The largest quarterly profit in banking history may hint at Wall Street’s future

Counterintuitive as it may seem, a recent record-breaking bank quarter could point to a more equitable banking future.

Last week, UBS reported the largest-ever quarterly profit in the history of banking, earning $29 billion in Q2 2023. Nearly all that profit came from UBS’s recent takeover of Credit Suisse.

Although UBS stated that integration won’t be complete until 2026, the firm hinted that wealth management will be the combined organization’s focus.

That is, less trading and “shilling” corporate America, and more advice for investors.

UBS isn’t an outlier by any means. Hordes of banks, including Morgan Stanley, are shifting their focus into wealth management. But how on earth does it potentially contribute to inclusiveness?

Is wealth management the future of banking?

At the urging of the Swiss government, this past June UBS took over its biggest rival, Credit Suisse. Combined, UBS and Credit Suisse will be the world’s second-largest wealth manager.

UBS has continued recruiting and hiring wealth managers, even as the firm plans to cut 30% of its global workforce.

The focus on wealth management is a stinging rebuke of Credit Suisse’s former business model, which focused on private and investment banking.

Since the acquisition, UBS CEO Sergio Ermotti has been highly critical of Credit Suisse’s operations.

“Credit Suisse went under because it had a business model for years which was simply not right,” he said. “The bank unfortunately made billions in operating losses over the last few years and could have gone on making losses.”

In comparison, wealth management made up the bulk of UBS’s revenues in recent years.

Banking activities, which include lending and trading a firm’s money, can be risky. Credit Suisse knew that all too well— in 2021, it notched a $5.5 billion loss after it lent to a doomed hedge fund.

Wealth management fees, however, are more reliable.

Firms are paid for advice, not for putting capital at risk. That’s a huge difference—one that will keep firms out of regulators’ crosshairs.

That stability proved attractive for banks left reeling from the 2008 financial crisis.

Since that time, several firms have shifted their focus to wealth management—most notably Morgan Stanley. Its assets, in turn, more than doubled from $1.7 trillion in 2010 to about $4.2 trillion in 2022.

As the global stock of wealth grows and firms rush into the space, this trend looks set to continue.

According to consulting firm Bain, wealth management industry revenues are expected to nearly double by 2030 - climbing to $509 billion.

But it’s not just global banks and Wall Street that are gaining from this trend. Investors should benefit, too.

Wealth management becomes more accessible

Everyday investors are often skeptical of the services Wall Street provides—and for good reason.

But wealth management appears to offer clients genuine value through investment management and financial planning.

Research from Vanguard indicates that working with an adviser can add about 3% annually to an investor’s returns— far greater than the standard 1% fee they’ll pay for the service.

As competition heats up and technology improves, that standard fee may very well start to fall.

Not all investors will use wealth management services, but a more competitive market is good for everyone.

In a report on the state of the wealth management industry, consulting firm Deloitte put it best.

“Investors across all wealth tiers have never had as many options for advice as they do today, and they will use this leverage to insist on greater value.”