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FUTURE of Private Banking

Phil Molyneux

Aims of Presentation


 

Examines the future prospects for the private banking / wealth management industry Recaps key trends Focuses on sources of new profitable growth:
Geographical areas Client relationship deepening. New areas / propositions Future industry structure Critical success factors.
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Key Future Trends




  

Private banking firms need to develop their businesses models and change (or enhance) their strategic focus in order to take advantage of the opportunities afforded by higher growth markets and product segments Profit growth is expected to be mid-market HNWIs in the developed wealth management markets of North America and Europe, with a stronger growth potential in the newer emerging markets of Asia, the Middle East, Latin America and Eastern Europe Global private banks are actively developing activities in the three key markets of China, India and Russia Growth in the offshore wealth management area is expected to lag that of onshore business; Singapore and Hong Kong are perceived as markets that offer the greatest potential here, given their advantages in attracting Asian wealth.
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Transformation of wealth management

Sources of new profitable growth




Geographic participation. Potential growth opportunities in established and new markets Client relationship deepening. Increasing the penetration and loyalty of existing clients, and targeting new client segments New propositions. Developing product and service innovations and personalising the wealth management advisory role.

Geographic participation


New emerging wealth markets:


Particular attention has focused on the BRIC economies Brazil, Russia, India and China in particular the latter three economies, given the projected economic growth over the coming decades Indias economy could be larger than Japans by 2032 Chinas larger than the US by 2041 (and the second biggest economy in the world by 2016) Goldman Sachs forecasts show that the combined BRIC economies will be larger than the current G6 (US, Japan, UK, Germany, France and Italy) by 2039.

Overtaking the G6: when BRICs US$GDP would exceed G6

Source: Goldman Sachs (2003).

The largest economies in 2050

Source: Goldman Sachs 2003.

HNWI financial wealth forecast by region, 20042009E (US$ trillions)

Source: Capgemini Merrill Lynch (2005), World Wealth Report Capgemini.

Global HNW wealth growth estimates




Global HNW wealth estimates from the Merrill Lynch Capgemini (2005) WorldWealth Report is expected to grow at an average annual rate of 6.5% between 2004 and 2009. Emerging markets are generally expected to experience the fastest growth:
Middle East 9.1% Asia Pacific 6.9% Latin America 6.4% Seems to be consensus on above ranking but forecasts of HNWI wealth appear to vary is for the US and Europe. Cap Gemini and Merrill Lynch expect a relatively low growth of 3.8%, whereas BCG forecast 6% annual growth in HNW wealth.

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Global HNW wealth growth Growing Consensus


   

 

Growth of private banking business in North America and Europe will predominantly come from established clients The North American wealth market will grow faster than that of Europe and, because of its sheer size, will still remain a key market In emerging markets (Asia, Eastern Europe and Latin America), growth will come from emerging (generally entrepreneurial) clients In the Middle East, growth is mainly expected to come from inherited wealth as well as from clients that have businesses linked mainly to the energy sectors China, India and Russia, plus possibly Brazil, are the most attractive growth markets Offshore wealth will grow slower than onshore wealth, particularly in Europe, driven mainly by regulatory pressures relating to transparency and disclosure of activities, and by initiatives relating to the cross-border taxation of investment income
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Global HNW wealth growth




China HNW wealth is believed to have been around $0.91 trillion in 2004 and this is expected to grow to $1.73 trillion by 2009 an annual growth rate of 14%. Russia Perceived as the key growth market in Eastern Europe. HNWI wealth is estimated to amount to around $320 billion and this is expected to more than double by 2009. At present most of this is held offshore India HNW wealth is estimated at around $310 billion (similar in size to that of Russia) and the market is expected to grow by around 10%15% annually to $520 billion by 2009. (Other forecasts suggest that growth in UHNW clients could be even higher) Middle East and Latin America (particularly Brazil) have stronger growth opportunities than the European and North American

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Dont forget JAPAN!!!

Source: Maude (2006), Box 10.1, p263-266

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Growth in offshore private banking assets Singapores ascendancy

Source: IBM Consulting Services (2005). European Wealth and Private Banking Industry Survey 2005, IBM Business Consulting Services.

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Client relationship deepening




   

Given the demographics and growth prospects of the traditional wealth management markets of North America and Europe, the opportunities to boost performance by attracting new clients will be severely limited Focus in these markets is to cultivate new business mainly through existing client relationships and focusing aggressively on intergenerational wealth transfers, especially for mid-range HNWIs (ranging from $1 million to $30 million of AuM) WHY? Because the wealth of mid-market clients is expected to grow by more than that of less wealthy clients Mass affluent market has not been a success Focus is to extend the range of services on offer to mid-level HNWIs, expand the advisory role to encompass intergenerational wealth transfer (product life-cycle) products and services and develop broader family wealth relationships
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Growth of multigenerational client relationships, by client type, 20022004

Source: Capgemini Merrill Lynch (2005), World Wealth Report. Capgemini. 16

New Clients


New clients will emanate primarily from those economies expected to have the greatest economic growth potential, namely Russia, India and China These will have created their wealth through entrepreneurial activity and will seek services that reflect their greater familiarity with more complex financing options coupled with relatively strong protection elements
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Increasing client penetration and loyalty


  

Understanding the needs and aspirations of clients Focusing on higher-value clients Creating value-added services for clients.
Focus on delivering relevant value to targeted clients. That, of course, requires wealth managers to understand the needs and expectations of clients and also really demands that the relationship manager understands more precisely what clients value.
  

