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The Future of Wealth Management: Thinking about the Next 20 Years

Sebastian Dovey Managing Partner Scorpio Partnership London
The profitability of the private wealth industry has been declining, and the industry is now at a critical juncture. Its future will be determined by its willingness and ability to meet the challenges or opportunities posed by todays digital world and to reassess its approach to client relationships, beginning with a thorough understanding of what really matters to private wealth clients.

hen I was 25 years old, my partners and I founded Scorpio Partnership with one clear ambition: to become the global leader in understanding the mind of the millionaire. I believe we are on the right path to realizing that goal. To achieve this goal, we focus on an anthropological understanding of what wealth is and what wealth clients need next. I will begin with a discussion of the current status of the private wealth market and where it is going in the future. I will also talk about wealth clients and transitions that are taking place in highnet-worth asset management. Finally, I will offer some ideas about the future of making money for millionaires and from millionaires.

Challenges to the Private Wealth Market

The private wealth industry currently has about $16 trillion in assets under management (AUM) in private banking institutions worldwide. Table 1 lists the top 20 global institutions in terms of AUM out of the 200 that we track at Scorpio. The top 20 institutions control nearly 80% of the $16 trillion in the market, but the top 5 firms control nearly 50%. The market is actually quite congested. In 2011, traditional inflows were relatively flat at about $2.9 billion. In terms of net new money, which is the best measure of whether private banking is attracting new wealth clients, the five-year period ending in 2011 was rather poor. Today, there is an average inflow of around $2 billion a year in net new money. Although that figure is larger than
This presentation comes from the European Investment Conference 2012 held in Prague on 1819 October 2012 in partnership with CFA Society Czech Republic.

the asset base of some institutions, as an industry average, it is quite low. Many private banking firms with AUM of less than $25 billion $30 billion have been struggling or even losing money. Fundamentally, new money inflows are fairly patchy in this market and have been for some time. This lack of growth is incredible given the amount of assets that are being generated by wealthy individuals across the globe. A question the industry needs to ask itself is, Where are the wealthy going for wealth management? Before discussing that issue, I want to talk about the efficiency of wealth management in the private banking model. Private banking is a very tough business. The cost of regulation has led to margins that are thinner than ever. Cost-to-income ratios are declining and could return to levels not seen since 1985. Declining cost-to-income ratios put pressure on firms in the industry to generate new solutions when managing or engaging with their clients because the most expensive component of the wealth management model is the relationship model, which consumes about 60% of total costs. Regulation is also costly. The industry has gone throughand is still going througha radical change in its understanding about what constitutes compliance and noncompliance. This bleak outlook for wealth management is half of the equation; the other half is the wealth itself. Table 2 shows global wealth by region in 2012. Although the growth of assets in all of these regions was relatively flat during 2012, there were significant pockets of growth in specific segments in each of these markets. To access these pockets of growth, private wealth advisers need to understand the hearts and minds of high-net-worth clients, a concept the industry is only beginning
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Table 1.  Top 20 Private Banking Institutions in AUM in 2012

Institution Bank of America UBS Wells Fargo Morgan Stanley Credit Suisse Royal Bank of Canada HSBC Deutsche Bank BNP Paribas J.P. Morgan Pictet & Cie Goldman Sachs Citigroup ABN AMRO Barclays Julius Br Northern Trust BNY Mellon Crdit Agricole Lombard Odier Darier Hentsch AUM (USD billions) 1,671.00 1,554.53 1,300.00 1,219.00 843.32 573.32 377.00 348.60 316.20 291.00 262.11 227.00 208.00 189.98 182.71 178.79 173.70 168.00 163.67 151.30 Growth in 2011 2.17% 0.34 7.01 0.81 2.51 0.68 3.33 5.41 7.11 2.46 5.48 0.87 47.83 13.67 1.72 0.12 12.50 1.20 4.74 1.18 Reporting Currency USD CHF USD USD CHF CAD USD EUR EUR USD CHF USD USD EUR GBP CHF USD USD EUR CHF Ranking Move +1 +1 2 +7 1 1 1 +1 1 3 1

Notes: This list is determined based on the key performance indicators of 200 private banking institutions tracked by Scorpio. USD are U.S. dollars, CHF are Swiss francs, CAD are Canadian dollars, EUR are euros, and GBP are British pounds.

