The pace of global economic growth may have slowed since the financial crisis, but the creation and concentration of private financial wealth has revved up.
Times are booming for high-net-worth individuals and the private bankers who serve them with increasingly sophisticated products. Global wealth held by individuals and households expanded 14.6% to $152 trillion in 2013, according to Boston Consulting Group’s (BCG) latest annual survey of the private banking industry. It sees the figure hitting $198 trillion by 2018.
Of the $20 trillion in incremental wealth created, BCG said, 75% was from returns on existing assets (mainly stocks) and 25% was newly created wealth (chiefly savings from Asian countries). Most notable is growth in the ultra-high-net-worth (UHNW) segment, according to Organization for Economic Cooperation and Development data. The financial crisis hit investment portfolios hard and temporarily reversed that trend, but it’s been newly fortified by the strong recovery in markets.
John Mathews, head of UHNW business for UBS’s Wealth Management Americas division, says the segment, pegged at $100 million-plus, is growing more than twice as fast as any other client demographic, resulting in a surge of demand for financial planning, investment management, lending and financial concierge services provided by private banking.
UBS is the world’s biggest global private banker, with a large presence in the US (which is still the world leader, with $46 trillion in private financial wealth) and dominant positions in Europe and Asia—the fastest-growing region. Assets under management by the bank surpassed $2 trillion last year.
But despite a brisk business, private bankers also face challenges as their costs climb and competition intensifies. While BCG’s study of 140 private banks showed total assets under management up 11% and revenue up 8%, it also reported costs rising 3.5%. Competition among local banks, universal banks, brokerages, advisers and family offices is fierce, and strong returns in equity markets may mask vulnerabilities in the industry. The average return on assets for private banks and wealth managers was just 23 basis points in 2013—a roughly 30% decline from pre-crisis levels. The average cost/income ratio for the private banks surveyed by BCG was 70%.
“In all regions of the world and for all business models, there is pressure on margins,” says Anna Zakrzewski, a partner with BCG in Zurich. She notes that regulatory, risk management and technology costs have risen dramatically. Clients’ expectations vary across markets. “There is no one-size-fits-all globally,” she says.
Higher costs and client demands have increased the need for scale in private banking. While behemoths like UBS, Credit Suisse, JPMorgan and Citi Private Bank can afford the tech investments needed for compliance and customer service across markets, many smaller players cannot. “Scale was always important in the brokerage world, but it’s becoming that way in private banking too,” says Alois Pirker, a senior analyst with Aite Group and former adviser with UBS.
In all regions of the world and for all business models, there is pressure on margins.
~ Anna Zakrzewski, Boston Consulting Group
Banks need advanced data systems to pinpoint market segment services and provide clients with top-notch digital resources. Credit Suisse has undertaken a massive restructuring of its digital platform. Citi Private Bank has upgraded its “In View” digital application for clients. “A big firm that can do that has an advantage,” says Pirker. “Smaller firms will struggle.”
At the same time, challenges have also resulted in larger players’ scaling down their operations, sacrificing reach for a more targeted approach. Bank of America Merrill Lynch sold its international wealth management business to Swiss bank Julius Baer two years ago to focus on North America. In March of this year, Royal Bank of Scotland agreed to sell the international operations of its Coutts & Company private banking business to Switzerland-based Union Bancaire Privée. Bank analysts expect further reshuffling.
Other private banks have honed their expertise. Geneva-based Pictet, for instance, has zeroed in on entrepreneurship. The group held its first Entrepreneur Summit in Geneva
in September 2014; it also sponsors The Entrepreneurs, a weekly business briefing published by online magazine The Monocle.
“Banks can’t jump on every opportunity at once. They have to focus on a few and do it right,” says Zakrzewski.
ASIA—THE SIREN’S CALL
There’s no greater opportunity, or risk, than Asia. Total private wealth in the Asia-Pacific region (excluding Japan) jumped by 30.5% in 2013, to $37 trillion, despite generally weak equity markets. Asia was just behind Europe, at $37.9 trillion, and will most likely surpass it in 2014. (North America remained the largest regional wealth management market, with $50.3 trillion in total private wealth at the end of 2013.)
Asia’s boom in private wealth management, driven by strong economic growth and high savings rates in China, India and other Asian markets, accounts for the bulk of new wealth creation globally. The number of millionaire households in China alone jumped to 2.4 million in 2014 from 1.5 million the year before. BCG projects total private wealth in China will increase 84%, from $22 trillion in 2013 to $40 trillion by the end of 2018, which would make it the second-wealthiest nation (after the US).
“The growth opportunity is massive in Asia, but the pool of advisory talent is small there,” notes Aite’s Pirker.
Singapore-based DBS Bank, a fast-growing Asian bank that recently bought Societe Generale’s private banking business in Hong Kong and Singapore, took a novel approach last year when it began implementing IBM’s Watson cognitive technology to put better research and recommendations in the hands of its relationship managers.
Asia has also proved to be a tough place to turn a profit, analysts say. Market returns tend to be smaller than in other regions, and Asian clients, typically entrepreneurial and first-generation wealth, are not as comfortable using professional wealth managers. “People here still don’t trust others with their money as much as in other regions,” says Sean Choo, principal in the Singapore office of global consultant A.T. Kearney. He belives it will take a generation for such attitudes to change.
Choo estimates that about 10% to 15% of high-net-worth investors’ wealth is under professional management in Asia, compared to roughly 40% in mature markets in Europe and North America. And in a report last year, A.T. Kearney found cost/income ratios in the wealth management industry in the region were close to 80% on average, with smaller banks faring worse. (It compared them to “boiling frogs,” which don’t sense danger even as they’re being cooked.)
That’s a tough operating environment. Choo figures private banks need $20 billion to $50 billion in assets under management to break even. “A bank with $5 billion in assets has to get to scale organically or through partnerships in three to five years,” he says.