Confidentiality Security and Performance are important value-enhancing propositions.

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New propositions - Product Innovation




Affluent women
In the UK there are more women millionaires aged between 18 and 44 than men In Saudi Arabia, the regions largest wealth market, women are reported to own 40% of private wealth

 

Ethnic groups See Box 10.2 Maude (2006 p.270-272 for more details)
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Non-financial lifestyle services




Lifestyle services are an umbrella term referring to a wide range of services designed to support, facilitate and improve the lifestyles of wealthy clients Includes: 1. Lifestyle organization services aimed at assisting in organizing and facilitating aspects of individuals lives such as leisure, entertainment, shopping and event planning. 2. Travel services aimed at supporting and arranging individuals travel requirements. 3. Property and home services aimed at assisting with individuals household and property requirements including finding, purchasing, moving and maintaining the home. 4. Luxury asset acquisition services aimed at helping wealthy individuals in the purchase and management of large-scale luxury items.

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Lifestyle services

Source: Datamonitor, Incorporating Lifestyle Services into the Wealth Management Proposition Survey 21 , May 2003,

Lifestyle services


Attractions of offering such services: No single established best source for lifestyle services Wealth managers are in a relatively strong position to supply such services as they (a) have access to the client segment that is more likely to require lifestyle services and (b) can often have strong and trusted relationships with their clients, which makes them credible referees for these types of services. Such services can add to:
 

1. Revenue diversification.. 2. Incremental revenue opportunities. For example, by offering to help wealthy clients buy luxury items, wealth managers can maintain a post-acquisition role in the management of the acquired item. 3. Increase client loyalty. Lifestyle services can increase client loyalty and deepen client knowledge

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Aggregator role


The industry is increasingly being viewed (and talked about) as an aggregator, whereby a whole range of suppliers, both internal and external to the bank, offer a range of services that can be offered individually or bundled together to meet client needs. Such aggregation activity means that wealth managers have to be much more nimble and efficient in sourcing, distributing and identifying value-enhancing services (for both the client and the bank). The aggregator function of wealth managers, and the growing focus on value-added advice led sales, has encouraged (or forced) the industry to consider developing their business along similar lines to the family office, with the aim of offering holistic and independent advice.

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Industry Structure - Evolving to the next level of a global trusted advisor?

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Industry Structure


Global champions league. Strong global wealth management giants such as UBS, Credit Suisse, Citigroup, Merrill Lynch and HSBC. These target numerous onshore and offshore locations and are developing their businesses in both mature markets and emerging high growth regions. Regional premier league. Medium-to-large players with strong domestic and regional brands such as BNP Paribas, Deutsche Bank, Santander, Bank of America, etc. They offer a wide range of products and services, but typically do not have a strong international presence. Small specialised players. These operate mainly locally or focus on niche product or client segments. They include EFG International, Wegelin & Company, Sal Oppenheim, Hoare & Co, family offices, etc. They are mainly distributors and rely entirely on client relationships as their main asset, with heavily outsourced production, operations and technology.
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Winners and losers in European wealth management over the next 3 to 5 years

Source: Mercer Oliver Wyman (2005).


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CRITICAL SUCCESS FACTORS




Common skill set needed for success. These relate to:


Building client relationships and developing a proactive and flexible response to increasingly complex needs Networking, for both production and distribution purposes Marketing, co-branding and enhanced target client focus Improving operational efficiency cost, revenue and capital efficiency Implementing value-based pricing and client management.

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Key is to develop common skills in building relationships

Source: IBM Consulting Services (2005).

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Boosting Efficiency


Cost efficiency can be improved by initiatives such as centralising and outsourcing operations, shedding low-value clients, more aggressive product management and more rigorous management of human resources (e.g. remunerating managers more on the basis of value created) Revenue efficiency can be boosted by initiatives such as applying more systematic value added pricing models tailored to specific client segments, increasing investment thresholds for unprofitable clients, identifying areas for effective cost-plus pricing and promoting higher-margin specialised advisory services Capital efficiency directs capital resources to the highest valueadding areas of the business, with a relentless focus on value creation across all product and business areas.

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Conclusion


Examines the future prospects for the private banking / wealth management industry Focuses on sources of new profitable growth:
Geographical areas China, India, Russia Client relationship deepening focus on mid-wealth HNWIs and intergenerational wealth planning services + focus on holistic advice New areas / propositions women, ethnic groups, lifestyle services, family office style services Future industry structure Critical success factors - building on relationships, more value-based approach to business and clients
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