Table 2.  Global Wealth by Region, 2012

Region North America Latin America Europe Middle East Africa Asia Pacific Overall Wealth (USD trillions) 11.4 7.1 10.1 2.8 1.1 10.7 Change 2.3% 2.9 1.1 0.7 2.0 1.1 Number of High-Net-Worth Individuals (millions) 3.35 0.5 3.2 0.5 0.1 3.37 Change 1.1% 5.4 1.1 2.7 3.9 1.6

Source: Based on data from the World Wealth Report, Capgemini, and RBC Wealth Management (2012): www.capgemini.com/services-and-solutions/by-industry/financial-services/solutions/wealth/ worldwealthreport/.

to grasp. Globally, overall wealth is $42 trillion, but only $16 trillion is currently managed by the private wealth industry, which means $26 trillion is being managed outside the realm of private banking. Why Should Wealth Managers Care?The private banking industrys economic model is in trouble because of rising costs and falling revenues. The income stream generated from asset classes has been declining for many years. Wealth managers need to reconfigure the current model to make it worthwhile. Some believe market fragmentation has played a role in the models declining profitability, but I disagree with that view.
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Growing competitive influences are a big factor in the market. The primary competitive influences come from the options clients have for their money. They do not have to invest their money with a big firm, such as UBS, or with a small boutique asset manager. They can spend their money on a house, a boat, or a company: Wealth clients have many wealth management options, all of which represent competition with private banking. Client opinion is also an important factor in the wealth industry, although the industry has been very dismissive of it. For the past 14 years, I have been saying the industry must focus on client opinion. I do not believe most advisers in private wealth truly understand their clients, which
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is a real problem when these advisers are trying to build a business. Often, when I interview clients on behalf of a wealth management business, they will tell me they do not think their managers really know who they are. Many times, I find that a bank believes it has 50% of a clients wealth when it actually has only 5%. A better understanding of clients is necessary, not only from a regulatory perspective but also from a business perspective. The business model that private banks have favoredrelying on the relationship manager as the only source of client informationis flawed; this model does not provide enough information. Why Do Wealth Managers Care? The demographics of wealth creation are very encouraging both in emerging markets and around the world. Wealth creation is manifesting itself not only in the industries that have created wealth in the past, such as durable goods, but also in new industries that were unheard of a decade ago. The highnet-worth market is substantial, and the amount of wealth creation is also substantial if mediumnet-worth individuals are included. As the mass affluent move into the high-net-worth category, a significantly larger market is being created. The wealth management industry needs to learn how to capture the hearts and minds of people in these new wealth-creation centers. Another development in wealth management is the financial services industrys reinvention of itself, not just with innovative products but also with innovative delivery to the customer. The client revolution is a crucial development, but perhaps a less exciting one. Clients are beginning to ask themselves, What is the real value of my adviser? One of the damaging responses to that question for the industry is that clients believe they can manage their own wealth. Professional advisers may well disagree about the ease of managing ones own wealth, but financial clients have started to ask themselves the question and to believe that the risks of managing their own money might not be insurmountable. They will likely return to professional services, but it might take a long time for them to do so. The final development shaping the industry is the science of wealth. Significant advances have been made by researchers in calibrating the effectiveness of a business and understanding the customer. Tools and equipment that are used in other industriessuch as in the telecommunications, pharmaceutical, and medical industriesto help professionals understand their customers are only beginning to be used in wealth management. The financial services industry is still in the spreadsheet era when it comes to wealth management, as
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opposed to, for example, the medical industry, in which providers understand their customers very well. With net new money growth within private banks still sluggish, it is difficult to say whether wealth management is genuinely in recovery. But wealth creation is continuing, and the key to success will be to understand what private wealth clients need next.

