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Bcg the battle_to_regain_strength_may_2012_tcm80-106998

  1. 1. Report Global Wealth 2012The Battle to Regain Strength
  2. 2. The Boston Consulting Group (BCG) is a global managementconsulting firm and the world’s leading advisor on business strategy.We partner with clients from the private, public, and not-for-profitsectors in all regions to identify their highest-value opportunities,address their most critical challenges, and transform their enterprises.Our customized approach combines deep in­ ight into the dynamics of scompanies and markets with close collaboration at all levels of theclient organization. This ensures that our clients achieve sustainablecompet­tive advantage, build more capable organizations, and secure ilasting results. Founded in 1963, BCG is a private company with77 offices in 42 countries. For more information, please visit
  3. 3. Global Wealth 2012The Battle to RegainStrength Jorge Becerra Peter Damisch Bruce Holley Monish Kumar Matthias Naumann Tjun Tang Anna ZakrzewskiMay 2012 | The Boston Consulting Group
  5. 5. INTRODUCTIONT he global wealth-management industry is at a crossroads of sorts. While mature markets are experiencing either slow ornegative growth, developing markets are riding a wave of very strongmomentum. These broad trends are likely to continue, even if equitymarkets rebound in the coming years. The question is one of direc-tion: should established players in the “old world” look eastward orsouthward for fresh opportunities, or should they adopt new strate-gies and business models in an effort to capture untapped potential athome? Should institutions in the “new world” concentrate solely ontheir own burgeoning regions, or should they also try to compete withentrenched institutions abroad? The jury will likely be out on suchquestions for quite a while.In the meantime, wealth managers must continue to find ways toraise their performance in a climate of volatile equity and bond mar-kets, increasingly demanding clients, and ever-watchful regulatoryagencies. Especially in mature markets, the lingering impact of the2008–2009 financial crisis has led to laser-like scrutiny along withtough measures to increase transparency in all areas of the invest-ment world.In The Battle to Regain Strength, BCG’s twelfth annual report on theglobal wealth-management industry, we explore the current size ofthe market, the present dynamics of offshore banking, the perfor-mance levels of leading institutions in a wide range of categories, theemergence of alternative business models, and key trends that allplayers must adapt to. Our aim is to present a clear and comprehen-sive snapshot of today’s wealth-management industry, as well as toprovide thought-provoking discussion of issues that will affect alltypes of wealth managers as they strive to grow in the coming years. The Boston Consulting Group | 3
  6. 6. MARKET SIZINGA YEAR OF MODEST GAINS G lobal private financial wealth grew by 1.9 percent in 2011 to reach a total of $122.8 trillion.1 (See Exhibit 1.) The rise was Exhibit 2.) In the BRIC countries, for exam- ple, where nominal GDP growth was 15.5 per- cent on a weighted-average basis, wealth in- considerably weaker than in either 2009 or creased by 18.5 percent in 2011.2 2010—when global wealth grew by 9.6 percent and 6.8 percent, respectively—owing Equity markets suffered across most of the largely to overall economic uncertainty and world in 2011, with positive showings in only struggling equity markets in major developed a few countries. Europe’s equity markets economies. were hurt the most, with Greece’s falling by a staggering 52 percent. In the Middle East, Egypt’s stock market declined by an almost- Global Overview as-steep 49 percent. The evolution of private wealth varied con- siderably by region in 2011, highlighting the Globally, the amount of private wealth held difference in how the year’s economic turbu- in equities declined by 3.4 percent, driven by lence affected the developed and developing both negative market performance and asset worlds. North America, Western Europe, and reallocation.3 Wealth held in bonds (corpo- Japan all lost private wealth, while the rapid- rate and government) grew by 3.3 percent, ly developing markets in Asia-Pacific and Lat- and wealth held in cash and deposits rose by in America sustained the double-digit growth 5.2 percent. The overall asset mix changed that they have experienced in recent years. somewhat from year-end 2010, although the share of wealth held in equities lost only The Middle East and Africa continued to about 2 percentage points to cash and depos- grow but at a more moderate rate than in its and still represented about 33 percent