Introducing Private Banking / Wealth Management Market

1. Introducing Private Banking / Wealth Management Market Phil Molyneux

2. Aim of Lecture • To define the wealth management market • Provide an idea of its size and recent growth • Examine the key drivers of the wealth management industry. • Outline the economics of the industry • Describe the competitive landscape.

3. Definition of Wealth Management & Private Banking • Wealth Management: • financial services provided to wealthy clients, mainly individuals and their families , typically with $100,000+ investable assets • Private banking: • an important, more exclusive, subset of wealth management, typically with $1 million + of investable assets. • Private banking traditionally consisted of banking services (deposit taking and payments), discretionary asset management, brokerage, limited tax advisory services and some basic concierge-type services, offered by a single designated relationship manager. On the whole, private banking relationships were mainly ‘passive’ • Wealth management is broader and typically deals with managing both the assets & liabilities side of clients’ balance sheets

4. Wealth Management - Products • While asset management is a key feature, wealth management has a greater emphasis on financial advice and is concerned with gathering, maintaining, preserving, enhancing and transferring wealth. • Products include: • Brokerage. • Core banking-type products • Lending products, such as margin lending, credit cards, mortgages and private jet finance. • Insurance and protection products, such as property and health insurance, life assurance and pensions. • Asset management in its broadest sense: discretionary and advisory, financial and non-financial assets (such as real estate, commodities, wine and art), conventional, structured and alternative investments. • Advice in all shapes and forms: asset allocation, wealth structuring, tax and trusts, various types of planning (financial, inheritance, pensions, philanthropic), family-dispute arbitration – even psychotherapy to children suffering from ‘affluenza’. • A wide range of concierge-type services, including yacht broking, art storage, real estate location, and hotel, restaurant and theatre booking.

5. Wealth Management Pool by Product Non-cash investments may account for no more than c.36% of the global wealth management revenue pool

6. Client Segments • Private banking targets only the very wealthiest clients or high net worth individuals (HNWIs): broadly speaking, those with more than around $1 million in investable assets. • Wealth management, by contrast, targets clients with assets as low as $100,000, i.e. affluent as well as high net worth (HNW) clients.

7. Number of Millionaires These millionaires account for 28.6% of global wealth! These 7.2 Millionaires own 28.6% of world wealth Merrill Lynch / Cap Gemini 8.7 million Source: BCG Global Wealth 2006

8. Where do Millionaires Live? Source: BCG Global Wealth 2006

9. Defining the Wealth Management Service Proposition • The following three criteria differentiate a firm as a wealth manager: • The relationship that wealth managers have with their clients, both in terms of breadth (where providers emphasise terms such as ‘holistic’, ‘comprehensive’ and ‘all-inclusive’) and depth (‘intimate’ and ‘individualised’). • The products and services provided, with a particular emphasis on estate planning and multigenerational planning services, as well as tax advisory expertise and alternative investments. • The specific objectives of wealthy clients, such as investment performance, wealth preservation or wealth transfer.

10. Investment Mandates • Custodianfor a client’s assets. That involves, essentially, asset safekeeping, income collection, fund disbursement and associated reporting. • Execution-only mandate, the wealth manager executes, or selects brokers to execute, securities transactions on behalf of the client. Not investment advice, service aimed primarily at self-directed clients. • Advisory mandate • Discretionary mandate

11. Discretionary Mandates • The wealth manager usually has sole authority to buy and sell assets and execute transactions for the benefit of the client, in addition to providing investment advice. Starts off with: • Construction of a brief with the client, detailing investment aims, level of risk-aversion and other factors that will influence the portfolio (In some discretionary accounts, the wealth manager is given only limited investment authority). However, in all cases, major investment decisions, such as changing the account’s investment strategy or asset allocation guidelines, may be subject to the client’s approval. • The wealth manager is generally paid on the basis of a flat-fee arrangement linked to the value of the assets under management. • The gross revenue margin of a discretionary mandate is typically at least double that of an execution-only mandate.

12. Investment Mandates & Clients Wealth • The proportion of clients using advisory mandates is, in general, relatively stable across the various client wealth bands. • Execution-only mandates become more prevalent the greater the clients wealth • Discretionary mandates less prevalent, as client wealth rises. • Wealth management can mean different things in different geographic regions. • In the US, wealth management is more closely allied to transaction-driven brokerage and is typically investment-product driven. • In Europe, the term is more synonymous with traditional private banking, with its greater emphasis on advice and exclusivity.

13. Onshore & Offshore Wealth Management • Onshore wealth management is the provision of products and services within the client’s main country of residence. • Offshore wealth management, by contrast, serves clients wishing to manage their wealth outside their main country of residence for reasons such as: • financial confidentiality; • legal-system flexibility; • tax considerations; • the lack of appropriate products and services onshore; • a low level of trust in domestic financial markets and governments; and • the need for safety and geographical diversification in response to domestic political and macroeconomic risks. Some clients treat their offshore account(s) primarily as a ‘vault’.