Winning Private Wealth Clients

Today, as in the past, private banks and private wealth managers believe the best way to get their industry out of this recessionary environment is to spend money and then spend some more. I say okay, but it should be done wisely. The use of a wide range of approaches has grown the industry to $16 trillion in AUM so far, but the next $10 trillion will require a targeted approach. Winning clients in the future will depend not on developing fantastic new investment products but on positioning products to meet the needs of a specific customer base. Some of my assertions may be surprising to wealth managers because they believe success in this business is based almost exclusively on longterm relationships. To address that misconception, I will first define what I call the vicious-virtuous cycle. The marketing approach of most private wealth firms is to project one message: We focus on the client at any cost. But then the firms often engage in product dumping, so the client receives a completely different message: We cannot afford to focus on clients at any cost. The final element of this cycle occurs when firms blame bad practices on other financial institutions: Firm X is able to cover its costs because it is not focused on its clients, and we are unique because we focus on clients at all costs. This practice is not helpful, either. The cycle then repeats. As I mentioned earlier, 80% of wealth today is managed by 20 institutions, and based on our insight interviews, the clients at each of these institutions remark that they hear the same lines, whether the firm is UBS, Credit Suisse, J.P. Morgan, Goldman Sachs, or any of the others. Clients then become frustrated and begin to question what is really true. The frustration is the same for high-net-worth, ultrahigh-net-worth, and family office clients as it is for retail clients. It is this vicious-virtuous cycle that gives independent businesses an opportunity to provide value in the market today; small firms can provide relief from this confusion and frustration. To avoid the vicious-virtuous cycle and reinvent the existing business model, I suggest three simple steps for private wealth firms and managers.
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Step One: Recognize That Clients Are Cus tomers.My partners and I launched a 10-year project called Futurewealth to help us understand the anthropology of the private wealth client.1 For Futurewealth, we regularly survey individuals with investable assets in excess of around $3 million about what is important to them. The results are illustrated in Figure 1. We cover customer views on such topics as brands, independent opinions, marketing information, salespeople, and staff efficiency; we call the results the customer journey. This journey reveals certain moments of truth, represented by the high points in the graph. We ask these same clients what is important to them in the nonfinancial industries in which they also spend substantial amounts of money each year, such as charities, technology, cars, and so on. We have been able to get a sense of what motivates individuals to commit capital to one area versus another and what might influence them to commit more to specific areas in the future. One moment of truth is brand. Brand is incredibly important. For the last century, the
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financial services industryand particularly wealth management believed the brand was the relationship manager, not the institution. The industry has been wrong. From a customer perspective, the brand consists of both the institution and the relationship manager; they go together. In fact, it is very important that they stay together, but it does not always happen. The brand is one of the most important factors among all of the customer factors we analyze. Step Two: Identify Those Who Like You and Those Who Do Not. Another factor that is important to the wealthy is access to information online. Wealth management has been very slow to recognize the importance of online information. That lack of recognition has to change. The relationship manager has always been the centerpiece of value in wealth management. But what we continue to see is customers questioning the economics of the relationship and asking if they are paying the right price. The compensation structure of the industry may change radically in the future because value to the client is not just about point of contact with a human.

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Figure 1.  Important Elements in Wealthy Consumers Customer Journey

Importance (%)

75

65

55

45

Pre-Purchase 35 Brand or Model Independent Online Marketing Opinion Information Information Donated a Major Charitable Gift Salesperson

During Purchase Premises Try Before You Buy Staff Efficiency

Set Up a Relationship with a Private Bank or Wealth Adviser Purchased a New Piece of Technology Purchased New Jewelry or Watch