of previous years, owing particularly to political global private wealth at the end of 2011 (ver- instability in the region. North America re- sus 35 percent in 2010). mained the wealthiest region globally, fol- lowed by Western Europe and the Asia- In terms of household segments, the highest Pacific (ex Japan) region. growth rate was in the ultra-high-net-worth (UHNW) segment (households with more Overall, global growth in private wealth is than $100 million in wealth), which saw its clearly being driven by rapidly developing wealth rise by 3.6 percent—compared with economies in the “new world,” not by the average growth of 1.7 percent across all other “old world” of traditional, mature ones. (See segments.4 | The Battle to Regain Strength
  7. 7. Exhibit 1 | The Growth of Global Wealth Slowed in 2011 Private financial wealth ($trillions) 7.5 0.9 1.8 35.6 38.3 38.0 41.5 4.2 0.4 1.8 32.2 33.6 33.5 36.7 15.5 14.4 8.7 2.2 0.8 2.0 1.4 1.7 1.9 2.9 17.8 18.2 17.8 18.5 2009 2010 2011 2016E 2009 2010 2011 2016E North America Eastern Europe 2009 2010 2011 2016E 2009 2010 2011 2016E Western Europe Japan 4.3 8.0 4.7 6.6 11.1 6.8 1.9 151.2 3.9 4.3 4.5 6.1 40.1 11.0 10.6 8.9 12.8 10.7 120.6 122.8 112.9 2.9 3.2 3.5 5.4 2009 2010 2011 2016E 21.4 23.7 19.0 Middle East and Africa 2009 2010 2011 2016E Latin America 2009 2010 2011 2016E Asia-Pacific (ex Japan) 2009 2010 2011 2016E Average annual change (%) GlobalSource: BCG Global Wealth Market-Sizing Database, 2012.Note: Private financial wealth numbers for all years were converted to U.S. dollars at year-end 2011 exchange rates to exclude the effect of currencyfluctuations. Percentage changes and global totals of private financial wealth are based on complete (not rounded) numbers. Calculations for 2009 and 2010are based on the same methodology used for the 2011 calculations. Global wealth is measured by financial wealth across all private households. Countriesincluded in each region can be found in the report.Exhibit 2 | The “New World” Drove the Modest Growth in Global Wealth Growth in 2011 Drivers GDP growth +3.2% Newly created wealth f Savings rate 4.7% “Old World” 0.9% • North America f • Western Europe Equity performance 12.2% • Japan Existing assets f Bond performance 1.6% Global Cash performance ~0% private financial + wealth GDP growth +11.3% Newly created wealth f +1.9% Savings rate 5.1% “New World” +10.0% • Asia-Pacific (ex Japan) f • Eastern Europe Equity performance 11.7% • Latin America • Middle East and Africa Existing assets f Bond performance 0.7% Cash performance ~0%Source: BCG Global Wealth Market-Sizing Database, 2012.Note: All growth rates are nominal, including GDP growth rates. Performance averages are unweighted and reflect domestic market development.1 New private financial wealth, generated primarily through income.2 Growth in asset value. The Boston Consulting Group | 5
  8. 8. Looking ahead, private wealth is expected to cent of the total, still below the precrisis post a compound annual growth rate (CAGR) share of 38.5 percent. In addition, over the of 4 to 5 percent over the next five years to next five years, the total amount of wealth reach more than $150 trillion by the end of held by all clients with more than $1 million 2016. Equities will be the fastest-growing as- in wealth should show a CAGR of around 6 set class, with a projected CAGR of 4.9 per- percent annually—driven mainly by an in- cent. By year-end 2016, the share of global creasing number of households in this seg- wealth held in equities should be 34.0 per- ment in Asia-Pacific. (See Exhibit 3.) Average Exhibit 3 | UHNW Households Will Post the Strongest Growth over the Next Five Years Private financial wealth by region ($trillions) and share of wealth by household segment Global Developed regions North America Western Europe Japan CAGR¹ CAGR¹ CAGR¹ CAGR¹ 120.6 122.8 151.2 (5-year) 38.3 38.0 41.5 (5-year) 33.6 33.5 36.7 (5-year) 18.2 17.8 18.5 (5-year) 1% 1% 1% 6% 6% 7% +8% 6% 6% 6% +3% 7% 7% 7% +3% +2% +2% +4% 23% 23% 24% +2% +6% 18% 18% 20% 33% 34% 37% 48% 47% 48% +1% +1% +3% +1% 75% 75% 73% 77% 77% 76% 61% 61% 57% 47% 47% 46% 2010 2011 2016E 2010 2011 2016E 2010 2011 2016E 2010 2011 2016E Developing regions Middle East and Africa Latin America Eastern Europe Asia-Pacific (ex Japan) CAGR¹ CAGR¹ CAGR¹ CAGR¹ 4.3 4.5 6.1 (5-year) 3.2 3.5 5.4 (5-year) 1.7 1.9 2.9 (5-year) 21.4 23.7 40.1 (5-year) 9% 9% 10% +8% +9% +12% 5% 5% 7% +18% 12% 12% 12% 24% 26% 30% +13% +11% +8% 24% 25% 41% 28% 43% 44% 44% 46% +9% 47% 26% 27% +8% 28% +5% +8% +7% 64% 63% 60% 50% 54% 52% 48% 47% 45% 47% 42% 46% 2010 2011 2016E 2010 2011 2016E 2010 2011 2016E 2010 2011 2016E Household wealth segments <$1 million $1 million–$100 million >$100 million Source: BCG Global Wealth Market-Sizing Database, 2012. Note: Private financial wealth numbers for all years were converted to U.S. dollars at year-end 2011 exchange rates. Growth rates and totals of private financial wealth are based on complete (not rounded) numbers; segment wealth percentages may not sum to 100 because of rounding. Countries included in each region can be found in the report. 1 Compound annual growth rates (CAGRs) are calculated from year-end 2011 through 2016.6 | The Battle to Regain Strength
