Wealth management is one of the areas in which banks and other personal financial services players are investing heavily. But the market is changing fast. Going forward, players therefore need to adapt their strategies to the new realities: what worked in the past will not, for the most part, be appropriate in the future. This unique book, written by a former McKinsey consultant, offers an up-to-date, remarkably detailed, practical understanding of this exciting area of financial services.

Packed with best-practice examples and perspectives on the opportunities ahead, highlights include:

• Wealth management challenges: new and old
• The changing client profile
• New products, pricing and channels
• Competitor and business-model landscapes
• External challenges and opportunities
• Future perspective
• Wealth market analyses for 25 countries

For anyone involved in wealth management, this should be a compulsory read.

DAVID MAUDE is an independent consultant. A former consultant at McKinsey & Company, he serves financial institutions around the world, advising on their key strategic, organisational and operational issues. He has also worked in strategy for Barclays, and spent six years as a senior economist at the Bank of England and HM Treasury. He co-authored the pioneering Euromoney book, Private Banking: Maximising Performance in a Competitive Market, published in 1996. He may be contacted at david_maude@lycos.co.uk.

Global Private Banking and Wealth Management

The New RealitiesBy David Maude

John Wiley & Sons

Copyright © 2006 David Maude
All right reserved.
ISBN: 978-0-470-85421-1

Chapter One

Global Market Overview

In the late 1990s, wealth management was reported to be the fastest growing sector of the financial services industry. Though the 2000-2002 downturn took its toll on many wealth management providers, looking ahead, the industry remains attractive, with strong fundamentals. Globally, the number of millionaires continues to grow at more than 7% a year – around 6 times the pace of the population as a whole. The industry is certainly up there with investment banking in terms of fun, glamour and glitz. However, to meet the evolving needs of clients, the industry has become increasingly broad and complex.

For decades, the industry was dominated by a select group of sleepy, very traditional players. But during the 1990s, the industry changed almost beyond recognition. There was a huge influx of new players offering a wide range of specialised products and services to a broader, ever more demanding client base.

The aims of this introductory chapter are to:

Define the wealth management market and provide an idea of its size and recent growth.

Examine the key drivers of the wealth management industry.

Outline the economics of the industry.

Briefly describe the competitive landscape.

Most of the themes introduced here will be explored in more detail in later chapters.

1.1 THE WEALTH MANAGEMENT MARKET

There is no generally accepted standard definition of wealth management – both in terms of the products and services provided and the constitution of the client base served – but a basic definition would be financial services provided to wealthy clients, mainly individuals and their families.

Private banking forms an important, more exclusive, subset of wealth management. At least until recently, it largely consisted of banking services (deposit taking and payments), discretionary asset management, brokerage, limited tax advisory services and some basic concierge-type services, offered by a single designated relationship manager. On the whole, many clients trusted their private banking relationship manager to ‘get on with it’, and took a largely passive approach to financial decision making.

Private banking has a very long pedigree, stretching back at least as far as the seventeeth century in the case of some British private banks. It is, however, only really over the last 15 years or so that the term ‘wealth management’ has found its way into common industry parlance. It developed in response to the arrival of mass affluence during the latter part of the twentieth century; more sophisticated client needs throughout the wealth spectrum; a desire among some clients to be more actively involved in the management of their money; a willingness on the part of some types of financial services players, such as retail banks and brokerages, to extend their offerings to meet the new demand; and, more generally, a recognition among providers that, for many clients, conventional mass-market retail financial services are inadequate. Wealth management is therefore a broader area of financial services than private banking in two main ways:

Product range. Asinprivatebanking,assetmanagementservicesareattheheartofthewealth management industry. But wealth management is more than asset management. It focuses on both sides of the client’s balance sheet. Wealth management has a greater emphasis on financial advice and is concerned with gathering, maintaining, preserving, enhancing and transferring wealth. It includes the following types of products and services:

(a) Brokerage.

(b) Core banking-type products, such as current accounts, time deposits and liquidity management.

(c) Lending products, such as margin lending, credit cards, mortgages and private jet finance.

(d) Insurance and protection products, such as property and health insurance, life assurance and pensions.

(e) Asset management in its broadest sense: discretionary and advisory, financial and non-financial assets (such as real estate, commodities, wine and art), conventional, structured and alternative investments.

(f) Advice in all shapes and forms: asset allocation, wealth structuring, tax and trusts, various types of planning (financial, inheritance, pensions, philanthropic), family-dispute arbitration – even psychotherapy to children suffering from ‘affluenza’.

(g) A wide range of concierge-type services, including yacht broking, art storage, real estate location, and hotel, restaurant and theatre booking.

