The ranks of the wealthy continue to grow in the GCC, and with their wealth growing in complexity, too, they are demanding ever more from their wealth managers.
Substantial numbers of the world’s high net worth individuals (HNWI) and ultrahigh-net-worth individuals (UHNWI) are located in the Middle East, and those numbers are growing. Management consultant Capgemini estimates that the region’s high-net-worth population increased by 6.8% in 2020 while their wealth increased 10.7% to reach $3.2 trillion. The Middle East ranks fourth globally for its HNWI population and fifth in HNWI wealth.
Enriched by decades of oil and gas revenue, the region has become an important wealth management hub. But the onslaught of Covid-19, lower oil prices and the rapid takeup of new technology has cut through an industry that some say has not been agile enough in responding to fundamental shifts.
GCC wealth managers confront a unique set of challenges, both tangible and intangible. Although the sector has been preoccupied with the impact of artificial intelligence (AI) and machine learning, the client side has also been radically altered by the pandemic.
In EY’s 2021 Global Wealth Research Report, the consultancy says that three key dimensions characterize the client’s contemporary experience of private banking: “the expectation of core services they receive, how they engage with those services, and their ability to achieve purpose with their wealth.”
The world’s rich also are becoming more risk averse, EY finds, craving “financial protection, diversity and security” as investment conventions are tested. Not all private banks will successfully navigate the disruption, and there is evidence some industry bellwethers are struggling to service rapidly evolving client demands.
The Middle East Beat
Few regions are as volatile. Despite recent milestones such as the decision by Bahrain and the United Arab Emirates to normalize relations with Israel, there is still a tendency by clients to offshore their money. Countries such as Switzerland, Luxembourg and Liechtenstein, famed bastions of private banking, have historically been magnets for Middle East investment portfolios.
But local wealth managers in the Middle East have proliferated, and the sector increasingly mirrors the high fragmentation found in other major wealth management markets. International and local private banks vie for business alongside retail banks, independent financial advisors, family offices, independent wealth managers, insurance companies and professional services firms. The growth of robo-advisors has also upended the sector, which relies heavily on face-to-face interactions.
To be sure, while private banking advice has been criticized for being expensive, clients often associate private banks with stability. According to EY, 43% of clients in the Middle East expect to become more risk averse. Private banking may be down, but it is not out.
Even so, independent advisers and family offices are eroding the private banking sector’s market share, and a lot of that comes down to cost, says Sailaja Devireddy, head of operations for the Fund Marketing Services division at financial business intelligence firm Acuity Knowledge Partners.
“Advisory firms, such as single- or multifamily firms, have seen steady growth in markets such as the UAE. Clients in the Middle East demand holistic portfolio aggregation and management services,” says Devireddy. They also need strong oversight from an experienced advisory team in a family office, she says.
“Family offices pool bank resources at a much lower cost, leading to more-favorable cost-to-income ratios than bigger players,” she says. Blue-blooded banks, take note.
Independent asset managers (IAMs) can adapt to the stampede for digital products quicker than major banks, due to the higher levels of compliance that the banks have to meet. That means IAMs are able to disseminate their views and information more rapidly, Devireddy points out. Pressure to ditch upfront commissions in favor of fee-based structures has upended the strategy of independent advisers, but it is also creating opportunities.
“[It] is prompting some firms to segment their client base to serve smaller clients or those with limited fee generation, through the use of technology and office-based client-support teams,” comments Mark Leale, head of the Dubai office for investment management firm Quilter Cheviot.
EY’s report found that 48% of Middle East wealth management clients have concerns about hidden costs when working with their adviser.
Getting Digi With It
Downward pressure on margins and the increasing prevalence of digital solutions is weighing heavily on the sector. The emergence of wealthtech looks set to increasingly influence the investors of tomorrow. According to Devireddy, millennials and Gen Z investors around the world are set to inherit $53 trillion over the next 20 years.
In the short-to-medium term, the majority of clients in the Middle East acknowledge digitalization—but only to a certain extent. A recent survey by Asian wealth management firm Hubbis, in conjunction with the Swiss fintech Additiv, found that 78% of clients in the Middle East “are ready and want to use digital channels, but still appreciate support from an adviser.” And in the same survey, first published in March, wealth managers indicate that 73% of their clients plan to take advice from their wealth management providers in the year ahead.
For wealth managers to achieve a deeper understanding of their clients’ aspirations and build them into an investment strategy, they’ll require an overhaul of current professional-skills training and client education, the study’s authors suggest. Yet time may not be on wealth managers’ side.
EY estimates that globally the greatest gains in client relationships over the next three years will go to fintech providers. But Iain Ramsey, chief investment officer of AHR Private Wealth, cautions that the industry’s rush to embrace all things digital is not a replacement for tailored solutions.
“This is a very complex area, which often requires technical and bespoke solutions,” says Ramsey. “It seems difficult to imagine AI-driven strategies could meet these demands.” That could change in the future if the integration of digital and AI solutions can be achieved quickly and smoothly.
Quilter Cheviot’s Leale says issues such as multiple jurisdictions and clients potentially moving to other countries in the future may limit the steady march of wealthtech in UHNWI and HNWI markets. “Automated fintech solutions are far less likely to be able to adapt to and consider the impact these [issues] might have on financial plans,” he says.
It is perhaps no surprise the wealth management sector is bolstering user experiences to align more closely with shifting investment objectives. That presents the possibility firms will have to consolidate—and in some cases partner with other advisers, a phenomenon EY refers to as “co-opetition” (collaboration with competitors).
The Crystal Ball
Investing for the future demands consideration of the climate crisis. But if clients are seeking purpose from their investments, are finance firms ready with solutions? In the Middle East, EY found that 76% of clients now have sustainability goals, yet only 44% of those surveyed believe that their wealth managers understand their goals.
Some 48% of Middle East clients consider climate change and carbon emissions important to future investments, finds the EY study. And clients with sustainability goals are twice as likely to embrace alternative investments, forcing providers to offer new, perhaps unfamiliar asset types. There is a pressing need for new and innovative partnerships with specialist providers, not currently found in the sector.
But it is not just the “E” of ESG that shapes how the wealthy choose money managers. Diversity and inclusion are top considerations, and not just in the US and Europe. Gender, sexual orientation, race, religion, ethnicity, disability and education have moderate to high importance among 55% of Middle East investors.
Wealth management is being challenged to demonstrate its long-term, big-picture value. Client values have changed profoundly in the wake of the pandemic, and clients are more investment savvy than ever. Tomorrow’s wealth managers will not only need to be tech enabled but will also need a deeper, more intuitive understanding of client needs amid unprecedented disruption. Broader cooperation, particularly among and with smaller independent advisers, seems inevitable.
Still, the ranks of the world’s wealthy continued to grow throughout the pandemic, even in hard-hit Latin America. The transformation journey might be a bumpy ride, but private banking will arrive in good shape.