Individual wealth is a fast-growing market, with room for wealth managers big and small. Silvia Pavoni reports on developments that mean business opportunities are increasing, new products are more numerous and competition is becoming ever tighter.
Private banking is growing at a phenomenal rate. Globally, high net worth individual wealth totals more than $33,300bn, according to the latest figures, and wealth management services are a big contributor to global banks’ profitability. Three players, UBS, Citigroup and Merrill Lynch, have overtaken the thousand-million-dollar mark in assets under management.
High net worth individuals are increasing in number and sophistication. Countries such as China and Russia are future gold mines for private banks, with the growing wealth of their population and the increased openness of their markets to foreign financial players.
The picture in more traditional markets is exciting, too. According to data provider Mergermarket, the estimated individual wealth created in the past six months alone in central and northern Europe has reached €55bn, while wealth potentially generated by liquidity events, such as initial public offerings, in the same time period comes to a total of about €310bn.
Battle for business
Business opportunities for big and small players are up for grabs. But with the constellation of wealth managers and products available on the market, the battle to reach, gain and retain clients is as hard fought as ever.
Open architecture has played an important role in this respect. Allowing advisers to buy third-party provider offerings, open architecture represents a powerful tool in meeting clients’ demand for best fitting products, which do not necessarily come from the same provider. Of equal importance, the willingness to buy competitors’ products reassures clients that their wealth manager puts their clients’ interests first.
Some argue that open architecture is more useful as a communication tool than as an effective way of offering the best products to clients, particularly for big players whose own brand is a guarantee of a good product offering. Open architecture has had the biggest impact among small firms, allowing even one-man consultancies to offer as wide a product range as the big firms.
“Clients do not really care if they deal with an individual or an institution,” says Catherine Tillotson, head of research at Scorpio Partnership, a wealth management consultancy. “The relationship between client and adviser is paramount.”
Big firms have realised the distribution potential of smaller banks, particularly those set up by former employees that are most likely to take clients with them. Both old firms and new would benefit from the possibility of new small players staying on the same technology platform. If technology, on the one hand, allows clients to shop around for the best investments, on the other, it gives bigger private banks a new distribution channel for their products.
With this in mind, UBS launched its ‘Bank for Banks’ initiative for private bankers and financial intermediaries, inviting them to take advantage of a “virtual private bank” function based on its international network and global product breadth.
Influential trend
Access to a number of such platforms allow wealth managers to respond to increasingly sophisticated and informed clients. According to this year’s Merrill Lynch and CapGemini World Wealth report, more than two-thirds of relationship managers identify information available to clients as one of the most influential trends in wealth management in the past decade.
There has been a significant change in Swiss private bank Pictet’s distribution of its own products. In the 1990s, 90% of its products were sold through proprietary channels, today the figure is only 30%. “The trend towards open architecture is irreversible,” says Laurent Ramsey, CEO of Pictet Funds, Pictet’s fund distribution company. “Clients are much more aware than they were about what is available and of the performance of the funds, as shown by the media. On top of this, big banks that control the client relationship need to give independent advice and propose the best solutions for the clients’ needs, and the best solution might not be only proprietary funds.”
In some cases, the best solution is not available at all. The offer of products is too often based on good ideas but is not the result of client demand or market research. “In the industry in general, the dialogue between the manufacturer and the distributor is very much a dialogue between a salesman and a buyer, rather than a dialogue between two partners trying to design a solution together,” says Mr Ramsey.
Developing dialogue
Developing partnerships with other market players is increasingly important. Most players realise this and many are already marching towards it. “We invest huge amounts of money in operational platforms for private clients,” says Matthew Brumsen, head of UBS Wealth Management UK, northern and eastern Europe. “And we have an offering that would appeal to intermediaries as well as directly to individual clients.”
A marketing effort is much needed, particularly in the structured product area. “Structured products are 10 years behind in terms of marketing,” says Ms Tillotson.
Structured products have traditionally been the domain of investment banks. So far, few fund management houses have developed their own tailored offering. Those that have include Société Générale, with its asset management operation, SG Hambros, and German fund house DWS.
Creating new products
The migration of many investment bankers to private banking is helping the process of creating new products, thanks to the cross-pollination of specialist investment banking knowledge and the private banking expertise. “It’s the investment banking DNA implanted in the private bank,” says Mr Brumsen.
Marketing and innovation are crucial components for enabling players to compete in a fast-growing environment. And it is innovation that recently allowed Dresdner Kleinwort, the investment bank, and Kleinwort Benson, the UK private bank (both part of Dresdner Bank) to open new investment opportunities to a segment of the market.
Accessing an area previously occupied by hedge funds and proprietary trading desks of investment banks, the banks have developed two open-ended funds that profit from differences between implied and realised volatility on the S&P 500 index. The funds were made available thanks to innovations in the derivatives market and changes in European legislation, which allowed mutual funds to invest in instruments that were previously prohibited.
Business opportunities can also be spotted in new distribution channels, such as the booming trend of wealthy families establishing offices to manage their wealth. Initially developed in the US, the concept of a group of advisers working to protect and enhance family wealth, rather than individual family members’ wealth – for the likes of the Rockefeller, Guggenheim or JPMorgan families, for example – was then exported to Europe in the mid-1990s. The definition of family office has now been extended and goes as far as including operations of private banks dedicated to family wealth.
The traditionally defined family office is a particularly valuable distribution channel but family offices are often difficult to locate. Families tend to be secretive about their investments and, even if family advisers are realising that they need to have a network of contacts to guarantee best practice, such networking activity tends to be carried out among peers rather than with providers.
Good managers
If technology, new and improved distribution channels, marketing and innovation are all variables, the constant in guaranteeing success in private banking remains good managers. Retaining staff is an increasingly difficult challenge. “There are not many star private bankers left to hire,” says Ms Tillotson. And, with booming business, private banks are able to offer investment banking-style guaranteed bonus schemes to secure the best people possible, also luring them from neighbouring banking areas.
The big firms can offer the best training and career opportunities to talented staff, but their challenge is not to alienate bankers by turning their work environment into an impersonal, wealth-enhancing banking machine. “The issue is to keep a big business as local as possible. Big banks have to make sure client relationship managers don’t feel like they are just a number,” says Anton Simonet, head of Dresdner Bank’s private banking group.
Private banking is still the most ‘personal’ of banking businesses. It remains a business in which trust plays an important role.