Based on research by BCG, non-cash investments may account for no more than c.36% of the global wealth management revenue pool (see Figure 1.1).

Client segments. Private banking targets only the very wealthiest clients or high net worth individuals (HNWIs): broadly speaking, those with more than around $1 million in investable assets. Wealth management, by contrast, targets clients with assets as low as $100 000, i.e. affluent as well as high net worth (HNW) clients.

Robert J. McCann, President of the Private Client Group at Merrill Lynch, provided a succinct definition of wealth management at a recent industry conference:

[Wealth management] addresses every aspect of a client’s financial life in a consultative and a highly individualised way. It uses a complete range of products, services and strategies. A wealth manager has to gather information both financial and personal to create an individualised series of recommendations, and be able to make those recommendations completely tailored to each client. Off the shelf – it won’t do. What [wealth management] requires is connecting with clients on a personal level that is way beyond the [retail financial services] industry norm.

When asked to describe the factors that distinguish their services from other types of retail financial institution, wealth managers emphasise the uniqueness of their client relationships – relationships that are broad, in that they encompass all areas of a client’s financial life, and deep with respect to the advisor’s intimate knowledge of a client’s values and priorities. In turn, this breadth and depth of relationship enables the wealth manager to develop and implement highly tailored solutions that address all aspects of a client’s financial well-being. At a minimum, the following three criteria differentiate a firm as a wealth manager:

The relationship that wealth managers have with their clients, both in terms of breadth (where providers emphasise terms such as ‘holistic’, ‘comprehensive’ and ‘all-inclusive’) and depth (‘intimate’ and ‘individualised’).

The products and services provided, with a particular emphasis on estate planning and multi-generational planning services, as well as tax advisory expertise and alternative investments.

The specific objectives of wealthy clients, such as investment performance, wealth preservation or wealth transfer.

1.1.1 Investment mandates

Wealth managers may serve clients under different types of investment mandate. At the most basic level, the wealth manager may act as a pure custodian for a client’s assets. That involves, essentially, asset safekeeping, income collection, fund disbursement and associated reporting.

Under an execution-only mandate, the wealth manager executes, or selects brokers to execute, securities transactions on behalf of the client. The wealth manager does not provide investment advice, so this service is aimed primarily at self-directed clients. The wealth manager is typically required to seek ‘best execution’ for client transactions, i.e. executing transactions so that the client’s total cost, or proceeds, in each transaction is as favourable as possible to the client under the particular circumstances at that time.

The next level of investment mandate is a formal service-level contract, of which there are two types:

Advisory mandate, under which the wealth manager will discuss and advise the client on investment opportunities. The client then makes the buying and selling decisions based on a combination of his or her own ideas and the investment advice of the wealth manager. The wealth manager will not make any investment decision without the client’s prior approval. The wealth manager is generally paid a commission based on the volume of executed trades, plus custody fees.

Discretionary mandate, under which the wealth manager usually has sole authority to buy and sell assets and execute transactions for the benefit of the client, in addition to providing investment advice. Discretionary management works by starting off with the construction of a brief with the client, detailing investment aims, level of risk-aversion and other factors that will influence the portfolio. In some discretionary accounts, the wealth manager is given only limited investment authority. However, in all cases, major investment decisions, such as changing the account’s investment strategy or asset allocation guidelines, may be subject to the client’s approval. The wealth manager is generally paid on the basis of a flat-fee arrangement linked to the value of the assets under management. The gross revenue margin of a discretionary mandate is typically at least double that of an execution-only mandate.

The proportion of clients using advisory mandates is, in general, relatively stable across the various client wealth bands. Execution-only mandates become more prevalent, and discretionary mandates less prevalent, as client wealth rises. That typically reflects a greater degree of financial sophistication among the wealthier clients.

Wealth management can mean different things in different geographic regions. The US and Europe have traditionally stood at two extremes in this regard. In the US, wealth management is more closely allied to transaction-driven brokerage and is typically investment-product driven. In Europe, the term is more synonymous with traditional private banking, with its greater emphasis on advice and exclusivity.

1.1.2 Offshore versus onshore

A fundamental distinction within wealth management is onshore versus offshore. Onshore wealth management is the provision of products and services within the client’s main country of residence. Offshore wealth management, by contrast, serves clients wishing to manage their wealth outside their main country of residence for reasons such as: financial confidentiality; legal-system flexibility; tax considerations; the lack of appropriate products and services onshore; a low level of trust in domestic financial markets and governments; and the need for safety and geographical diversification in response to domestic political and macroeconomic risks. Indeed, some clients treat their offshore account(s) primarily as a ‘vault’.

