Introducing Private Banking / Wealth Management Market

Phil Molyneux

Aim of LectureTo define the wealth management marketProvide an idea of its size and recent growthExamine the key drivers of the wealth management industry.Outline the economics of the industryDescribe the competitive landscape.

Definition of Wealth Management & Private BankingWealth Management:financial services provided to wealthy clients, mainly individuals and their families , typically with $100,000+ investable assetsPrivate 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 passiveWealth management is broader and typically deals with managing both the assets & liabilities side of clients balance sheets

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.

Wealth Management Pool by ProductNon-cash investments may account for no more than c.36% ofthe global wealth management revenue pool

Client SegmentsPrivate 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.

Number of MillionairesSource: BCG Global Wealth 2006These millionaires account for28.6% of global wealth!These 7.2Millionairesown 28.6% ofworld wealth Merrill Lynch / Cap Gemini8.7 million

Where do Millionaires Live?Source: BCG Global Wealth 2006

Defining the Wealth Management Service PropositionThe 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.

Investment MandatesCustodian for a clients 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 mandateDiscretionary mandate

Discretionary MandatesThe 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 accounts investment strategy or asset allocation guidelines, may be subject to the clients 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.

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 wealthDiscretionary 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.

Onshore & Offshore Wealth ManagementOnshore wealth management is the provision of products and services within the clients 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; andthe 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.

Wealth held OffshoreSource: Boston Consulting Group; Julius Baer; David Maudes client work.

Offshore and Onshore Wealth Manager Attributes

Market Size & GrowthDefining the size of the market is problematic because:Definitions of wealth varyThe stock of wealth has to be inferred from other broad economic indicatorsIdentifying & defining what constitutes High Net Worth individuals (HNWIs) & mass affluent clients / households can varySee Box 1.1 Wealth market measurement methodologies: lies, damn lies and wealth statistics? Of Maude (2006, p9)

Market Size & GrowthCommonly used estimates are provided by:Capgemini/Merrill Lynch annual World Wealth Report For their 2006 Report see: http://www.ml.com/media/67216.pdfRegional 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

Boston Consulting Group estimates from Global Wealth 2006

Boston Consulting Group estimates from Global Wealth 2006

Boston Consulting Group estimates from Global Wealth 2006

Boston Consulting Group estimates from Global Wealth 2006

Boston Consulting Group estimates from Global Wealth 2006

Key Features of Market Size (BCG estimates)Global Total Wealth (AuM) = $88.3 trillion in 2005 39% in investment portfolios41.1% in cash & depositsAffluent customers (>$100,000 investable assets) globally accounted for >50% of AuM74% in Japan62% in North America57% in Europe22% Latin AmericaMillionaires 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

Key Features of Market Size (BCG estimates)Wealth held offshore accounts for 6.7% of the total stock = $5.9 trillionOver 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)

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 2005-2010Annual 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

Key Wealth DriversEconomic 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

Key Wealth Drivers Regional DifferencesRegional 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

Key Wealth Drivers Regional DifferencesCentral and Eastern Europe: Strong economic developmentAsia-Pacific: Strong economic developmentLatin America: Traditional offshore-banking strongholdMiddle East: Oil-driven growthAfrica: Commodity-driven growth

Where does HNWI wealth come from?Merril Lynch / Cap Gemini World Wealth Report 2006

Industry EconomicsLarge and growing marketHigh profitabilityStable revenue stream.A relatively high stock market ratingStrong intragroup synergies

High Profitability Unicredito 2001

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

Stable Revenue Streams UBS & Credit Suisse High Recurring Income

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

Strong Intragroup SynergiesIntegrated 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

Competitive landscape

Main playersPure private banksTrust banksRetail and universal banksFamily officesFinancial advisorsStockbrokers and wirehouses (US term for large brokerage houses)Direct banksAsset managersInvestment banksOthers insurance companies, accountants, solicitors, financial planners

Main players Fragmented Market

ConclusionWealth management & private banking business is currently a major area for development for many of the worlds financial firmsThe market is large, growing and highly profitableIndustry 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 industrySee if you can get the quick quiz on next slide correct (no web serfing!!!)

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)