FUTURE of Private Banking

Phil Molyneux

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Aims of Presentation

 Examines the future prospects for the private

banking / wealth management industry
 Recaps key trends
 Focuses on sources of new profitable growth:
 Geographical areas
 Client relationship deepening.
 New areas / propositions
 Future industry structure
 Critical success factors.
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Key Future Trends
 Private banking firms need to develop their businesses models
and change (or enhance) their strategic focus in order to take
advantage of the opportunities afforded by higher growth markets
and product segments
 Profit growth is expected to be mid-market HNWIs in the
developed wealth management markets of North America and
Europe, with a stronger growth potential in the newer emerging
markets of Asia, the Middle East, Latin America and Eastern
Europe
 Global private banks are actively developing activities in the
three key markets of China, India and Russia
 Growth in the offshore wealth management area is expected to
lag that of onshore business;
 Singapore and Hong Kong are perceived as markets that offer
the greatest potential here, given their advantages in attracting
Asian wealth.

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Transformation of wealth management

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Sources of new profitable growth

 Geographic participation. Potential growth

opportunities in established and new markets
 Client relationship deepening. Increasing the
penetration and loyalty of existing clients, and
targeting new client segments
 New propositions. Developing product and
service innovations and personalising the
wealth management advisory role.

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Geographic participation

 New emerging wealth markets:

 Particular attention has focused on the ‘BRIC’ economies –

Brazil, Russia, India and China – in particular the latter
three economies, given the projected economic growth
over the coming decades
 India’s economy could be larger than Japan’s by 2032
 China’s larger than the US by 2041 (and the second
biggest economy in the world by 2016)
 Goldman Sachs forecasts show that the combined BRIC
economies will be larger than the current G6 (US, Japan,
UK, Germany, France and Italy) by 2039.

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Overtaking the G6: when BRICs’
US$GDP would exceed G6

Source: Goldman Sachs (2003). 7

The largest economies in 2050

Source: Goldman Sachs 2003. 8

HNWI financial wealth forecast by region,
2004–2009E (US$ trillions)

Source: Capgemini Merrill Lynch (2005), ‘World Wealth Report’ Capgemini.

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Global HNW wealth growth estimates
 Global HNW wealth estimates from the Merrill Lynch Capgemini
(2005) ‘WorldWealth Report’ is expected to grow at an average
annual rate of 6.5% between 2004 and 2009. Emerging markets
are generally expected to experience the fastest growth:

 Middle East 9.1%

 Asia Pacific 6.9%
 Latin America 6.4%
 Seems to be consensus on above ranking but forecasts of HNWI
wealth appear to vary is for the US and Europe.
 Cap Gemini and Merrill Lynch expect a relatively low growth of
3.8%, whereas BCG forecast 6% annual growth in HNW wealth.

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Global HNW wealth growth – Growing
Consensus
 Growth of private banking business in North America and Europe
will predominantly come from established clients
 The North American wealth market will grow faster than that of
Europe and, because of its sheer size, will still remain a key market
 In emerging markets (Asia, Eastern Europe and Latin America),
growth will come from emerging (generally entrepreneurial) clients
 In the Middle East, growth is mainly expected to come from inherited
wealth as well as from clients that have businesses linked mainly to
the energy sectors
 China, India and Russia, plus possibly Brazil, are the most attractive
growth markets
 Offshore wealth will grow slower than onshore wealth, particularly in
Europe, driven mainly by regulatory pressures relating to
transparency and disclosure of activities, and by initiatives relating to
the cross-border taxation of investment income

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Global HNW wealth growth
 China
 HNW wealth is believed to have been around $0.91 trillion in
2004 and this is expected to grow to $1.73 trillion by 2009 – an
annual growth rate of 14%.
 Russia
 Perceived as the key growth market in Eastern Europe. HNWI
wealth is estimated to amount to around $320 billion and this is
expected to more than double by 2009. At present most of this is
held offshore
 India
 HNW wealth is estimated at around $310 billion (similar in size to
that of Russia) and the market is expected to grow by around
10%–15% annually to $520 billion by 2009. (Other forecasts
suggest that growth in UHNW clients could be even higher)
 Middle East and Latin America (particularly Brazil)
 have stronger growth opportunities than the European and North
American

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Don’t forget JAPAN!!!

Source: Maude (2006), Box 10.1, p263-266 13

 Growth in offshore private banking assets
– Singapore’s ascendancy

Source: IBM Consulting Services (2005). European Wealth and Private Banking Industry 14
Survey 2005, IBM Business Consulting Services.
Client relationship deepening

 Given the demographics and growth prospects of the traditional

wealth management markets of North America and Europe, the
opportunities to boost performance by attracting new clients will
be severely limited
 Focus in these markets is to cultivate new business mainly
through existing client relationships and focusing aggressively on
intergenerational wealth transfers, especially for mid-range
HNWIs (ranging from $1 million to $30 million of AuM)
 WHY?
 Because the wealth of mid-market clients is expected to grow by
more than that of less wealthy clients
 Mass affluent market has not been a success
 Focus is to extend the range of services on offer to mid-level
HNWIs, expand the advisory role to encompass intergenerational
wealth transfer (product life-cycle) products and services and
develop broader family wealth relationships

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Growth of multigenerational client
relationships, by client type, 2002–2004

Source: Capgemini Merrill Lynch (2005), ‘World Wealth Report’. Capgemini. 16

New Clients

 New clients will emanate primarily from those

economies expected to have the greatest
economic growth potential, namely Russia,
India and China
 These will have created their wealth through
entrepreneurial activity and will seek services
that reflect their greater familiarity with more
complex financing options coupled with
relatively strong protection elements

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Increasing client penetration and loyalty

 Understanding the needs and aspirations of clients

 Focusing on higher-value clients
 Creating value-added services for clients.
 Focus on delivering relevant value to targeted clients. That,
of course, requires wealth managers to understand the
needs and expectations of clients and also really demands
that the relationship manager understands more precisely
what clients value.
 Confidentiality
 Security and
 Performance are important value-enhancing propositions.

