managers to keep hiring senior advisers. They point to research showing that there's little relationship between the number of advisers a wealth manager employs and the amount of net new money that comes in. Instead, they say that: "net new money depends significantly on share of senior relationship managers hired and therefore banks focus more on hiring high quality senior relationship managers."
We read this to mean that wealth managers will keep paying for top people even while investment banks probably won't.