Some practitioners go further and refer to four types of wealth management. Take the example of a Swiss wealth manager. It will, of course, have a presence in Switzerland: its domestic business. Its domestic business will typically serve two types of clients. First, there are Swiss clients seeking to keep assets within their own country of residence, which is referred to as the wealth manager’s domestic onshore business. Its domestic business may also serve clients from outside Switzerland, which is referred to as the wealth manager’s domestic offshore business. The Swiss wealth manager may also have a presence outside Switzerland: its international business. That may include a presence in Italy, serving both Italian clients (i.e. its international onshore business) and non-Italian clients (i.e. its international offshore business).

The onshore/offshore distinction matters because these two types of wealth management have very different client appeal, dynamics, product sets and economics (see below). Figure 1.2 illustrates that offshore private banks need, in particular, strong brands, trustworthiness and a high degree of professionalism. For onshore private banks, there is greater emphasis on local branch presence, strong relationships and ‘user friendliness’.

As Figure 1.3 illustrates, the proportion of wealth managed offshore varies significantly across regions. There is a general trend for assets to shift onshore, particularly in Western Europe, which is primarily driven by a series of global tax initiatives (see Chapter 9). But that shift is happening at different speeds, and some regions – including Africa, the Middle East, Latin America and Eastern Europe – continue to have a sizeable offshore wealth component. At the client level, the proportion of wealth held offshore tends to rise in line with the level of wealth. In terms of offshore wealth destinations, the main offshore centres are Switzerland, the United Kingdom (including the UK Channel Islands – Jersey, Guernsey and Isle of Man), Hong Kong, Singapore, Luxembourg, Gibraltar, Monaco, Cayman Islands, the Bahamas, New York and Miami. There are different types of offshore centres. Some – such as London, New York and Miami – offer a comprehensive range of private banking services in their own right. Others, such as the Cayman Islands, are principally booking centres, where funds and transactions are registered.

1.1.3 Market size and growth

Primary questions for wealth managers the world over is: who are the wealthy and how much wealth do they have?

Measuring the size of the wealth management market is certainly no easy task. For a start, as noted above, there is no generally accepted market definition. Individual institutions differ widely both in the level of the wealth threshold they use to separate a wealth management ‘client’ from a mass-market ‘customer’, and in how they define wealth itself. Frequently used metrics include: annual gross income, liquid financial assets, investable assets, net worth (i.e. assets net of debt) or some combination of these. The thresholds are sometimes defined by the geographic market that the wealth management provider is targeting.

The wealth management market is probably best thought of as a group of distinct submarkets, based on client wealth bands. Again, institutions vary considerably in how they define these wealth bands and in how they label them (see Figure 1.4). Broadly, the market can be divided into two subgroups – affluent and high net worth – with, in turn, further subsegmentation within each.

There is no industry-wide minimum requirement for the bankable assets entry criterion. In any case, the minimum account size often reflects the bank’s aspiration rather than reality (even at the most upscale institutions, the average account size is usually below the minimum asset requirement). During the late 1990s, many banks moved down market and accepted clients who did not fulfil their communicated entry criteria. Also, at the industry level, entry thresholds do not tend to change much over time and have not generally kept pace with asset-price inflation: over the long term, real (i.e. inflation-adjusted) entry thresholds for many players have fallen.

There are generally no official government or private statistics on the actual distribution of wealth within individual countries. We are therefore forced to rely on estimates, which come in a variety of shapes and forms (see Box 1.1).

Micro, survey data are often unreliable. Not unnaturally, many individuals deliberately attempt to conceal the exact size of their wealth, and a large proportion of wealth may be held not only in secret accounts and trusts but also in assets that are illiquid and/or not publicly quoted. Furthermore, it is often difficult to draw a distinction between an entrepreneur’s corporate and personal wealth.

Hence, in using these data, a ‘health warning’ applies: clearly, the output, in terms of the wealth estimate, can only ever be as good as the input, in terms of the data and analysis on which the estimate is based; the final estimates will be highly sensitive to the assumptions made; and there can, therefore, be substantial differences in estimates from different organisations. For example, Capgemini/Merrill Lynch estimate that global HNWI wealth as at end-2004 was $30.8 trillion; the corresponding estimate from The Boston Consulting Group was $24.5 trillion; and UBS’s published internal estimate was $35.4 trillion. There are also substantial differences within the regional breakdowns and dynamics (see Figure 1.5).

(Continues…)

Excerpted from Global Private Banking and Wealth Managementby David Maude Copyright © 2006 by David Maude. Excerpted by permission.
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