14. Wealth held Offshore Source: Boston Consulting Group; Julius Baer; David Maude’s client work.

15. Offshore and Onshore Wealth Manager Attributes

16. Market Size & Growth • Defining the size of the market is problematic because: • Definitions of wealth vary • The stock of wealth has to be inferred from other broad economic indicators • Identifying & defining what constitutes High Net Worth individuals (HNWI’s) & ‘mass affluent’ clients / households can vary • See Box 1.1 Wealth market measurement methodologies: lies, damn lies and wealth statistics? Of Maude (2006, p9)

17. Market Size & Growth • Commonly used estimates are provided by: • Capgemini/Merrill Lynch annual World Wealth Report • For their 2006 Report see: http://www.ml.com/media/67216.pdf • Regional snapshot see: http://www.ml.com/media/67217.pdf • Boston Consulting Group: • For their Global Wealth 2006 Reports see: http://www.bcg.com/publications/files/Sum_Global_Wealth_Sep06.pdf

18. Boston Consulting Group estimates from Global Wealth 2006

19. Boston Consulting Group estimates from Global Wealth 2006

20. Boston Consulting Group estimates from Global Wealth 2006

21. Boston Consulting Group estimates from Global Wealth 2006

22. Boston Consulting Group estimates from Global Wealth 2006

23. Key Features of Market Size (BCG estimates) • Global Total Wealth (AuM) = $88.3 trillion in 2005 • 39% in investment portfolios • 41.1% in cash & deposits • Affluent customers (>$100,000 investable assets) globally accounted for >50% of AuM • 74% in Japan • 62% in North America • 57% in Europe • 22% Latin America • Millionaires held 28.6% of AuM – the only regions where millionaires hold more than 50% of AuM is in Africa and the Middle East • Note BCG estimates millionaire wealth at $25.25 trillion whereas Merill Lynch /Cap Gemini put it at $33.3 trillion

24. Key Features of Market Size (BCG estimates) • Wealth held offshore accounts for 6.7% of the total stock = $5.9 trillion • Over 50% of this is held in relatively low yielding cash and deposits (see early reference to the ‘vault’!) • Offshore wealth declining – due to increased investment opportunities in domestic markets (Middle East, Asia) and regulatory / tax harmonisation pressures (to be discussed later in the course)

25. Key Features of Market Growth (BCG v Merrill Lynch / Cap Gemini estimates) • Annual growth of AuM predicted at around 5.6% (ML/Cap Gem 6%) from 2005-2010 • Annual growth rates of AuM range between 4.2% (North America) (ML/CG 7.4%) and 7.9% (Asia-Pacific – strongly driven by India (13.3%) and China (11.5%). • AuM growth in Europe (6%) (ML/CG 3.7%) slightly behind forecasts for Japan (6.7%) NOTE THAT ML/CAP GEMINI focus on HNWI wealth > $1 million in financial assets

26. Key Wealth Drivers • Economic growth • Asset prices • Wealth allocation – concentration of wealth ‘(US) households in the top 1% of the wealth distribution hold around one third of the total wealth in the economy, and those in the top 5% hold more than half. At the other extreme, many households (more than 10%) have little or no assets at all’ (See Wealth inequality: data and models by Marco Cagetti and Mariacristina De Nardi , 2005, Chicago Fed WP 2005-10 http://www.chicagofed.org/publications/workingpapers/wp2005_10.pdf • Demographic factors

27. Key Wealth Drivers – Regional Differences • Regional differences: • North America: high economic and productivity growth rates, strong US financial market returns, (invested weighted to equities) bulk of the wealth is held onshore. Income main source of HNWI wealth followed by business • Europe: Business Ownership / Sales of business / Wealth transfer between generations

29. Key Wealth Drivers – Regional Differences • Central and Eastern Europe: Strong economic development • Asia-Pacific: Strong economic development • Latin America: Traditional offshore-banking stronghold • Middle East: Oil-driven growth • Africa: Commodity-driven growth

30. Where does HNWI wealth come from? Merril Lynch / Cap Gemini World Wealth Report 2006

31. Industry Economics • Large and growing market • High profitability • Stable revenue stream. • A relatively high stock market rating • Strong intragroup synergies

32. High Profitability – Unicredito 2001

33. High Profitability – Citigroup 2004 (post tax return on invested capital)

34. Stable Revenue Streams – UBS & Credit Suisse – High Recurring Income

35. Relatively High Stock Market Rating – Financial Service Firm P/E ratios

36. Strong Intragroup Synergies • Integrated players benefit from their wealth management businesses in two ways. • Revenues side: • opportunities for wealth management operations to acquire clients from other parts of the group, e.g. the retail and business banking divisions. There are also opportunities for other parts of the group, e.g. investment banking divisions, to leverage the private client base for product sales. • Cost side: • opportunities to share infrastructure and spread fixed costs

37. Competitive landscape

38. Main players • Pure private banks • Trust banks • Retail and universal banks • Family offices • Financial advisors • Stockbrokers and wirehouses (US term for large brokerage houses) • Direct banks • Asset managers • Investment banks • Others – insurance companies, accountants, solicitors, financial planners

39. Main players – Fragmented Market

40. Conclusion • Wealth management & private banking business is currently a major area for development for many of the worlds financial firms • The market is large, growing and highly profitable • Industry is fragmented & there is no agreed single ‘preferred’ model • Remainder of the course will focus on a range of key topical issues relating to the industry • See if you can get the quick quiz on next slide correct (no web serfing!!!)

41. Conclusion – Billionaires (2005) & their motors Warren Buffet (2) Net Worth: $44 billion Ingvar Kamprad (IKEA) Net Worth: $23 billion (6) Lawrence Ellison (Oracle) Net Worth: $18.4 billion (9) Bill Gates (Microsoft) Net Worth: $46.5 billion (1)