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Opportunities for Action in Financial Services

Crafting New Approaches to Offshore Markets

OffshoreMarkets 12/8/03 2:55 PM

Crafting New Approaches to Offshore Markets

The European offshore-wealth market, traditionallycentered in Switzerland, is changing and presentingthe wealth management industry with many chal-lenges. Lower revenues, higher relative costs, a slumpin equity markets in recent years, and more aggressiveoversight from regulators in industrial countries—including pending tax reforms in the EuropeanUnion—are threatening to undermine the market’sgrowth prospects. And, as if those challenges weren’tenough, young European investors are increasinglyturning away from offshore providers, preferringonshore financial institutions in their home markets.

Given this environment, offshore players should thinkcarefully about the sustainability of their competitivepositions. If they are to retain or increase their sliceof the wealth management business in Europe andother parts of the world, they may wish to considernew growth strategies, including supplementing theiroffshore businesses with onshore offerings. Largercompetitors in particular should ensure that theyprofit from strong growth in newer offshore marketsin Asia, the Middle East, Latin America, and EasternEurope.

Growth Strategies for Changing Markets

Having enjoyed a period of rapid growth in the 1990s,offshore competitors in Europe and North Americanow find themselves in an increasingly difficult mar-ket where superior execution, strong product innova-tion, and sound investment strategies have becomecritical to remaining competitive. Those are toughgoals at any time. Today they’re even more daunting

OffshoreMarkets 12/8/03 2:55 PM Page 3

because offshore investors are already reacting to the expected changes in European withholding-taxregulations, which will take effect in 2005 providedthat preliminary intergovernmental agreements arefinalized. At that time, many European countries, in-cluding Switzerland, will start imposing a 15 percentwithholding tax on earnings from accounts that lackthe required documents proving adequate paymentsto relevant national authorities. By 2010 that rate willincrease to 35 percent.

These regulatory changes are likely to make the lowerend of the offshore wealth market less attractive andmay well signal a period of continued decline in thetraditional European offshore market. In anticipationof these events, some investors are already sendingtheir money to offshore centers outside Europe whileothers are bringing funds onshore.

But the main hurdle for wealth management playersis growth. We believe that there are four basic strate-gies for those companies interested in pursuingopportunities in the offshore market. First, they canplay an active role in the continuing consolidation ofthe offshore market. While some players are still opt-ing to grow organically—which can take years intoday’s offshore environment—others are seeking tospread their rising fixed costs by gaining share intheir home markets. That means merging with oracquiring local competitors. The Swiss market, forexample, is consolidating rapidly as players seekgreater scale to achieve sustainable profitability. Lastyear’s merger of Lombard Odier and Darier Hentsch,and Coutts’s recent acquisition of Bank von Ernst, arejust two examples of such consolidation.

Second, players can focus on a niche, selecting specif-ic customer segments or products. For example, theymay wish to focus on particular bands of wealth by


Total assets of countries’ residents1

($trillions)

Share of wealth held offshore3 (%)

Onshore

Mixed

Offshore

North America

Japan

AustraliaItaly

GermanyAsia2

Other WesternEuropean countries

UnitedKingdomFrance

Latin America

Eastern EuropeMiddle East

2

4

6

8

10

18

20 40 60 80 1000

SOURCE: BCG wealth market-sizing database, 2003.1Based on investors’ countries of residence.2Excludes Japan.3Wealth held outside investors’ countries of residence.

Exhibit 1. Offshore Banking’s Center May Be Shifting

catering to investors with, say, $10 million to $100 mil-lion. Alternatively, they can develop product expertiseor refine specialized offerings, such as principal-pro-tected products, and sell them through their own distribution networks or even through those of otherbanks. Indeed, successful product innovation thataddresses wealthy customers’ needs is a good way tomaintain and grow the offshore business in today’suncertain times.

Third, because many offshore investors are likely tomove their holdings onshore, wealth managers canensure that they have attractive onshore offerings thatcomplement their offshore ones. For example, someof the largest Swiss players are now developing theironshore-wealth-management businesses in Europe inorder to prepare for expected changes in the market.Western Europe remains the largest source of off-shore funds, but the center of the industry may beshifting. (See Exhibit 1.) For instance, leading players


in Asia and Latin America are reporting pretaxreturns of more than 60 percent.1 In addition, pros-perity in some Eastern European countries has pro-duced a new crop of offshore investors. Offshorecompetitors active in those countries have pros-pered—particularly as onshore markets have sufferedfrom local currency inflation and devaluation.

Fourth, larger competitors can expand beyond theirhome markets by targeting young, fast-growing off-shore markets elsewhere in the world that offer majoropportunities to experienced players with well-grounded strategies. In some cases, they may want tofollow some of their clients, many of whom are shift-ing money to Singapore and Hong Kong. Those hubsoffer a platform for taking advantage of Asia’s bur-geoning offshore markets.