  9. 9. wealth for these households is expected to in- European private financial wealth at the endcrease just marginally, however. Globally, the of 2011.UHNW household segment will continue togrow the fastest over the next five years, with Extreme levels of both government anda projected CAGR of 8 percent. By contrast, private debt, as well as the threat ofwe should see a CAGR of 3 percent in seg- bankruptcy faced by several European Unionments below the $1 million mark. countries, led to double-digit stock-market declines in some of the region’s largest economies—Germany and France—as wellRegional Variation as in Greece, Italy, Spain, and Portugal. OwingThe growth of private wealth varied widely mainly to repatriations, offshore wealthacross all regions in 2011. declined by 2.2 percent, reducing its share of total Western European private wealth to 7.6North America.4 Private wealth in North percent. Wealth in Western Europe isAmerica declined by 0.9 percent in 2011 to projected to show a CAGR of 1.8 percent and$38.0 trillion. The UHNW household segment to reach $36.7 trillion by the end of 2016,was hit particularly hard, losing 2.4 percent of driven by moderate equity-market recoveriesits wealth. Overall, the amount of wealth held in the largest equities and bonds decreased by 3.6percent and 2.1 percent, respectively. The Asia-Pacific (ex Japan).6 Private wealth inshare held in cash and deposits grew by 3.5 Asia-Pacific (ex Japan) increased by 10.7percent. percent in 2011 to $23.7 trillion, enabling the region to widen its gap with Japan as theA near default on U.S. government debt, com- third-wealthiest area globally. The strongestbined with the euro debt crisis, made 2011 an growth was in the higher wealth bands, withunpleasant year for the U.S. economy. These the share of total wealth held by householdsevents, along with the downgrade of the na- with more than $1 million in wealth increas-tion’s credit rating, led to significant investor ing to 48 percent. The amount of wealth helduncertainty, with the S&P 500 ending the in equities grew by 4.1 percent, a far weakeryear basically unchanged from 2010. Howev- performance than the average annual growther, stock markets both in the United States of 17.7 percent witnessed over the previousand in other developed countries are expect- five years. But wealth held in bonds roseed to gradually recover, driven partly by the sharply by 17.5 percent, and cash and depos-assumed future stabilization in the euro its increased by 13.4—painful as that may be. North Ameri-can wealth is projected to post a CAGR of 1.8percent over the next five years to reach$41.5 trillion by the end of 2016. The euro debt crisis took its toll on private wealth.Western Europe.5 Although Western Europedid not suffer as much as North America,the euro debt crisis took its toll, and private Despite relatively poor stock-marketwealth declined by 0.4 percent to $33.5 tril- performance in many large Asia-Pacificlion. The region remained the second countries, notably India and China, strongwealthiest worldwide. The amount of GDP growth driven primarily by high levelsWestern European wealth invested in of government and private consumption ledequities fell by a steep 7.1 percent—owing to to new wealth generation. Wealth in theweak performance in Western European region is expected to continue growing at amarkets and continued asset reallocation— double-digit rate, with a projected CAGR ofwith the amount held in bonds rising more 11.1 percent, reaching $40.1 trillion by thesharply than in previous years at 3.2 percent, end of 2016, at which time it will haveand cash and deposits increasing by 2.2 slightly overtaken Western and Easternpercent. Equities lost a 2.1 percentage point Europe (combined). These gains should beshare and constituted 28.5 percent of Western driven largely by sustained strong GDP The Boston Consulting Group | 7
