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 µpassive¶ 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 µaffluenza¶. 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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36% of 5 the global wealth management revenue pool .Wealth Management Pool by Product Non-cash investments may account for no more than c.

e. i. targets clients with assets as low as $100. those with more than around $1 million in investable assets. by contrast.000. 6 .Client Segments   Private banking targets only the very wealthiest clients or high net worth individuals (HNWIs): broadly speaking. Wealth management. affluent as well as high net worth (HNW) clients.

7 million Source: BCG Global Wealth 2006 7 .2 These account for Millionaires 28.Number of Millionaires These millionaires 7.6% of global own wealth! 28.6% of world wealth Merrill Lynch / Cap Gemini 8.

Where do Millionaires Live? Source: BCG Global Wealth 2006 8 .

such as investment performance. as well as tax advisory expertise and alternative investments.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. wealth preservation or wealth transfer. The products and services provided. with a particular emphasis on estate planning and multigenerational planning services. both in terms of breadth (where providers emphasise terms such as µholistic¶. 9 . µcomprehensive¶ and µall-inclusive¶) and depth (µintimate¶ and µindividualised¶). The specific objectives of wealthy clients.

Not investment advice. asset safekeeping. That involves. or selects brokers to execute. securities transactions on behalf of the client. essentially. income collection. Advisory mandate Discretionary mandate 10 . service aimed primarily at self-directed clients. the wealth manager executes. fund disbursement and associated reporting.Investment Mandates     Custodian for a client¶s assets. Execution-only mandate.

in all cases. However. The wealth manager is generally paid on the basis of a flat-fee arrangement linked to the value of the assets under management. detailing investment aims. 11 . The gross revenue margin of a discretionary mandate is typically at least double that of an execution-only mandate. may be subject to the client¶s approval. major investment decisions.Discretionary Mandates  The wealth manager usually has sole authority to buy and sell assets and execute transactions for the benefit of the client. such as changing the account¶s investment strategy or asset allocation guidelines. the wealth manager is given only limited investment authority). level of risk-aversion and other factors that will influence the portfolio (In some discretionary accounts. in addition to providing investment advice. Starts off with:    Construction of a brief with the client.

In Europe. In the US. in general. wealth management is more closely allied to transaction-driven brokerage and is typically investment-product driven. with its greater emphasis on advice and exclusivity. Execution-only mandates become more prevalent the greater the clients wealth Discretionary mandates less prevalent.Investment Mandates & Clients Wealth     The proportion of clients using advisory mandates is. 12 . the term is more synonymous with traditional private banking. as client wealth rises. relatively stable across the various client wealth bands. Wealth management can mean different things in different geographic regions.

legal-system flexibility. 13 . Some clients treat their offshore account(s) primarily as a µvault¶. by contrast.Onshore & Offshore Wealth Management   Onshore wealth management is the provision of products and services within the client¶s main country of residence. a low level of trust in domestic financial markets and governments. tax considerations. Offshore wealth management. serves clients wishing to manage their wealth outside their main country of residence for reasons such as: financial confidentiality. the lack of appropriate products and services onshore. and the need for safety and geographical diversification in response to domestic political and macroeconomic risks.

David Maude¶s client work. 14 .Wealth held Offshore Source: Boston Consulting Group. Julius Baer.

Offshore and Onshore Wealth Manager Attributes 15 .

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) & µmass affluent¶ clients / households can vary See Box 1.1 Wealth market measurement methodologies: lies. damn lies and wealth statistics? Of Maude (2006. p9) 16 .

com/media/67216.ml.com/media/67217.Market Size & Growth  Commonly used estimates are provided by: Capgemini/Merrill Lynch annual World Wealth Report   For their 2006 Report see: http://www.ml.pdf Regional snapshot see: http://www.com/publications/files/Sum_Global_Wealth_ Sep06.bcg.pdf For their Global Wealth 2006 Reports see: http://www.pdf Boston Consulting Group:  17 .

Boston Consulting Group estimates from Global Wealth 2006 18 .

