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Introducing Private Banking / Wealth Management Market

Phil Molyneux

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Aim of Lecture

To define the wealth management market Provide an idea of its size and recent growth Examine the key drivers of the wealth

management industry. Outline the economics of the industry Describe the competitive landscape.

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Definition of Wealth Management & Private Banking Wealth Management:

financial services provided to wealthy clients, mainly individuals and their families , typically with $100,000+ investable assets

Private banking: an important, more exclusive, subset of wealth management,

typically with $1 million + of investable assets.

Private banking traditionally consisted of banking services (deposit taking and payments), discretionary asset management, brokerage, limited tax advisory services and some basic concierge-type services, offered by a single designated relationship manager. On the whole, private banking relationships were mainly ‘passive’

Wealth management is broader and typically deals with managing both the assets & liabilities side of clients’ balance sheets

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Wealth Management - Products While asset management is a key feature, wealth management has a

greater emphasis on financial advice and is concerned with gathering, maintaining, preserving, enhancing and transferring wealth.

Products include: Brokerage. Core banking-type products Lending products, such as margin lending, credit cards, mortgages and

private jet finance. Insurance and protection products, such as property and health insurance,

life assurance and pensions. Asset management in its broadest sense: discretionary and advisory,

financial and non-financial assets (such as real estate, commodities, wine and art), conventional, structured and alternative investments.

Advice in all shapes and forms: asset allocation, wealth structuring, tax and trusts, various types of planning (financial, inheritance, pensions, philanthropic), family-dispute arbitration – even psychotherapy to children suffering from ‘affluenza’.

A wide range of concierge-type services, including yacht broking, art storage, real estate location, and hotel, restaurant and theatre booking.

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Wealth Management Pool by Product

Non-cash investments may account for no more than c.36% ofthe global wealth management revenue pool

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Client Segments

Private banking targets only the very wealthiest clients or high net worth individuals (HNWIs): broadly speaking, those with more than around $1 million in investable assets.

Wealth management, by contrast, targets clients with assets as low as $100,000, i.e. affluent as well as high net worth (HNW) clients.

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Number of Millionaires

Source: BCG Global Wealth 2006

These millionaires account for28.6% of global wealth!

These 7.2Millionairesown 28.6% ofworld wealth

Merrill Lynch / Cap Gemini8.7 million

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Where do Millionaires Live?

Source: BCG Global Wealth 2006

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Defining the Wealth Management Service Proposition The following three criteria differentiate a firm as a

wealth manager: The relationship that wealth managers have with their

clients, both in terms of breadth (where providers emphasise terms such as ‘holistic’, ‘comprehensive’ and ‘all-inclusive’) and depth (‘intimate’ and ‘individualised’).

The products and services provided, with a particular emphasis on estate planning and multigenerational planning services, as well as tax advisory expertise and alternative investments.

The specific objectives of wealthy clients, such as investment performance, wealth preservation or wealth transfer.

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Investment Mandates

Custodian for a client’s assets. That involves, essentially, asset safekeeping, income collection, fund disbursement and associated reporting.

Execution-only mandate, the wealth manager executes, or selects brokers to execute, securities transactions on behalf of the client. Not investment advice, service aimed primarily at self-directed clients.

Advisory mandate Discretionary mandate

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Discretionary Mandates

The wealth manager usually has sole authority to buy and sell assets and execute transactions for the benefit of the client, in addition to providing investment advice.

Starts off with:

Construction of a brief with the client, detailing investment aims, level of risk-aversion and other factors that will influence the portfolio (In some discretionary accounts, the wealth manager is given only limited investment authority). However, in all cases, major investment decisions, such as changing the account’s investment strategy or asset allocation guidelines, may be subject to the client’s approval.

The wealth manager is generally paid on the basis of a flat-fee arrangement linked to the value of the assets under management.

The gross revenue margin of a discretionary mandate is typically at least double that of an execution-only mandate.

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Investment Mandates & Clients Wealth The proportion of clients using advisory mandates is, in general,

relatively stable across the various client wealth bands. Execution-only mandates become more prevalent the greater the

clients wealth Discretionary mandates less prevalent, as client wealth rises. Wealth management can mean different things in different

geographic regions. In the US, wealth management is more closely allied to

transaction-driven brokerage and is typically investment-product driven.

In Europe, the term is more synonymous with traditional private banking, with its greater emphasis on advice and exclusivity.

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Onshore & Offshore Wealth Management Onshore wealth management is the provision of products and

services within the client’s main country of residence. Offshore wealth management, by contrast, serves clients wishing

to manage their wealth outside their main country of residence for reasons such as: financial confidentiality; legal-system flexibility; tax considerations; the lack of appropriate products and services onshore; a low level of trust in domestic financial markets and

governments; and the need for safety and geographical diversification in response

to domestic political and macroeconomic risks. Some clients treat their offshore account(s) primarily as a ‘vault’.

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Wealth held Offshore

Source: Boston Consulting Group; Julius Baer; David Maude’s client work.