Purchased a New Car or Motorbike Purchased Art or Collectibles from a Gallery

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Staff efficiency is another area that is important to the wealthy. When these individualssome of whom are the most influential in the world have given firms their money to manage, they want things to be done in a particular way. Staff efficiency matters tremendously. To be successful, asset managers must understand these customer truths. They must recognize, for instance, the differences among clients in different regional markets, such as Asia, Europe, and the United States, and among different types of clients, such as entrepreneurs, philanthropists, and so on. An adviser needs to identify those clients the firm wants to do business with and those it does not. This industry serves many clients who were accepted as clients based only on their asset levels. Whether a client is right for the long termfor example, whether the client has referral capabilities or potential future assets that will increase his or her AUMhas not been given much thought. As an example, we considered several client segment profiles, including a client who is between 30 and 39 years old and a European client. We analyzed which factors are most important to each of them on their client journeys. Importantly, European clients are often dissatisfied with spending in the private banking industry. They tend to believe that too much is spent on hospitality events, networking, and educationareas that are not important to them. European high-net-worth clients do not expect a private bank to expend a lot of effort getting them to attend functions if attending such functions is not of interest to them. What does matter is staff efficiency. There is a certain sense of disintermediation that is very strong in the European market. Europeans expect their private bankers to invest their money but not to consume their time. On the other hand, 30- to 39-year-old clients who are ambitious professionals and have just earned their first $1 million may consider networking events to be important as they grow their asset bases. The bottom line is that the science of wealth management is becoming much more targeted; managers need to determine what customers want and how to find the customers best-suited to their firms. This knowledge comes from better insight. Chief marketing officers and chief intelligence officers are going to play much larger roles in driving business growth in the future. It is these roles that have been so significant during the last decade in Google, Apple, and Microsoftbusinesses that have clearly grown and reached clients. Step Three: Reconsider Aftercare to Retain Business.The private wealth industry needs to reconsider client retention. Firms need to be aware of who their clients are. In the past, the relationship
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manager has often been the only point of contact with the client, which results in a significant risk of losing the client if that contact is lost. From a clients perspective, periodic contact matters. Firms know that such contact is important, but they need to also understand what it should look like in the future. Loyalty is another significant part of the client relationship. Many clients we interview say that they have never been rewarded or recognized for being a customer of a private bank or a wealth manager for 5 years, 10 years, or longer. The industry thinks it has rewarded clients by just continuing to do business for them; clients expect more. It is not hospitality events that are rewarding but more subtle moments when a firm acknowledges that an individual has been a client for 10 years and says thank you. Such gestures of gratitude are common in the luxury sector but not in the financial services industry, particularly not in wealth management. As I have mentioned, brand is also incredibly important to clients. We asked thousands of highnet-worth individuals which brands they admire and for what reasons. We asked whether their admiration of the brand is dominated by a sense of passion (always coming up in their minds and conversations), intimacy (familiar or comforting), or commitment (always around and durable). The results are shown in Table 3. Some brands are important to millionaires even when they are not consumers of the brandfor example, Apple, Porsche, BMW, and Ferrari. A millionaire does not need to own a Ferrari to be passionate about this brand. Notably, all the financial services brands ranked lowest in the survey. Clients have a sense of intimacy toward these brands because of their financial investments, but they are not getting much else from the relationship. The financial services industry has a lot of work to do to improve its reputation. When we asked private wealth clients all around the world to name brands they admired, we were very surprised that not one financial company was ever chosen. In addition, 20% of the high-net-worth individuals that we surveyed actually work in financial services; they do not even admire their own businesses. These results are disappointing because I think financial services is a very admirable business.