  10. 10. growth in China and India and overall rates and strong double-digit GDP growth in stronger stock-market performance. oil-rich countries such as Saudi Arabia and Kuwait. Although the amount of wealth held Japan. Private wealth in Japan decreased by in equities decreased by 2.6 percent, the 2.0 percent in 2011 to $17.8 trillion. The value amount held in bonds rose by 13.3 percent of wealth held in equities fell by 7.6 percent, and cash and deposits grew by 5.1 percent. while amounts held in bonds as well as in Wealth in the UHNW household segment cash and deposits remained virtually flat. posted the strongest growth, at 9.0 percent, Drivers of the overall decline included the driven by government programs that benefit lingering effects of the March 2011 earth- large family conglomerates. Private wealth in quake and tsunami—and the subsequent the region is projected to show a CAGR of 6.6 Fukushima nuclear accident—as well as poor percent to reach $6.1 trillion in 2016, largely stock-market performance resulting from as a result of continued strong GDP expan- general economic instability. Nonetheless, sion in oil-rich countries. Japan is expected to overcome these challeng- es over the next five years. Private wealth is Latin America.9 Latin American private projected to post a CAGR of 0.8 percent to wealth grew by 10.6 percent in 2011 to reach $18.5 trillion by the end of 2016, $3.5 trillion, driven primarily by strong GDP recovering to pre-Fukushima levels. growth in Brazil and Mexico. Latin American stock markets were less affected by global economic uncertainty than those in many Many households crossed other economies, with regional wealth held in equities rising by 2.8 percent. Wealth held in the millionaire threshold in bonds soared by 16.6 percent, and cash and deposits rose by 9.2 percent. Private wealth developing economies. in Latin America is projected to post a CAGR of 8.9 percent over the next five years to reach $5.4 trillion by the end of 2016—more Eastern Europe.7 Russia, with GDP growth than double the amount of wealth held in the well above that of most mature economies, region in 2006 but still remaining relatively was the primary driver of the 2011 increase small compared with Asia-Pacific. Particularly in Eastern European wealth, which rose by in Brazil and Mexico, onshore offerings are 14.4 percent to $1.9 trillion. Each of the three becoming more sophisticated as international asset classes grew by roughly 14 percent. players enter the market. Eastern European wealth is forecast to grow significantly faster than Western European Millionaires wealth—at a CAGR of about 8.7 percent over Although the number of millionaire house- the next five years—reaching $2.9 trillion by holds decreased by a combined 182,000 in the end of 2016, with the bulk ($2.0 trillion) the United States and Japan in 2011, globally held in Russia. These gains will be driven the number grew by 175,000 as many house- largely by Russia’s status as the world’s larg- holds crossed the millionaire threshold in de- est oil producer and its continuing GDP mo- veloping economies, particularly China and mentum. The UHNW household segment is India. The total number of millionaire house- forecast to show the strongest growth, with holds reached 12.6 million by the end of wealth rising annually by 12 percent through 2011, making up about 0.9 percent of the 2016. households in our sample (comprising 63 markets representing more than 98 percent Middle East and Africa.8 Middle Eastern and of global GDP). The United States still had African stock markets suffered from the the largest number of millionaire households political instability caused by the uprisings (5.1 million), followed by Japan (1.6 million) across the Arab world in 2011. Still, the and China (1.4 million). (See Exhibit 4.) Chi- region’s private wealth grew by 4.7 percent to na’s number of millionaires should continue $4.5 trillion in 2011, driven by high savings to grow strongly, driven by the large number8 | The Battle to Regain Strength
  11. 11. Exhibit 4 | The United States, Japan, and China Have the Most Millionaires Ultra-high-net-worth (UHNW) households (more Millionaire households than $100 million in private financial wealth) Number of millionaire Number of UHNW households Proportion of millionaire Number of households per (thousands) households (%) UHNW households 100,000 households 2010 2011 2011 2010 2011 2011 1 U.S. 5,263 5,134 Singapore 17.1 U.S. 2,989 2,928 Switzerland 11 2 Japan 1,640 1,587 Qatar 14.3 U.K. 1,125 1,125 Singapore 10 3 China 1,239 1,432 Kuwait 11.8 Germany 807 807 Austria 8 4 U.K. 411 411 Switzerland 9.5 Russia 607 686 Norway 7 5 Germany 320 345 Hong Kong 8.8 China 538 648 Hong Kong 7 6 Switzerland 317 322 UAE 5.0 France 480 470 Kuwait 6 7 Italy 274 270 U.S. 4.3 Taiwan 369 375 Qatar 6 8 Taiwan 247 246 Israel 3.6 Switzerland 366 366 Taiwan 5 9 Hong Kong 209 212 Taiwan 3.2 Turkey 318 344 U.K. 4 10 France 199 200 Bahrain 3.2 Italy 319 333 Netherlands 4 11 Singapore 165 188 Japan 2.9 Austria 301 301 UAE 4 12 Canada 175 185 Belgium 2.9 Netherlands 