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September 24, 2013updated 05 Jun 2017 11:24am

Beyond 2038

Having evolved into a global multi-asset management industry, the wealth management community must now industrialise and decide where it can best make money by providing outstanding and targeted service and advice. Alison Ebbage does a 50-year sweep of the industry, with a look back and ahead to what success will look like in the future

By Alison Ebbage

Having evolved into a global multi-asset management industry, the wealth management community must now industrialise and decide where it can best make money by providing outstanding and targeted service and advice. Alison Ebbage does a 50-year sweep of the industry, with a look back and ahead to what success will look like in the future.

Private banks have been around for hundreds of years in Switzerland, but the modern private bank is a relatively modern incarnation. A lot has changed since PBI began covering the industry in 1988, and with the industry in the middle of a dramatic change – the next 25 years will see even greater innovation.

The first big development to mark the industry’s evolution was the move to a more discretionary approach, along with an opening up of the industry to commonly include not just deposits but also bonds, equities and latterly, all asset classes including alternatives, property and more esoteric investments like fine wine and art.

With this asset expansion the open versus closed architecture debate began. Cultural resistance to opening out what was an essentially a private business lost out to employing best of breed asset managers.

Seb Dovey, managing partner at the Scorpio Partnership, has noticed a big shift. "In the early 1990s the private banking industry, as we now know it, did not really exist. It was more of a deposit taking business that has since significantly evolved.

With alternative investments for example, most wealth managers would have said they had no alternatives allocation – or less than 5% of a client’s discretionary balanced portfolio in 2003. But now this figure would stand at something between 12% and 25%," says Dovey.

The expansion of the wealth management industry happened alongside another major evolution- that of tighter and exacting regulation. This had the effect of bring the old offshore world to an end with OECD and Financial Action Task Force (FATF) initiatives starting the ball rolling and the events of 2008 bringing the need for transparency into sharp focus.

As a mark of how far the on/offshore debate has come, the launch in 2001 of an onshore strategy by UBS was seen as a bit pointless by some in the industry.

Today the onshore wealth management business is very much the norm with the home domicile serving as starting point for wealth management strategies. That is not to say that assets and money are not kept offshore, but it is now much harder to hide money offshore and the on/offshore debate has become less relevant.

The globalisation of wealth

The amount of wealthy individuals and families, their characteristics and their geographic location has changed in almost every way.

The first big evolution of that wealth is that from inherited wealth to self-made, entrepreneurial wealth. This can clearly be seen in publications like the UK’s Sunday Times Rich List and Forbes, both of which show that today’s wealthy are, by and large, entrepreneurs as opposed to landed gentry.

Charlie Hoffman, managing director at HSBC Private Bank UK, comments: "There are 88 billionaires on the Times Rich list this year- when it started in 1989 there were just 9. Their combined wealthis eight times the figure of 25 years ago."

David Wilson, head of strategic analysis group at Capgemini, says that despite the most significant financial crisis since the 1920s, high net worth individual (HNWI) wealth has continued to power on.

"Six years ago, before the crisis, in 2006 the amount of HNWI wealth was $37.2 trillion which had grown to $46.2 trillion in 2012. A 24% increase during a challenging six years for the global economy, and an increase of almost $9 trillion in absolute terms."

The geography of the wealth has changed too with dispersal from the US, Europe and oil-producing countries to Asia and, to a lesser extent Latin America.

The RBC/CapGemini World Wealth report in 2012 showed that Asia-Pacific accounted for 43% of the nearly $9 trillion of global wealth added over 2006 to 2015.

The report forecasts that by the end of 2015, Asia-Pacific will have grown its HNWI wealth almost 90% from 2006 levels.

The expectation is that Asia-Pacific will lead global wealth growth to new record levels through 2015, at a 9.8% annual growth rate.

However that is not to say the Europe and the US are finished.

"It is a bit of a lazy headline to say that wealth is moving to the east. The Forbes Rich List list shows a broad spread of wealth with 442 billionaires in the US, 386 in Asia and 366 in Europe. Out of the top50 billionaires only five are Asian," Hoffman points out.

Assets under management (AUM) have changed too. According to Dovey, in 2002 the top 10 threshold was $100bn now it is $322bn.

Today there are 25 firms with AUM of $100bn or more (the top 25), and four with greater than $1 trillion (UBS, Bank of American, Wells Fargo, Morgan Stanley). In 2002 there was no firm with $1trillion.

This increase is partly down to the increase in the ‘share of wallet’ that private banks have been able to capture. In 2002, private banks only managed 13% of total high net worth assets. In 2012, this hadrisen to 32%.

The telescope view

Profitability for private banks is perhaps the key thing under the spotlight. Numerous private banking arms have sprung up in the past 25 years, but retrenchment from the likes of Merrill Lynch International and Morgan Stanley go hand in hand with consolidation.

