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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% of
the 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 for
28.6% of global
wealth!
These 7.2
Millionaires
own 28.6% of
world wealth
Merrill Lynch / Cap Gemini
8.7 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 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 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 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.

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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 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; 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 Maudes 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 (HNWIs) & 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


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Boston Consulting Group estimates from Global Wealth 2006
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Boston Consulting Group estimates from Global Wealth 2006
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Boston Consulting Group estimates from Global Wealth 2006
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Boston Consulting Group estimates from Global Wealth 2006
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Boston 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_1
0.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)