The way analysts and investors model wealth management is wrong, according to Exane BNP Paribas.

Researchers at the French broker say the majority of people use the same approach, estimating AuM growth as a function of net new money and market performance.

"Typically they also include some gross margin improvement, giving top line growth estimates of 10% or more, and then they put a growth multiple on this," says investment bank analyst Amit Goel.

However, BNP Paribas Exane's Goel says there are two key issues to consider.

“AuM growth over time is actually much lower. Over the last seven years the net returns for wealth management clients must have been negative, and AuM growth in total has been  c.1.6% per annum. 

“Secondly, margins have declined over time and this will continue. When clients are not making money, and look for returns of 100-200bps, it is hard to charge 80bps, especially if competition is increasing.

“We now assume negative returns for clients and some margin pressure over time.”

The broker has cut UBS wealth management earnings forecasts by 6%/13% for 2017/18 with lower margin and AuM growth assumptions.

Credit Suisse net profit estimates have been cut by 10% and 14% for 2017/18 respectively.

“In our valuations we assume lower multiples for wealth management than peers, as a result of lower growth expectations," Goel adds.

“We remain underperform on both, and cut our target prices to CHF13 and CHF11 per share for UBS and CS respectively.”