from a current level of $50 trillion to $75 trillion by 2012, a
bullish figure which nonetheless incorporates a slowdown in
worldwide growth, according to a new study by Oliver
Wyman. So, the wealth industry should stay in good shape.
The research can be seen as further muddying the outlook for the
global wealth market, contributing as it does a figure at odds with
other market estimates made over the past 12 months.
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The latest edition of the Merrill Lynch/Capgemini World Wealth
Report, a benchmark industry study, put collective high net worth
individual (HNWI) wealth at $37.2 trillion at end-2006; a study
from the Boston Consulting Group put that figure at $97.9 trillion,
albeit having factored in mass affluent individuals, a demographic
scrupulously avoided by both the World Wealth Report and Oliver
Wyman.
Scorpio Partnership, on the other hand, suggested in October 2007 a
figure of $24.4 trillion was the maximum amount of HNWI assets able
to be banked by the wealth industry in 2007, with the actual total
under management then standing at $16 trillion.
For its part, Oliver Wyman believes 50 percent of total assets, or
approximately $25 trillion, is currently professionally managed or
advised. Toby Pittaway, partner at the consultancy, suggested the
discrepancy between the consultancies’ figures may be down to the
way in which more opaque markets such as Latin America and the
Middle East, as well as offshore assets, were sized.
Pittaway also stressed that Wyman used its own proprietary data to
calculate HNWI wealth that remains tied up in retail banking
divisions. Both consultancies do, however, agree there remains a
significant proportion of wealth inaccessible to private bankers
because it is invested in other asset classes such as private
equity.
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By GlobalDataWyman puts the offshore market at some $8 trillion, but sees this
deteriorating in the coming years as a groundswell of regulatory
pressure begins to make itself felt across Europe. While the
consultancy sees Singapore and Hong Kong faring better in terms of
net new money flows, it acknowledges that “the traditional
competitive advantages of offshore centres are steadily
eroding”.
Conversely, the future for onshore wealth management remains
bright, the survey suggests, even though the end of the stock
market bull run will moderate the levels of wealth creation seen
since 2002. An 11 percent increase in HNWI wealth seen over the
past five years is expected to drop to 9 percent between now and
2012, with an expected 12 percent growth in the Asia-Pacific region
offset by the 8 percent growth rate predicted to materialise in the
US.
Pittaway believes the catalyst for recent wealth creation will not
prove to be its downfall, however. While the partner acknowledges
that the $50 trillion estimate could shift “by 5 or 10 percent” as
a result of market volatility, he suggests private banks’ wider
product offerings will insulate them from serious pain in this
regard.
“Broadly speaking, the numbers coming out of the private banks are
definitely holding up, and I think that reflects the strengths of
those private banks which have made greater efforts to diversify
their offering away from traditional stock broking and traditional
discretionary equity management,” he comments.
Noting that the modern HNWI no longer fits a set template, the
study says that private banks may be able to better leverage brand
image, typically based on notions of exclusivity and tradition, in
order to differentiate themselves.
The idea of a ‘typical’ wealth individual no longer holds, with
clients ranging from celebrity or sporting personalities to
successful entrepreneurs, each with a very different idea of what
they require from a private bank.
In further examining the value of individual clients to private
banks, the Wyman research notes that a transaction-based
broker/dealer structure which strongly emphasises the trading of
securities and is typically favoured by US private banks, is of
significantly less value than the advisory model common among
European wealth managers.
Broker dealer clients are also less likely to be
‘institutionalised’ and more likely to follow their relationship
manager to a new firm, further reducing their value to private
banks.
Wyman estimates – using a valuation model that takes into account
gross margin, gross money rates, client and RM defection, business
risk and compensation costs, among other metrics – that the average
value of a European onshore client to private bank is some three or
four times higher than that of a client at a US broker/dealer (see
graph below).
Accordingly, the study recommends that broker/dealers should focus
on emphasising the value of their institution and, somewhat
paradoxically, distancing clients from their relationship
managers.
The envisaged trend is of a shift towards the advisory model,
something Wyman already sees materialising in the US and elsewhere
through the rise of independent financial advisors and registered
investment advisors. Increasingly disparate client bases are seen
as fuelling this change: the rise of the self-made HNWI and their
unfamiliarity with an increasingly complex market is leading to a
desire for “customised and comprehensive solutions rather than just
products”.
However, the consultancy cautions that such changes are for now
incremental, with any wholesale shift unlikely to be forthcoming.
Some opportunities, such as the provision of loans, remain largely
untapped despite being a key service for many entrepreneurs and
other new entrants to the world of high net worth. While larger
banks are willing to lend, this is less the case for pure play
private banks and investment banks.