The Promise of Asia

In contrast to Europe and North America, the wealthmanagement market in Asia is thriving, and offshorebankers are reaping the rewards. (See Exhibit 2.) In2002, the number of wealthy Asian households grewby 200,000, reaching 2 million, and their assetsincreased from $1.9 trillion to $2 trillion. The eco-nomic performance of wealth managers in Asia,meanwhile, improved at an even faster pace, accord-ing to the BCG Wealth Manager Performance Survey,conducted in 2003, and our experience working withclients. On average, revenues and profits for wealthmanagers in Asia-Pacific grew by more than 15 per-cent in 2002. At a time when simply holding groundin the worldwide offshore market would have been

1. See Winning in Challenging Times: Global Wealth 2003, BCG report,July 2003.


considered an accomplishment, such gains were out-standing.

Several factors contributed to these results. The firstone is the strong performance of several of theregion’s economies. Growth in China and SouthKorea has remained high. And savings rates in theregion have continued at impressive levels, bodingwell for sustained asset accumulation among wealthyAsian investors.

The second factor is that Asia has the advantage ofbeing a relatively immature wealth market. For years,many Asian investors favored cash, direct investments,and property, and often preferred to manage theirown assets. As a result, while private banking boomed

Assetsundermanagement($billions)

900

Caribbean

25

1,700

Switzerland

30

850

Luxembourg

20

500

Miami/New York1

25

500

UnitedKingdomoffshore

20

450

Singa- pore/HongKong

25

Post-tax net profit marginfor offshore businesses, 2002 (%)

30

25

20

15

10

5

0

SOURCE: BCG analysis.1Major North American offshore centers.

Exhibit 2. Traditional Centers Face New Competition


in North America and Europe, it remained relativelyunderdeveloped in Asia. Then the Asian financial cri-sis severely damaged the holdings of many investorsin the region. The property market declined dramati-cally. Yields on cash accounts plummeted as interestrates declined to 40-year lows. Finally, equity marketscrashed, undermining investors’ faith in their ownskills.

Asian investors began looking for other state-of-the-artwealth-management options, embracing sophisticatedinvestments, such as structured products and hedgefunds. These products demand professional expertise.Thus, in recent years, wealth managers in Asia haveadopted the European offshore-business model andhave nurtured an emerging demand for professionaladvice. The approach is based on client relationshipmanagers rather than sales-oriented brokers and hasproved successful in turning skeptical Asian investorsinto clients.

The greatest promise in Asia lies in China, Taiwan,Hong Kong, and South Korea. Although China andKorea remain closed markets, their future growthpotential is too big to ignore. China is already the sin-gle biggest wealth market in Asia outside of Japan,with assets of $500 billion, and Korea is not farbehind. Once these countries float their currenciesand allow their citizens to hold assets in foreign cur-rencies, growth will skyrocket.

With the fundamentals in place—sustained economicand asset growth, and immature but fast-developingdemand for advice—wealth managers in Singaporeand Hong Kong stand to benefit from the exodus offunds from more established offshore centers. Forwealth managers elsewhere in the world, the questionis whether to seize the Asian opportunity and, if so,how to maximize it.


Questions for Offshore Players

Offshore players that want to make the most of theirexisting businesses should consider the following questions:

Are you realizing the full potential from your currentoperations when it comes to revenues and costs?

Existing opportunities within current operations maywell provide the most promising avenues for growth.Developing new segments or new products within your existing markets may be attractive strategies. Youshould review your target markets and ensure thatyour selected segments and approaches constitute aviable business. For example, you must make certainthat your pricing strategies and account minimumsprovide sufficient revenues.

What are your ambitions and what is your competitiveadvantage? Where do you want your business to be inthree to five years?

Look carefully at your best-performing businesses andconsider how you might use them to develop newpathways to growth. You should then consider whetheryour objectives might be better achieved through amerger or joint-venture partners. Such partners can,for example, provide useful local expertise and clientaccess that complement your own strengths.

What markets would you target to achieve your ambi-tions? Are they just offshore markets, or are they off-shore and onshore? How can onshore markets helpyou achieve your goals?

You may want to consider a more integrated approachthat allows for the onshore migration of some tradi-tional offshore investors. Meanwhile, you should con-


tinue to serve those that remain offshore and takeadvantage of the growth in new offshore markets inAsia, the Middle East, Latin America, and EasternEurope. And make sure that you fully understand the implications of the forthcoming changes to Euro-pean tax regulations and what they mean for yourbusinesses.

* * *

Substantial upheaval is coming to offshore markets.As always, change will favor those institutions that arebest prepared and have proactively adjusted theirbusiness models. It is time for wealth managers toreview their businesses in order to retain and increasetheir competitive advantage in offshore markets.When appropriate, they should integrate their off-shore and onshore offerings. For players with ambi-tions in the global wealth-management market, anoffshore business is an attractive and potentially veryprofitable business.

Victor AerniJorge BecerraRoman Scott

Victor Aerni is a vice president and director in the Zürichoffice of The Boston Consulting Group. Jorge Becerra is asenior vice president and director in the firm’s Miami office.Roman Scott is a vice president and director in BCG’sSingapore office.

You may contact the authors by e-mail at:

[email protected]

[email protected]

[email protected]

© The Boston Consulting Group, Inc. 2003. All rights reserved.


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