Transition in the Private Wealth Industry

Our research and development work indicates that the wealth industry is on the cusp of a completely new order and is poised for transition. A digital or online connection is unavoidable. Firms that connect with
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Table 3.  High-Net-Worth Individuals Views of Admired Brands

Brand Apple Porsche BMW Ferrari Rolex Audi Mercedes Benz Bose Patek Philippe De Beers Cartier Singapore Airlines Jaguar OMEGA Chanel Gucci Sony Emirates Bang & Olufsen Four Seasons NetJets Mandarin Oriental Louis Vuitton Tiffany & Co. Swarovski Marriott Standard Chartered Burberry Virgin Hilton Aston Martin American Express HSBC UBS Citibank Brand Love Index Score 67.1 65.9 62.9 62.9 62.4 62.4 62.2 60.8 59.3 58.7 57.0 56.6 56.2 55.8 55.7 54.7 54.7 54.5 53.6 52.1 50.2 49.7 49.5 47.3 46.4 45.2 42.6 42.0 41.9 41.5 41.1 36.0 31.8 30.0 26.4 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Passion Dominates * * * * * Intimacy Dominates Commitment Dominates

Notes: The Brand Love Index was created by Scorpio with data from the Futurewealth Project. The average Brand Love Index score is 49.7.

clients digitally can be much more successful than firms that do not. The use of social media and digital connections might sound like a retail approach, but wealthy people are plugged in and online. Some private banking firms recognize this change and are orchestrating aggressive campaigns to move into the digital world. We are experiencing the second round of the digital revolution. The first round of the digital revolution during the dot-com era did not go well because it was poorly orchestrated and filled with
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misinformation. Banks that tried to join the revolution then wasted a lot of money because they did not understand their customers or know how to reach them. They simply built things and expected everyone to want those things. The current digital transformation is different. Financial institutions need to understand that, in a sense, they are content managers. They have to think like publishers. Success depends on more than great financial instruments or great performance; it
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also depends on how content is delivered to clients. It must be delivered via any channel a client wants, at any time, and in a way that is customizable to the client. This flexibility is crucial. Technology is critical to a comprehensive delivery strategy; firms must have the capability to reach their customers. In the future, banks will recognize that they are technology firms first, content managers second, and financiers third. This shakeup in sequence is going to be hard for the industry to understand because many of its participants are focused on new product innovation. But to sell those new products, technology and content must come first. Globally, the wealthy are already connected. High-net-worth clients of all ages are becoming increasingly involved in the digital revolution. The increase in social media engagement among highnet-worth individuals is demonstrated in our 2012 Futurepriority Report and our 2012 Futureadvisor Asia Report.2 Of all high-net-worth individuals we surveyed, 83% are on Facebook, 42% use Twitter, and 24% use LinkedIn. Of the entire internet populationconsidered to be 901 million people worldwide45% are on Facebook. As an example of how important it is to be aware of social media, consider this anecdote from a U.K. bank that was replacing a clients relationship manager with a new manager. The bank sent a letter to the client announcing the change and praising the quality of the new relationship manager. Within an hour of receiving the letter, the client notified the bank by e-mail that he did not want this manager. He had seen the new managers profile on LinkedIn and considered him too inexperienced to manage his account. The client also directed the bank to the managers Facebook page, the content of which he found to be a bit alarming. On the positive side, wealth clients own a number of gateways that facilitate online access. Apple iPads and tablets will soon be as ubiquitous as laptops. The retail marketwhich is hugeis similarly connected. The world is an ecosystem of content exchange, and financial services are part of this system. Yet, 60% of the wealth management and private banking industry is completely inactive in this arena. The challenge is to determine how digital marketing and relationships can enhance corporate returns. Small firms currently lead in this space. We asked millionaires how much time they spend online in various areas, such as news, social media, general research, and so on. We learned that the wealthier the individuals, the more time they spend online and, more significantly, the more
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time they spend online making and monitoring investments and engaging in financial research. Millionaires spend an average of 5.3 hours a week in online investment and banking activities. Private bankers must ask themselves how they can integrate these habits into their relationship model. This moment is critical for the industry. Wealth clients are ambitious, digitally connected, and agents of referrals. They are going to share their opinions about their adviserswhether positive or negativevia Facebook and Twitter. Social media constitutes an important channel for referrals, which are crucial to the industry. I am not arguing that wealth management is going to rely purely on digital solutions in the future, but I am arguing that professionals in this industry must effectively integrate digital awareness and interaction into their ecosystem or they are going to miss out on a lot of clients. Recall that net new money is flat. Private wealth managers must adjust to a consumer whose options are not limited: No manager has the right to a clients business. Customers are being influenced online and are connected by their phones, their tablets, and their computers. They are researching online, communicating online, and buying online. What wealth managers can do is move into the digital space of consumers, as National Australia Bank did with a successful online retail campaign. Part of the success of retail campaigns at banks can be traced to Google because many consumers use the search engine to research financial choices. Our statistics indicate that 50% of high-net-worth individuals will be using the internet more frequently for researching investment choices in the future. One-third of clients expect that the amount of financial advice they will require in the future will be at least as much as they require today, and 44% expect that the amount of financial services they need will increase. These individuals are going to interact digitally to facilitate their wealth management. Many of the larger private banksthose in the top 20 in Table 1are quick to adopt retail trends but very slow to adopt trends in wealth management. The obstacle they cite every time is that wealth management is a relationship management business and the relationship model requires communication from one person to another. But the research on a significant scale is suggesting something very different. Digital interaction is not going to break the relationship model; it is going to augment it.