291 279 Belgium 4 13 India 134 162 Oman 2.5 India 241 278 Israel 4 14 Netherlands 157 152 Ireland 2.2 Canada 252 257 Sweden 3 15 Spain 147 139 Netherlands 2.1 Australia 228 228 Denmark 3 Sources: BCG Global Wealth Market-Sizing Database, 2012. Note: UAE is United Arab Emirates. The 2010 rankings are determined on the basis of year-end 2011 exchange rates.of initial public offerings (IPOs) expected in Notesthe country as well as by new wealth generat- 1. Private financial wealth includes cash and deposits, money market funds, listed securities held directly ored mainly by entrepreneurs. indirectly through managed investments, and other onshore and offshore assets. It excludes investors’ ownThe highest density of millionaire households businesses, residences, or luxury goods. Global wealth reflects total financial assets across all 2011 was in Singapore—where more than Unless stated otherwise, wealth figures and percentage17 percent of all households have private changes are based on local totals converted to U.S.wealth of $1 million or higher—followed by dollars at year-end 2011 exchange rates for all years in order to exclude the effect of fluctuating exchange rates.Qatar (14.3 percent), Kuwait (11.8 percent), 2. GDP data are from Economist Intelligence Unit.and Switzerland (9.5 percent). The United 3. This chapter looks at three asset classes: equities,States had the largest number of both UHNW bonds, and cash and deposits. Managed funds areand billionaire households in 2011 at 2,928 distributed across these three asset classes on a country-by-country basis.and 363, respectively. Relative to population 4. United States and Canada.size, however, Switzerland had the highest 5. Germany, France, United Kingdom, Ireland, Italy,number of UHNW households, and Hong Spain, Portugal, Switzerland, Austria, Netherlands,Kong was the leader in the number of billion- Belgium, Norway, Sweden, Finland, Denmark, and Greece.aires—driven partly in both countries by the 6. Taiwan, China, Australia, South Korea, Hong Kong,immigration of billionaire families. India, Singapore, Indonesia, Thailand, Malaysia, New Zealand, Philippines, and Pakistan.UHNW households held $7.1 trillion, or 5.8 7. Russia, Poland, Czech Republic, Hungary, and Slovakia.percent of global private wealth, in 2011, a 8. Saudi Arabia, United Arab Emirates, Israel, Turkey,3.6 percent increase over 2010. At a projected South Africa, Kuwait, Iran, Egypt, Algeria, Qatar, Oman,CAGR of about 8 percent over the next five Morocco, Lebanon, Bahrain, Tunisia, Syria, Yemen, andyears, UHNW households should hold $10.3 Jordan.trillion, or 6.8 percent of global wealth, by the 9. Mexico, Brazil, Venezuela, Colombia, Argentina, Chile, Peru, and Uruguay.end of 2016. The Boston Consulting Group | 9
  12. 12. OFFSHORE WEALTHA CHALLENGED DOMAIN B ecause wealth management clients will always seek diversification, broad private-banking capabilities, specialized wealth booked in Swiss-domiciled banks in 2011—although it experienced stagnant growth compared with 2010 as funds flowing expertise, high-quality service, discretion, and in from the “new world” just offset those domiciles with relatively high levels of flowing out from the “old world.” (See Exhibit economic and political stability, there will 5.) In addition, Switzerland has already estab- always be a need for offshore banking. In lished new transparency and withholding-tax 2011, offshore wealth—defined as assets agreements with the United States and Ger- booked in a country where the investor has many, and related discussions with Belgium, no legal residence or tax domicile—increased France, Italy, the United Kingdom, and other to $7.8 trillion, up 2.7 percent from 2010. The countries are in progress. These initiatives— increase was driven partly by a flight to safe aimed at greater transparency, the disclosure havens by investors in politically unstable and regularization of legacy assets, and the countries and partly by inflows from UHNW adoption of withholding taxes on investment families based in rapidly developing econ- income—have altered the Swiss landscape, omies. somewhat increasing the attractiveness of other offshore centers. Greater Scrutiny Although the single biggest pool of private fi- Despite ongoing client needs and interest, nancial wealth booked offshore in Switzer- however, offshore wealth management as an land still comes from Western European cli- industry remains under intense and increas- ents, this wealth declined by 2.2 percent in ing pressure owing to greater regulatory scru- 2011 and will likely continue to erode. Anoth- tiny—particularly from tax authorities in the er traditional offshore center, Luxembourg, United States and Western Europe. Simply has experienced a decline in wealth owing to put, in difficult fiscal times such as these, gov- its high exposure to Western European inves- ernments need funds—and cracking down on tors. In both Switzerland and Luxembourg, perceived “tax havens” is one way of obtain- client assets originating in North America ing them. have dwindled to an almost negligible amount. Of the major offshore banking centers, Swit- zerland has received the most attention from Obviously, in regions where concerns over is- foreign tax authorities. It is still the largest sues such as tax fraud and tax evasion are center, with about $2.1 trillion in offshore less pronounced, regulatory scrutiny is con-10 | The Battle to Regain Strength
