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August 19, 2009updated 05 Jun 2017 11:40am

Realising the value of the super rich

Businesses have been shifting up the wealth management pyramid in the past year, looking to gear their service to ultra high net worth clients William Cain looks at the challenges of courting the super wealthy.There has been an explosion of interest in ultra high net worth wealth management in the past year, but the segment looks unlikely to deliver the hoped-for profits.Rupert Phelps, director of family office services at Bank of New York Mellon, told PBI there was currently a creep up the asset pyramid that business strategists found appealing

By William Cain

Businesses have been shifting up the wealth management pyramid in the past year, looking to gear their service to ultra high net worth clients. But some in the industry do not believe the segment is the panacea it is being painted as. William Cain looks at the challenges of courting the super wealthy.

There has been an explosion of interest in ultra high net worth wealth management in the past year, but the segment looks unlikely to deliver the hoped-for profits.

Rupert Phelps, director of family office services at Bank of New York Mellon, told PBI there was currently a “creep up the asset pyramid” that business strategists found appealing. But he said the number of wealth managers that have targeted ultra high net worth individuals (UHNWIs) means it will be hard for them to establish meaningful and profitable businesses.

While definitions of ultra high net worth vary, Phelps said the area with the most overcapacity was among clients with $100 million and above.

“I think it’s got to that point and it’s been there for a while,” he said. “There’s something seductive about being at the top of the pyramid, because more assets means making more money and offering more products – and maybe the UHNW clients you attract will bring their rich friends with them.

“I just don’t think there are enough customers to provide profitable business to those that have expressed a desire to grow in it. There’s quite a neat point which Raymond Baer made, which is that UHNW is a terrible place to try to operate and the reason for that, he argues, is that they are quasi-institutional.

“They will bargain down on prices because they don’t want to be ripped off and they can do that because they’re well advised. You have to give them the very best service, it’s not just your CRM tools, and his [Baer’s] point is you are being so squeezed by that that it’s hard to make money.”

One bank which is particularly active in the UHNW segment is Citigroup, which is popularly credited with having one-third of the world’s billionaires as clients.

Citi, which recently sold off the majority of its brokerage operation Smith-Barney to Morgan Stanley, now has a much more concentrated position as a private bank to the super-rich, though it has operated in the UHNW area for some time.

David Poole, head of Citi’s UK private banking operations, said there had been a notable shift in attitudes towards private clients in the past two decades.

“When I started this job in 1987, investment management was the poor relation to investment banking,” he said.

“I started at Lazard Brothers corporate management, and the investment management business was not even secondary, it was tertiary. Within that tertiary business, the private client was even more marginalised and in the last 20 years or so, the private client has moved across the spectrum from being absolutely in no-one’s interest, to being reasonably interesting to now being actually very considerably interesting.”

While Citi has the advantage of already being an established UHNW player, the opportunists look likely to face a more difficult challenge. Yet announcements from wealth managers looking to move into the UHNW space continue to be made, according to independent consultant David Maude.

“Among some players, there’s definitely an element of perceived kudos – sentimentality even – attached to being seen to serve UHNW clients, even though the margins aren’t typically there,” he said. “That helps drive overcapacity. On a more commercial level, there is an argument that developing a truly distinctive UHNW proposition (for example, investment product, wealth structuring and reporting capabilities) can help raise the skills profile and credibility of the entire bank.

“As to why players are attacking this area now, my own analysis and interviews suggest that UHNWIs account for a disproportionately large proportion of the declines in assets under management at many wealth managers. Now some of that simply reflects a relatively aggressive asset allocation. But some of it reflects proactive account switching: these are very much the assets in motion at the moment. So I guess the desire to capture some of that might be another way of squaring the circle.”

Poole added private individuals were becoming more important, particularly in emerging wealth markets, where money is being generated in owner-managed businesses. Large banks are well positioned to deliver a holistic wealth management offering in this area, he said, because of the need of these clients to have their business and personal wealth interests looked after. Many, like Citi, place their private client business in their institutional banking divisions to help offer this range of service, which Poole described as a private-investment banking offering.

“I feel that the little old private client, who forever was the pariah of almost everybody in the industry, suddenly has become more and more central, which is why there’s been such growth in our business,” he said.

“And I do think that large banks are finally realising the value of looking after super rich individuals around the world and in this country as well, and are playing a more central role in providing holistic banking and business services to those individuals.”

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