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FUTURE of Private Banking
Phil Molyneux
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Aims of Presentation
Examines the future prospects for the privatebanking / 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 modelsand change (or enhance) their strategic focus in order to takeadvantage of the opportunities afforded by higher growth marketsand product segments
Profit growth is expected to be mid-market HNWIs in the
developed wealth management markets of North America andEurope, with a stronger growth potential in the newer emergingmarkets of Asia, the Middle East, Latin America and EasternEurope
Global private banks are actively developing activities in thethree key markets of China, India and Russia
Growth in the offshore wealth management area is expected tolag that of onshore business; Singapore and Hong Kong are perceived as markets that offer
the greatest potential here, given their advantages in attractingAsian wealth.
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Transformation of wealth management
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Sources of new profitable growth
Geographic participation. Potential growthopportunities in established and new markets
Client re
lationship deepening. Increasing thepenetration and loyalty of existing clients, and
targeting new client segments
New propositions. Developing product and
service innovations and personalising thewealth management advisory role.
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Geographic participation
New emerging wealth markets:
Particular attention has focused on the BRIC economies
Brazil, Russia, India and China in particular the latterthree economies, given the projected economic growthover 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.
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Overtaking the G6: when BRICs
US$GD
P would exceedG6
Source: Goldman Sachs (2003).
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The largest economies in 2050
Source: Goldman Sachs 2003.
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HNWI financial wealth forecast by region,
20042009E (US$ trillions)
Source: Capgemini Merrill Lynch (2005), World Wealth Report Capgemini.
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Global HNWwealth growth estimates
Global HNW wealth estimates from the Merrill Lynch Capgemini(2005) WorldWealth Report is expected to grow at an averageannual rate of 6.5% between 2004 and 2009. Emerging marketsare 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 HNWIwealth appear to vary is for the US and Europe.
Cap Gemini and Merrill Lynch expect a relatively low growth of3.8%, whereas BCG forecast 6% annual growth in HNW wealth.
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Global HNWwealth 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 ofEurope 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 inheritedwealth as well as from clients that have businesses linked mainly tothe energy sectors
China, India and Russia, plus possibly Brazil, are the most attractive
growth markets Offshore wealth will grow slower than onshore wealth, particularly inEurope, driven mainly by regulatory pressures relating totransparency and disclosure of activities, and by initiatives relating tothe cross-border taxation of investment income
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Global HNWwealth growth China
HNW wealth is believed to have been around $0.91 trillion in2004 and this is expected to grow to $1.73 trillion by 2009 anannual 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 isexpected to more than double by 2009. At present most of this isheld 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 around10%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 NorthAmerican
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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 IndustrySurvey 2005, IBM Business Consulting Services.
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Client relationship deepening
Given the demographics and growth prospects of the traditionalwealth management markets ofNorth America and Europe, theopportunities to boost performance by attracting new clients willbe severely limited
Focus in these markets is to cultivate new business mainly
through existing client relationships and focusing aggressively onintergenerational wealth transfers, especially for mid-rangeHNWIs (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 intergenerationalwealth transfer (product life-cycle) products and services anddevelop 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.
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New Clients
New clients will emanate primarily from thoseeconomies expected to have the greatesteconomic growth potential, namely Russia,
India and China
These will have created their wealth throughentrepreneurial activity and will seek services
that reflect their greater familiarity with morecomplex financing options coupled withrelatively 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 theneeds and expectations of clients and also really demandsthat the relationship manager understands more preciselywhat 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 agedbetween 18 and 44 than men
In Saudi Arabia, the regions largest wealthmarket, women are reported to own 40% ofprivate wealth
E
thnic 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 rangeof services designed to support, facilitate and improve thelifestyles 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 individualstravel requirements.
3. Property and home services aimed at assisting withindividuals 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-scaleluxury items.
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Lifestyle services
Source: Datamonitor, Incorporating Lifestyle Services into the Wealth Management Proposition Survey, May 2003,
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Lifestyle services
Attractions of offering such services:
No single established best source for lifestyle services
Wealth managers are in a relatively strong position to supplysuch services as they (a) have access to the client segment that
is more likely to require lifestyle services and (b) can often havestrong and trusted relationships with their clients, which makesthem 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 maintaina post-acquisition role in the management of the acquired item.
3. Increase clientloyalty. Lifestyle services can increase client loyaltyand deepen client knowledge
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Aggregator role
The industry is increasingly being viewed (and talked about) asan aggregator, whereby a whole range of suppliers, bothinternal and external to the bank, offer a range of services thatcan be offered individually or bundled together to meet clientneeds.
Such aggregation activity means that wealth managers have tobe much more nimble and efficient in sourcing, distributing andidentifying value-enhancing services (for both the client and thebank).
The aggregator function of wealth managers, and the growing
focus on value-added advice led sales, has encouraged (orforced) the industry to consider developing their business alongsimilar lines to the family office, with the aim of offering holisticand 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 managementgiants such as UBS, Credit Suisse, Citigroup, Merrill Lynch andHSBC. These target numerous onshore and offshore locationsand are developing their businesses in both mature markets andemerging high growth regions.
Regional premierleague. Medium-to-large players with strongdomestic and regional brands such as BNP Paribas, DeutscheBank, Santander, Bank of America, etc. They offer a wide rangeof products and services, but typically do not have a stronginternational presence.
Smallspecialised players. These operate mainly locally or focus
on niche product or client segments. They includeE
FGInternational, Wegelin & Company, Sal Oppenheim, Hoare & Co,family offices, etc. They are mainly distributors and rely entirelyon client relationships as their main asset, with heavilyoutsourced production, operations and technology.
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Winners and losers in European wealth
management over the next3
to5
years
Source: Mercer Oliver Wyman (2005).
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CRITICALSUCCESS FACTORS
Common skill set needed for success. These relateto:
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 capitalefficiency
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 ascentralising and outsourcing operations, shedding low-valueclients, more aggressive product management and more rigorousmanagement of human resources (e.g. remunerating managersmore on the basis of value created)
Revenue efficiency can be boosted by initiatives such asapplying more systematic value added pricing models tailored tospecific client segments, increasing investment thresholds forunprofitable clients, identifying areas for effective cost-pluspricing and promoting higher-margin specialised advisory
services Capital efficiency directs capital resources to the highest value-
adding areas of the business, with a relentless focus on valuecreation across all product and business areas.
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Conclusion
Examines the future prospects for the privatebanking / 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 onholistic advice
New areas / propositions women, ethnic groups, lifestyle
services, family office style services Future industry structure
Critical success factors - building on relationships, morevalue-based approach to business and clients