  13. 13. Exhibit 5 | Switzerland Remains the Largest Offshore Center, but Its Lure Is Being Challenged Private financial wealth held in offshore centers, 2011 ($trillions) Destination of offshore wealth Origin of Channel Hong Caribbean offshore Switzer- United Islands Luxem- Kong United Regional and Other wealth land Kingdom and bourg and States total Panama Dublin Singapore North 0.04 0.12 0.11 0.39 0.05 0.00 0.02 0.7 America Western 0.93 0.15 0.51 0.36 0.13 0.14 0.12 0.22 2.6 Europe Eastern 0.09 0.05 0.04 0.03 0.03 0.03 0.3 Europe Asia- 0.23 0.26 0.14 0.06 0.16 0.76 0.20 0.10 1.9 Pacific Latin 0.25 0.03 0.03 0.01 0.25 0.24 0.05 0.9 America Middle East 0.56 0.33 0.21 0.04 0.06 0.06 0.04 0.22 1.5 and Africa Booking center total 2.1 0.9 1.0 0.5 1.0 1.0 0.6 0.6 7.8 = Change in 2011 Source: BCG Global Wealth Market-Sizing Database, 2012. Note: Discrepancies in totals reflect rounding. 1 Predominantly Miami and New York. 2 Includes Dubai and Monaco.siderably less onerous. Indeed, offshore cen- est offshore financial center in the near fu-ters such as Hong Kong and Singapore, whose ture, benefiting from asset inflows that origi-clients come mainly from Asia-Pacific and the nate in high-growth regions such as LatinMiddle East—rather than from the United America, Eastern Europe, the Middle East,States and Western Europe—have been much and Africa. Nevertheless, if recent growthless affected by the calls for greater transpar- rates remain constant, it is possible that Sin-ency and tax rigor in the industry. For exam- gapore and Hong Kong combined will surpassple, governments in the Middle East do not Switzerland as an offshore booking center intake issue with residents booking financial as- terms of size in the next 15 to 20 years.sets in offshore hubs such as Switzerland, theUnited Kingdom, and Singapore. Overall, regulatory tightening will mean that the amount of assets flowing to all offshore centers from investors in markets where taxImperatives for New Offshore regimes are becoming ever stricter will de-Growth cline—owing to supplementary tax payments,The key question for traditional offshore cen- penalties, repatriation, increased consump-ters and for the banks that operate in them is tion, and the elimination of small accounts.simply this: Where will growth come from in At the same time, client assets flowing off-the future? In Switzerland, for example, asset shore from the “new world,” especially coun-inflows from investors in neighboring coun- tries with underdeveloped private-bankingtries will certainly decline. Through 2016, we industries, will continue to grow. Clearly, off-expect Western European assets booked in shore centers with a favorable client-domicileSwitzerland to decrease substantially because mix will have a structural advantage—partic-of new, stricter taxation agreements. That ularly Singapore and Hong Kong, which aresaid, Switzerland will continue to be the larg- attracting offshore wealth originating in high- The Boston Consulting Group | 11
  14. 14. growth countries. Roughly 75 percent of as- try-specific—making it impossible to master sets booked offshore in Hong Kong and the distinct requirements of many different Singapore are from Asia-Pacific. client domiciles. Due diligence on new assets with regard to the source of wealth and its tax What does this new landscape really mean status will by necessity have to become more for wealth managers? First, it is clear that the rigorous. As an overarching consequence, “one size fits all” business model is dead. In many wealth managers will essentially have the future, wealth managers will need tai- to reinvent themselves, rethinking their strat- lored offerings and distinctive advice and ser- egies and operating models for each target vice models for each client domicile. Individ- market. They will have to customize and fo- ual relationship managers (RMs) will no cus their offerings to meet each client’s spe- longer be able to serve clients from a large cific needs with regard to products, services, number of domiciles because regulatory com- tax reporting, and preferred booking centers. pliance will become more complex and coun-12 | The Battle to Regain Strength