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New propositions
- Product Innovation
 Affluent women
 In the UK there are more women millionaires aged
between 18 and 44 than men
 In Saudi Arabia, the region’s largest wealth
market, women are reported to own 40% of
private wealth
 Ethnic groups
 See Box 10.2 Maude (2006 p.270-272 for
more details)

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Non-financial ‘lifestyle’ services

 Lifestyle services are an umbrella term referring to a wide range

of services designed to support, facilitate and improve the
lifestyles of wealthy clients
 Includes:
 1. Lifestyle organization services aimed at assisting in organizing
and facilitating aspects of individuals’ lives such as leisure,
entertainment, shopping and event planning.
 2. Travel services aimed at supporting and arranging individuals’
travel requirements.
 3. Property and home services aimed at assisting with
individuals’ household and property requirements including
finding, purchasing, moving and maintaining the home.
 4. Luxury asset acquisition services aimed at helping wealthy
individuals in the purchase and management of large-scale
luxury items.

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Lifestyle services

Source: Datamonitor, ‘Incorporating Lifestyle Services into the Wealth Management Proposition Survey’
, May 2003, 21
Lifestyle services
 Attractions of offering such services:
 No single established best source for lifestyle services

 Wealth managers are in a relatively strong position to supply

such services as they (a) have access to the client segment that
is more likely to require lifestyle services and (b) can often have
strong and trusted relationships with their clients, which makes
them credible ‘referees’ for these types of services.
 Such services can add to:

 1. Revenue diversification..
 2. Incremental revenue opportunities. For example, by offering to
help wealthy clients buy luxury items, wealth managers can maintain
a post-acquisition role in the management of the acquired item.
 3. Increase client loyalty. Lifestyle services can increase client loyalty
and deepen client knowledge

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Aggregator role

 The industry is increasingly being viewed (and talked about) as

an ‘aggregator’, whereby a whole range of suppliers, both
internal and external to the bank, offer a range of services that
can be offered individually or bundled together to meet client
needs.
 Such ‘aggregation’ activity means that wealth managers have to
be much more nimble and efficient in sourcing, distributing and
identifying value-enhancing services (for both the client and the
bank).
 The ‘aggregator’ function of wealth managers, and the growing
focus on value-added advice led sales, has encouraged (or
forced) the industry to consider developing their business along
similar lines to the family office, with the aim of offering holistic
and independent advice.

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Industry Structure - Evolving to the next
level of a global trusted advisor?

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Industry Structure
 Global ‘champions league’. Strong global wealth management
giants such as UBS, Credit Suisse, Citigroup, Merrill Lynch and
HSBC. These target numerous onshore and offshore locations
and are developing their businesses in both mature markets and
emerging high growth regions.
 Regional ‘premier league’. Medium-to-large players with strong
domestic and regional brands such as BNP Paribas, Deutsche
Bank, Santander, Bank of America, etc. They offer a wide range
of products and services, but typically do not have a strong
international presence.
 Small specialised players. These operate mainly locally or focus
on niche product or client segments. They include EFG
International, Wegelin & Company, Sal Oppenheim, Hoare & Co,
family offices, etc. They are mainly distributors and rely entirely
on client relationships as their main asset, with heavily
outsourced production, operations and technology.

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Winners and losers in European wealth
management over the next 3 to 5 years

Source: Mercer Oliver Wyman (2005).

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CRITICAL SUCCESS FACTORS

 Common skill set needed for success. These relate

to:
 Building client relationships and developing a proactive and
flexible response to increasingly complex needs
 Networking, for both production and distribution purposes
 Marketing, co-branding and enhanced target client focus
 Improving operational efficiency cost, revenue and capital
efficiency
 Implementing value-based pricing and client management.

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Key is to develop common skills in
building relationships

Source: IBM Consulting Services (2005). 28

Boosting Efficiency
 Cost efficiency can be improved by initiatives such as
centralising and outsourcing operations, shedding low-value
clients, more aggressive product management and more rigorous
management of human resources (e.g. remunerating managers
more on the basis of value created)
 Revenue efficiency can be boosted by initiatives such as
applying more systematic value added pricing models tailored to
specific client segments, increasing investment thresholds for
unprofitable clients, identifying areas for effective cost-plus
pricing and promoting higher-margin specialised advisory
services
 Capital efficiency directs capital resources to the highest value-
adding areas of the business, with a relentless focus on value
creation across all product and business areas.

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Conclusion

 Examines the future prospects for the private

banking / wealth management industry
 Focuses on sources of new profitable growth:
 Geographical areas – China, India, Russia
 Client relationship deepening – focus on mid-wealth HNWIs
and intergenerational wealth planning services + focus on
holistic advice
 New areas / propositions – women, ethnic groups, lifestyle
services, family office style services
 Future industry structure
 Critical success factors - building on relationships, more
value-based approach to business and clients

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