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Offshore and Onshore Wealth Manager Attributes

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Market Size & Growth

Defining the size of the market is problematic because: Definitions of wealth vary The stock of wealth has to be inferred from other

broad economic indicators Identifying & defining what constitutes High Net

Worth individuals (HNWI’s) & ‘mass affluent’ clients / households can vary

See Box 1.1 Wealth market measurement methodologies: lies, damn lies and wealth statistics? Of Maude (2006, p9)

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Market Size & Growth

Commonly used estimates are provided by: Capgemini/Merrill Lynch annual World Wealth Report

For their 2006 Report see: http://www.ml.com/media/67216.pdf

Regional snapshot see: http://www.ml.com/media/67217.pdf Boston Consulting Group:

For their Global Wealth 2006 Reports see: http://www.bcg.com/publications/files/Sum_Global_Wealth_Sep06.pdf

18Boston Consulting Group estimates from Global Wealth 2006

19Boston Consulting Group estimates from Global Wealth 2006

20Boston Consulting Group estimates from Global Wealth 2006

21Boston Consulting Group estimates from Global Wealth 2006

22Boston Consulting Group estimates from Global Wealth 2006

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Key Features of Market Size (BCG estimates) Global Total Wealth (AuM) = $88.3 trillion in 2005 39% in investment portfolios 41.1% in cash & deposits Affluent customers (>$100,000 investable assets) globally

accounted for >50% of AuM 74% in Japan 62% in North America 57% in Europe 22% Latin America Millionaires held 28.6% of AuM – the only regions where

millionaires hold more than 50% of AuM is in Africa and the Middle East

Note BCG estimates millionaire wealth at $25.25 trillion whereas Merill Lynch /Cap Gemini put it at $33.3 trillion

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Key Features of Market Size (BCG estimates) Wealth held offshore accounts for 6.7% of the

total stock = $5.9 trillion Over 50% of this is held in relatively low

yielding cash and deposits (see early reference to the ‘vault’!)

Offshore wealth declining – due to increased investment opportunities in domestic markets (Middle East, Asia) and regulatory / tax harmonisation pressures (to be discussed later in the course)

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Key Features of Market Growth (BCG v Merrill Lynch / Cap Gemini estimates) Annual growth of AuM predicted at around

5.6% (ML/Cap Gem 6%) from 2005-2010 Annual growth rates of AuM range between

4.2% (North America) (ML/CG 7.4%) and 7.9% (Asia-Pacific – strongly driven by India (13.3%) and China (11.5%).

AuM growth in Europe (6%) (ML/CG 3.7%) slightly behind forecasts for Japan (6.7%)

NOTE THAT ML/CAP GEMINI focus on HNWI wealth > $1 million in financial assets

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Key Wealth Drivers Economic growth

Asset prices

Wealth allocation – concentration of wealth ‘(US) households in the top 1% of the wealth distribution hold around one third of the total wealth in the economy, and those in the top 5% hold more than half. At the other extreme, many households (more than 10%) have little or no assets at all’ (See Wealth inequality: data and models by Marco Cagetti and Mariacristina De Nardi , 2005, Chicago Fed WP 2005-10 http://www.chicagofed.org/publications/workingpapers/wp2005_10.pdf

Demographic factors

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Key Wealth Drivers – Regional Differences Regional differences:

North America: high economic and productivity growth rates, strong US financial market returns, (invested weighted to equities) bulk of the wealth is held onshore. Income main source of HNWI wealth followed by business

Europe: Business Ownership / Sales of business / Wealth transfer between generations

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Key Wealth Drivers – Regional Differences Central and Eastern Europe: Strong

economic development Asia-Pacific: Strong economic development Latin America: Traditional offshore-banking

stronghold Middle East: Oil-driven growth Africa: Commodity-driven growth

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Where does HNWI wealth come from?

Merril Lynch / Cap Gemini World Wealth Report 2006

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Industry Economics

Large and growing market High profitability Stable revenue stream. A relatively high stock market rating Strong intragroup synergies

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High Profitability – Unicredito 2001

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High Profitability – Citigroup 2004 (post tax return on invested capital)

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Stable Revenue Streams – UBS & Credit Suisse – High Recurring Income

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Relatively High Stock Market Rating – Financial Service Firm P/E ratios

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Strong Intragroup Synergies

Integrated players benefit from their wealth management businesses in two ways.

Revenues side: opportunities for wealth management operations to acquire

clients from other parts of the group, e.g. the retail and business banking divisions. There are also opportunities for other parts of the group, e.g. investment banking divisions, to leverage the private client base for product sales.

Cost side: opportunities to share infrastructure and spread fixed costs

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Competitive landscape

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Main players

Pure private banks Trust banks Retail and universal banks Family offices Financial advisors Stockbrokers and wirehouses (US term for large brokerage

houses) Direct banks Asset managers Investment banks Others – insurance companies, accountants, solicitors, financial

planners

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Main players – Fragmented Market

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Conclusion

Wealth management & private banking business is currently a major area for development for many of the worlds financial firms

The market is large, growing and highly profitable Industry is fragmented & there is no agreed single

‘preferred’ model Remainder of the course will focus on a range of

key topical issues relating to the industry See if you can get the quick quiz on next slide

correct (no web serfing!!!)

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Conclusion – Billionaires (2005) & their motors

Warren Buffet (2)Net Worth: $44 billion

Ingvar Kamprad (IKEA)

Net Worth: $23 billion (6) Bill Gates (Microsoft)Net Worth: $46.5 billion (1)

Lawrence Ellison (Oracle)Net Worth: $18.4 billion (9)