  15. 15. WEALTH MANAGER BENCHMARKING A FIGHT FOR PROFITABILITYT o understand how wealth managers fared in 2011, BCG benchmarked theperformance of more than 130 institutions— •• The rate of net new asset (NNA) genera- tion—which measures the difference between asset inflows and outflows ineither private banks or wealth management comparison with the asset base at theunits of large universal-banking groups—in beginning of the period—increased to 4Europe, Asia-Pacific, North America, and percent in 2011 from only 2 percent inLatin America. Overall, wealth managers 2010 for European offshore institutions,faced considerable difficulties in their efforts and to 10 percent from 7 percent into bolster growth in assets under manage- Asia-Pacific—owing partly to new wealthment (AuM) and revenues amid a highly creation but also to improved front-officeuncertain market environment. That said, capabilities, more-proactive RMs, and ansome cost-reduction efforts have started to increased focus on client a positive impact on wealth managers’bottom lines. •• Global revenues were virtually stagnant in 2011, rising by just 1 percent. GlobalGlobally, the asset bases of the wealth man- return on assets (ROA) increased slightlyagers in our sample remained flat in 2011, but was still significantly below historicalcompared with a gain of 11 percent in 2010. levels. Broadly, wealth managers wereThe principal reason for the lack of growth able to increase their level of tradingwas the deterioration in market values, which activities and shift somewhat to higher-was not offset by net new inflows. Still, there margin products.was wide variation in how wealth managersfared across regions and performance catego- •• Cost-to-income ratios (CIRs) varied acrossries. (See Exhibit 6.) Among the results are regions in 2011, from 68 percent in Latinthe highlights below: America and 80 percent in Asia-Pacific to 65 percent for European onshore players•• AuM decreased in Europe for both and 76 percent for European offshore offshore and onshore institutions. Eco- players—in all cases representing an nomic instability, demonstrated by euro increase over the previous year. zone challenges and negative market performance, led clients to shift wealth •• Revenue and cost challenges resulted in a into real (nonfinancial) assets and to slight decrease in profitability in most deleverage in order to reduce their regions in 2011. For example, for Euro- exposure. pean offshore players as well as Latin The Boston Consulting Group | 13
  16. 16. Exhibit 6 | There Was Wide Variation in How Wealth Managers Fared Across Regions and Performance Categories European European Asia- Latin North North offshore onshore Pacific American American American institutions institutions (ex Japan) institutions banks brokers 2009 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011 Growth 27 20 19 Change in 10 12 11 13 9 13 13 8 6 5 AuM (%) 1 2 1 −2 −3 13 10 Net new 3 3 4 5 7 8 8 5 2 4 assets (%) 1 0 1 1 −1 0 ROA 87 95 94 83 83 84 92 90 83 73 71 73 73 69 65 68 78 79 (basis points) Products Discretion- ary 24 36 41 45 15 15 16 15 22 23 2 6 4 18 22 12 12 12 mandates (% of AuM) Frontline CAL 249 248 259 273 255 207 297 263 287 301 220 184 234 226 238 129 97 105 per RM ($millions) Revenue 2.3 2.6 2.7 2.2 2.3 2.4 1.7 1.9 1.7 2.2 per RM 1.4 1.2 1.5 1.5 1.6 0.8 0.7 0.8 ($millions) Efficiency Cost-to- 81 80 94 88 83 74 74 76 68 62 65 75 65 63 68 75 75 73 income ratio (%) Pretax profit margin 26 27 23 27 29 27 29 33 23 27 27 26 16 18 15 10 14 (basis 5 points) Source: BCG Wealth-Manager Performance Database, 2010 through 2012. Note: This analysis was based in Swiss francs for European offshore institutions, in euros for European onshore institutions, and in U.S. dollars for all other institutions. CAL is client assets and liabilities. CAL per RM and revenue per RM are in U.S. dollars for all institutions; averages are weighted by CAL; figures for 2009 and 2010 may deviate from previous reports because the sample size has increased. 1 Offshore institutions included primarily private banks from Switzerland. 2 Relative to year-end 2010 AuM. 3 Revenues divided by yearly average client assets and liabilities. 4 Cost-to-income ratios of European onshore institutions are likely to be understated because large banks often do not fully allocate costs to their private- banking operations. 5 Revenues less total costs from private banking, divided by average CAL.14 | The Battle to Regain Strength