The Future
The future of wealth management will be about how clients engage with their money. First, private wealth advisers must reconnect with their

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clients. On the Forbes billionaires list, 89 of the 500 billionaires nearly 20%are from the technology industry. One can expect that a similar percentage of millionaires have a technology background. When these high-net-worth individuals require financial services, they will wonder why they cannot connect with their advisers in the same way that they connect in other areas of their lives. If advisers cannot meet their clients needs, those clients will either go to another private wealth adviser or manage their own wealth. Wealth managers must be wary of the latter because online wealth management firms are being established to target these clients. For example, one of the principals of LinkedIn has launched an online business targeting the private wealth management client at substantially lower fees than the private banking industry charges. This company leverages the technological knowledge and sophistication gained from the LinkedIn experience to connect with its wealth customers. Another example is a Silicon Valleybased free web application featuring online bankers who target specific types of wealth clients according to the bankers very different demographic profiles. These firms are targeting private wealth clientsthe high-net-worth customers. Technology allows their efforts to be scalable; clients could have $10 million or $100 million. I know of one particular family who is beginning to use these types of services on a trial basis. This family is worth $150 million. Advisers must consider what they are doing to be competitive in the online wealth management industry because clients consider this online interaction valuable. Digitally connecting does not discount the value of offering clients investment solutions; rather, it enhances the client service experience. Spending alone, whether on relationships or products, may no longer be able to achieve growth. Industry financials are grim. Cost-to-income ratios are poor, and revenues are declining. The declining cost-to-income ratios demonstrate that simply adding more managers is not very efficient. There is little value in continuing to manage wealth as it has been managed in the past. The relationship model has to change because customers are demanding it.

They will refuse to do business with firms that cannot evolve. The industry can prevent further margin deterioration and introduce new value by focusing on financial planning services, asset allocation management, and other intellectual skills that clients are amenable to paying for on an ongoing basis. The millionaires are taking more control over some of their portfolio decisions. Firms will have to offer a blend of active advisory and discretionary services. Many clients no longer want to delegate complete control of their investments; instead, they want to be in control of their wealth management for a while. After they are comfortable with the control and understand the mechanics of their investments, they will feel confident allowing their adviser to take over. But advisers must earn that trust.

Conclusion
Wealth clients are becoming more purposeful and directed. They know what they want. They have access to more information and have more exposure to financial markets than ever before. To be sure, there will be a niche opportunity in the industry for those individuals who stay lowtech. High-net-worth individuals who have never picked up an iPad do exist. But staying low-tech and relying on such a small percentage of potential clients would mean missing a huge opportunity. The industry does not need to abandon the relationship management model, but it does need to change the way it views its customers. I have presented some ideas about what the future of the wealth management industry will be like during the next decade. Economic issues are driving the need for improvement but so are fundamental client issues. Clients are asking the wealth industry for improvements, and the industry should not ignore them. If the industry fails to respond, a significant opportunity will be missed, which would be a shame because the collision of the wealth management world and the digital world is a fantastic moment for the industry.
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Q&A: Dovey