Boston Consulting Group estimates from Global Wealth 2006 19 .

Boston Consulting Group estimates from Global Wealth 2006 20 .

Boston Consulting Group estimates from Global Wealth 2006 21 .

Boston Consulting Group estimates from Global Wealth 2006 22 .

25 trillion whereas Merill Lynch /Cap Gemini put it at $33.000 investable assets) globally accounted for >50% of AuM 74% in Japan 62% in North America 57% in Europe 22% Latin America Millionaires held 28.Key Features of Market Size (BCG estimates)     Global Total Wealth (AuM) = $88.1% in cash & deposits Affluent customers (>$100.3 trillion in 2005 39% in investment portfolios 41.6% 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 $25.3 trillion 23 .

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 µvault¶!) Offshore wealth declining ± due to increased investment opportunities in domestic markets (Middle East.Key Features of Market Size (BCG estimates)    Wealth held offshore accounts for 6. Asia) and regulatory / tax harmonisation pressures (to be discussed later in the course) 24 .

4%) and 7.2% (North America) (ML/CG 7.7%) slightly behind forecasts for Japan (6.Key Features of Market Growth (BCG v Merrill Lynch / Cap Gemini estimates)    Annual growth of AuM predicted at around 5. AuM growth in Europe (6%) (ML/CG 3.7%) NOTE THAT ML/CAP GEMINI focus on HNWI wealth > $1 million in financial assets 25 .3%) and China (11.5%).6% (ML/Cap Gem 6%) from 2005-2010 Annual growth rates of AuM range between 4.9% (Asia-Pacific ± strongly driven by India (13.

2005.org/publications/workingpapers/wp2005_1 0. At the other extreme.chicagofed.Key Wealth Drivers    Economic growth Asset prices in the top 1% of the wealth distribution hold around one third of the total wealth in the economy.pdf Wealth allocation ± concentration of wealth µ(US) households  Demographic factors 26 . 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 . and those in the top 5% hold more than half. Chicago Fed WP 2005-10 http://www.

Key Wealth Drivers ² Regional Differences  Regional differences: North America: high economic and productivity growth rates. Income main source of HNWI wealth followed by business Europe: Business Ownership / Sales of business / Wealth transfer between generations 27 . (invested weighted to equities) bulk of the wealth is held onshore. strong US financial market returns.

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Key Wealth Drivers ² 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 29 .

Where does HNWI wealth come from? Merril Lynch / Cap Gemini World Wealth Report 2006 30 .

Industry Economics      Large and growing market High profitability Stable revenue stream. A relatively high stock market rating Strong intragroup synergies 31 .

High Profitability ² Unicredito 2001 32 .

High Profitability ² Citigroup 2004 (post tax return on invested capital) 33 .

Stable Revenue Streams ² UBS & Credit Suisse ² High Recurring Income 34 .

Relatively High Stock Market Rating ² Financial Service Firm P/E ratios 35 .

e. There are also opportunities for other parts of the group.  Cost side: opportunities to share infrastructure and spread fixed costs 36 . e. the retail and business banking divisions. Revenues side: opportunities for wealth management operations to acquire clients from other parts of the group.g. to leverage the private client base for product sales.g. investment banking divisions.Strong Intragroup Synergies   Integrated players benefit from their wealth management businesses in two ways.

Competitive landscape 37 .

accountants. financial planners 38 . solicitors.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.

Main players ² Fragmented Market 39 .

growing and highly profitable Industry is fragmented & there is no agreed single µpreferred¶ 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!!!) 40 .Conclusion      Wealth management & private banking business is currently a major area for development for many of the worlds financial firms The market is large.

5 billion (1) 41 .4 billion (9) Warren Buffet (2) Net Worth: $44 billion Bill Gates (Microsoft) Net Worth: $46.Conclusion ² Billionaires (2005) & their motors Ingvar Kamprad (IKEA) Net Worth: $23 billion (6) Lawrence Ellison (Oracle) Net Worth: $18.

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