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. Last Updated: 07/27/2016

Survey Says $2.6 Trillion Lost in 2001

LONDON -- Rich investors on both sides of the Atlantic lost $2.6 trillion -- or 6 percent of their wealth -- in 2001's plunging markets, according to a survey.

The mountain of assets wiped off in just one year is roughly the size of the entire private banking industry in Switzerland, where wealthy client assets managed by banks are estimated at between $2 trillion and $3 trillion.

"Few investors or regions were untouched by the destruction,'' said the benchmark industry survey published by global management consultant Boston Consulting Group.

The survey gave no year-earlier comparisons, but said the drop in private banking profitability was unprecedented in 2001, with 69 percent in the United States and 34 percent in Europe, and there was no sign of recovery in 2002.

The downturn has exposed some inefficiencies in a crowded industry full of newcomers lured to the promise of easy profitability in a fragmented market where the top 20 players account for only around 10 percent of managed assets.

Brokerages were hit worst while larger banks that rely on fee income fared better. Small, independent private banks including many in Switzerland were hurt more than their European counterparts with an average fall in profits of 43 percent in 2001.

A wave of consolidation has already hit the Swiss scene, in particular mid-tier institutions that have found it tough to go it alone and have been forced into mergers or alliances.

Geneva private banks Lombard Odier and Darier have announced plans to merge, as have family-owned Union Bancaire Privee and the Discount Bank and Trust Company, a secretive Geneva private bank controlled by an Israeli family.

And unlisted Rabobank of the Netherlands recently bought a strategic stake in Bank Sarasin after the Swiss bank's profits fell sharply.

BCG, which surveyed more than 60 leading private banking firms representing total assets of $3 trillion, said 2.3 million households around the world slipped below a wealth threshold of $250,000 in net assets last year.

The rich are alarmed by the wealth destruction and are becoming risk averse, shifting to cash and money market funds, it said.

The survey said costs in the industry rose by an average 2 percent in 2001 despite staff cuts and belt-tightening. The average cost to income ratio for European wealth management firms deteriorated to 76 percent in 2001 from 2000's 67 percent.

"Most wealth managers have so far done surprisingly little to address costs given their reduced revenues,'' the survey said.

"Many competitors are still assuming unrealistic levels of growth. ... Institutions must actively manage their costs instead of focusing too narrowly on revenue and asset growth,'' it said.

It said 2001 industry revenues fell an average 11 percent, commission income 21 percent and asset fee income 8 percent while compensation costs climbed 1 percent, marketing expenditure 5 percent and operational costs 2 percent.

As many banks managing money for the rich scale back ambitious expansion plans, bankers expect more job cuts.

The survey said many banks were pursuing unprofitable low-balance accounts. On average, half of client accounts at most firms held balances below stated minimums, it added.