Question and Answer Session

Sebastian Dovey
Question: With the growth in wealth, particularly in Asia and South America, projected to be substantial enough to provide plenty of business for all wealth management firms, where does the need for marketing fit in? Dovey: Marketing is embedded in the private banking model. Otherwise, how will firms get clients? Some of our banking clients do not believe in marketing; they rely on word of mouth to grow assets. But when I interview potential clients for these institutions, the clients invariably say they have never heard of these banks. By refusing to engage in marketing, these banks are ensuring that they will remain unknown to clients. Without marketing, the future of the wealth industry will continue to diminish. The cost-to-income ratios and revenues will get worse. Those who believe marketing is unnecessary are in the wrong industry. The wealth industry is a consumer industry that requires firms to reach out to clients and win their hearts, minds, and ultimately, their assets. Firms need to respect the fact that clients expect them to earn their business. Question: What is the difference between an investment manager and a family office? Dovey: The difference between an investment manager and a family office is slight. There are two types of family offices: genetic and nongenetic. The genetic family office actually has a family behind it. Typically, those types of family offices begin with an administrative function, which evolves into a gatekeeping function and then an investment function. If the family has a good investment performance record, the family office might actually become an asset manager. If the family multiplies, the family office ends up resembling a pension fund. The nongenetic family office is generally formed by a group of bankers as an asset management business, using the family office front as a marketing technique to target very rich clients. The business typically has an assetbased fee, and growth comes from increasing AUM. Success becomes difficult when markets are tough. One difference between a nongenetic family office and an investment manager is segmentation, although a lot of firms that claim to be family offices tend to seek clients from the same market as traditional investment firms. There may be some other differences relating to the servicing experience. For example, a family office might offer more monitoring of asset allocations. The family office industry is not mature, and the economics of the industry are unfavorable at the moment. The economics I discussed for the private banking industry apply to many of the family offices that are in the market today. Question: How can a firm serve its clients efficiently without resorting to client segmentation, which does not seem to work well? Dovey: Client segmentation has worked incredibly well until now. Much of the $16 trillion of industry money has been managed according to segmentation, but the industrys approach to segmentation has been very crude. Segmentation has been
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based on either the amount of assets a client has or the type of investor a client isfor example, an entrepreneur, retiree, or inheritor. This type of segmentation is very superficial. Other industries that segment their clients typically use three reference pointsmoney, location, and profession. A fourth reference point that is emerging in the private wealth industry is behavioral patterns. The behavioral patterns of millionaires are something we are studying in-depth right now. Behavioral patterns are not the same as risk profiling. Behavioral patterns are such things as the way customers like to be treated or what influences them. Wealth management is a consumer industry first and a financial services industry second. Question: Do minor differences matter over time, culture, and geography? Dovey: The industry does put a lot of emphasis on addressing cultural differences. Much of the insight we have gained at Scorpio does not correlate with the industrys beliefs pertaining to cultural and geographical differences. Clients in Singapore have the same hopes, fears, dreams, and ambitions regarding their money as clients in Germany. For example, they do not want to lose money and do not want their money mismanaged. We do see some differences among markets, but not to the degree that wealth managers often imagine. To illustrate, for the last 20 years, private bankers have told me not to talk about death in Asia because the topic is taboo. Every client we have spoken
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to in Asia has laughed at this notion. In fact, these clients have told us that Asians need to know how to factor death into their estate planning and what type of products they will need, but no one discusses these issues with them.

Another industry belief is that clients in Asia prefer active trading to taking a conservative investment posture. The evidence shows that most customers in Asia are asking for an investment plan and advice, not trading ideas. So, managers

must be careful when making assumptions about clients based on rudimentary segmentation. Segmentation is becoming much more sophisticated because we are able to obtain better data on millionaires.

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