In the future, attention will be much more focused on profitability and scale. Client demand will be largely for a global wealth manager able to leverage corporate and institutional arms to add value to the existing wealth management provision.

There will also be a smaller number of specialist players. Ian Ewart, head of product, services and marketing at Coutts, says the industry has become much more professional and needs to become yet sharper in terms of providing value for money.

"There has to be clarity over the range of services that will be provided – the question, ‘what is the proposition?’ must be answered," he says.

Answering that means knowing what clients want. One important change has been the internationalisation of wealthy families in terms of their location, their business interests and their wealth.

This has dovetailed with the new era of transparency so that clients, unable not to declare assets, now want the very best advice and are fairly neutral over the jurisdiction or the location of the private bank as long as it is offering the very best in terms of advice and service.

Ewart comments: "Clients will increasingly look at fees and want to know they are justified. A total expense ratio model as is currently used in the institutional market is now increasingly being adopted, our challenge is to respond with real added value. The Retail Distribution Review has accelerated this tendency."

Luigi Pigorini, Europe, Middle East and Africa CEO at Citi Private Bank, comments: "Banks are also realising that wealthy families just really want the very best advice and service.

In the UHNW space the client is very often via the family office and this emphasises that demand. As a consequence there is the trend to have a smaller amount of regional hubs that have the critical mass to be able to be the best."

Having a smaller number of regional hubs with a critical mass of expertise also feeds into consolidation in an industry where size increasingly matters.

Indeed the change to entrepreneurial wealth means that most private banking clients are also business owners and so have a need for corporate and institutional services.

"Being able to leverage off the other sides of the bank is very useful for our clients’ businesses. With their level of wealth, they want an almost institutional style service," says Pigorini.

Local or global?

Stephen Skelly, head of private wealth solutions, EMEA & Americas, HSBC Private Bank adds: "Trade banks can provide the leverage of their corporate services and institutional offering- this is what wealthy entrepreneurs need."

But that is not to say that smaller or local players are without hope and given the move to onshore they are also sometimes best placed to serve clients.

The Bank of Singapore and Coutts in the UK are two notable examples with Bank of Singapore planning to expand its discretionary business and increase assets under managementto $80 billion by 2016.

Dovey comments: "The importance of domestic offerings cannot be underestimated. The Bank of Singapore is one offering that is now worldwide. Domestic banks often have a better cultural handle too."

But Pigorini thinks that local banks, although potentially successful, are often better at servicing affluent markets that need a local physical footprint.

"In the affluent space clearly a more retail strategy is needed. Perhaps this is where some of the local banks have gone from strength to strength," he says.

What this does illustrate nicely, however, is another key factor: the need to segment and service clients accordingly in order to see profit.

Pigorini explains: "Once you define the model of advice then the time and cost to service that is the same no matter what the level of wealth. That’s why banks need to define their core client base and tailor the offering around that. Clients that are wealthy or very wealthy need a different type of offering that evolves with them. They do not just need products like in the affluent space; they need the advice and the relationship in a holistic one-to-one offering."

Ewart adds: "The bank needs to be able to effectively mirror the wealth management needs of an individual over his or her lifespan. We may onboard at £500,000 but that individual may go on to be worth £40m. As they evolve so will their needs, whether these are in respect to tax, intergenerational wealth planning, philanthropic ventures, succession planning as well as corporate finance services. Being able to adapt the offering to where the client is in life is key."

Tech you out

The final piece of the pie of future success seems to be the ability to offer the service in a variety of channels. In practice this means having a solid digital offering that allows the client what they want, which will differ according to segment, when they want it and is easy to use and reliable.

Technology also needs to be able to bend to see how clients are doing against key indicators; it needs to provide away to measure and then manage the business.

"While direct, in-person contact remains, globally, HNWIs’ preferred means of navigating the wealth management relationship, a robust 23.7% of HNWIs we surveyed in 2013 (total survey of 4,400 HNWIs across 21 countries) prefer digital contact to direct," highlights CapGemini’s Wilson.

He thinks this trend is likely to increase in the future and is something firms need to prepare for, given that the preference for digital contact overtakes direct contact at younger age levels and in some countries it is already higher. "For example, 29.1% of HNWIs below the age of 40 prefer digital contact compared to just 20.2% preferring direct contact," he adds.

Skelly agrees, but thinks there is always a place for face-to-face.

"The role of technology is clearly important however it is largely transactional and the complex stuff; the asset allocation, acting as a sounding board, doing the succession planning needs human interaction. In that sense the private banking industry remains unchanged," he concludes.

So what will the future hold? Artificially intelligent robot RMs who do all the boring paper work, leaving human RMs to do the client interaction? We’ll have to wait until 2038 to find out.

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