The Boston Consulting Group has made public a new study of the market for wealth management [that is, chiefly, for private banking], taking in a range of related subjects including: the dynamics of offshore banking, the emergence of alternative business models, and key trends that will continue to press at the margins of such managers.
Switzerland is a landlocked country, so referring to it as a center of “offshore banking” seems pretty off-putting to those of us for whom that phrase still connotes tropical islands with actual (and sandy) shores. Still, offshore banking for purposes of this report consists of the investor practice of booking assets in a place where the investors themselves have no residence or tax domicile. This practice, unhappy though it makes the jurisdictions that aren’t the beneficiaries, isn’t going to go away. As the BCG observes, wealth management clients “will always seek diversification broad private-banking capabilities, specialized expertise, high-quality service, discretion, and domiciles with relatively high levels of economic and political stability.”
The amount of wealth held offshore in Switzerland by clients in Western Europe declined in 2011 “and will likely continue to erode,” says BCG. Switzerland, which is joined by Luxembourg in this, has suffered from the difficulties of Western Europe and their high exposure to investors there.
More broadly, the development of such centers, and the diplomatic pressures brought to bear upon them, are such that individual relationship managers may no longer “be able to serve clients from a large number of domiciles because regulatory compliance will become more complex and country-specific – making it impossible to master the distinct requirements of many different client domiciles.”
That is in fact the theme throughout this report. If you’re a private banker, your life is getting more difficult, and you’d better get used to it.
Alternative Business Models & Key Trends
Three new business models in particular are pressuring established wealth manager using older ways of doing business: external asset managers, family offices, and online wealth managers. In each case, traditionalists may reflectively want to defend their own turf, their own business model too, but they might decide that in some respect it is better to join ‘em.
For example, online wealth managers aren’t just online brokers anymore, they offer “advice, research, portfolio management, and investment products,” and they do so in ways that are becoming more user-friendly over time. Bank based wealth managers ought to consider their own branded online platforms, and the 24-7 availability of services that implies.
Players in the wealth management market will have to adapt to each of the following trends:
- Continued growth in the emerging markets
- Continued pressure for wealth managers from competition, product commoditization, the slowness of recovery of demand for high-margin products, and other constraints
- More sophisticated clients, confident in taking a large active role in their own affairs
- Simpler and more modular products
- More transparent pricing, more closely linked to service models.
In this difficult context, those who survive will be those who have strongly embedded risk management throughout all their systems, who have developed multi-channel capabilities and a social media presence, and who keep up to date with technology and infrastructure in order to meet customer expectations, especially in regard to customer relations management (CRM) itself.
Size of the Market
Global private financial wealth grew by just 1.9 percent in 2011. You might contrast that, for scale, with the growth recorded in 2009 (9.6 percent) or 2010 (6.8). BCG attributes the slowdown to “overall economic uncertainty and struggling equity markets in major developed economies.”
All of the growth that did occur can be chalked up to what the BCG calls the “new world,” or the emerging market nations of Eastern Europe, Latin America, the Middle East, Africa, and the Asia-Pacific (ex Japan). Drilling down a bit: in Asia-Pacific ex-Japan private wealth increased by 10.7 percent in 2011, reaching $23.7 trillion. The amount of wealth held in equities in this region increased by only 4.1 percent, but the amount held in bonds rose by 17.5 percent, and cash or deposits increased 13.4 percent.
In the Old World of mature economies (Western Europe, North America, and Japan) private financial wealth shrank by -.9 percent. In Japan, private wealth decreased by 2 percent in 2011. The amounts held in cash and deposits remained “virtually flat,” while the amount held in equities dropped by 7.6 percent.
Over the next five years the BCG expects private wealth at a compound annual growth rate of between 4 and 5 percent. It expects that the fastest growing asset class will be equities, with a CAGR of 4.9 percent.
As to the size of the market for managing wealth, the bottom line is this: Ultra High Net Worth households held $7.1 trillion in 2011, an increase of 3.6 percent over 201. At the projected CAGR, they’ll hold $10.3 trillion, or 6.8 percent of global wealth, at the close of 2016.