  17. 17. American institutions, pretax profit mentation. (See Exhibit 7.) ROA declined margins of 23 basis points reflected a in all wealth bands among European deterioration from the previous year. offshore banks, but the dip was especially Pretax profit margins for North American strong in the $0.25 million to $1 million brokers improved from 10 basis points to segment (144 basis points in 2011 versus 14 basis points—largely because of cost 172 basis points in 2010). By contrast, reductions. European onshore banks managed to increase ROA in most segments. In all•• ROA for European onshore banks and regions, banks barely managed to increase North American brokers rose by 2 basis ROA for wealth bands above $20 million, points and 1 basis point, respectively. reflecting the strong negotiating power of However, ROA declined in Latin America these client segments. Particularly in the (from 83 basis points in 2010 to 68 basis UHNW band, ROA shrank in almost all points in 2011) and Asia-Pacific (from 69 regions, with only North American banks basis points to 65 basis points), as well as showing a slight increase (2 basis points). among North American banks (from 92 basis points to 90 basis points) and Our benchmarking also revealed other dy- European offshore banks (from 95 basis namics concerning products, front-office ex- points to 94 basis points). cellence, and costs.•• ROA also varied considerably across AuM Products. In 2011, most institutions in our wealth bands, being highly dependent on sample managed to keep their share of service models, pricing, and client seg- discretionary mandates relatively stable, with Exhibit 7 | Achieving High ROA Depends on Service Model, Pricing, and Segment Approach European offshore European onshore Asia-Pacific Latin American North American institutions institutions (ex Japan) institutions banks 2011 62 124 44 93 64 125 66 129 72 166 2010 67 147 43 84 67 124 67 134 74 163 AuM wealth band ($millions) >100 36 19 32 30 36 20100 57 38 62 63 60 1020 72 54 78 81 87 510 84 64 86 90 107 15 104 79 97 103 145 0.251 144 106 153 154 188 0 150 300 0 150 300 0 150 300 0 150 300 0 150 300 3 ROA by wealth band (basis points) Average ROA for Average ROA for AuM wealth 1 quartile 4 quartile AuM wealth bands bands between $0.25 million Weighted ≥$5 million and $5 million average Source: BCG Wealth Manager Performance Database, 2011 and 2012. Note: This analysis was based in U.S. dollars; averages were weighted by client assets and liabilities. 1 Offshore institutions included primarily private banks from Switzerland. 2 North American brokers are not part of this analysis because of the difference in business model. 3 Revenues divided by average client assets and liabilities. The Boston Consulting Group | 15
  18. 18. a slight decrease to 21 percent (from 24 Front-Office Excellence. Globally, the size of percent in 2010). Yet there was wide variation total client portfolios per RM increased to a by region, driven by differences among weighted average of $266 million in 2011, business models. European offshore banks with especially positive trends in Latin were able to slightly increase their share of America and Asia-Pacific. One reason for the discretionary mandates (from 15 percent to increase was a reduction in RM head counts 16 percent), while Asia-Pacific banks saw a (as banks weeded out poor performers), decline to 4 percent, down from 6 percent the leading to the streamlining and consolidation previous year. Nevertheless, discretionary of client portfolios. Also, sales force initiatives mandates remain an opportunity for Asian aimed at achieving a more rigorous, efficient, banks that use the right business model and and performance-oriented approach were that, for example, are not acting only as effective for some banks. Many institutions brokers. have increasingly aligned RM capabilities with higher client expectations about invest- Clients generally continued to allocate their ment advice. Consequently, weighted-average assets in a conservative manner: 23 percent revenue per RM increased slightly to $2.2 mil- in cash and deposits, 21 percent in direct lion, up from $2.1 million in 2010. bonds, and 25 percent in direct equities. Allo- cations to managed funds increased to 21 per- Costs. Overall, the share of costs related to cent (up from 18 percent in 2010) and alter- the front office has gradually decreased over native and other investments together made the past few years as wealth managers have up 10 percent. Loans as a percentage of AuM invested more in areas such as operations were at 13 percent, up from 9 percent in and IT. (See Exhibit 8.) Additionally, tighter 2010. regulations and greater transparency require- Exhibit 8 | CIRs for Offshore Banks Have Increased Because of Higher Non-Front-Office Costs Offshore banks cost split, Two-year change 2009–2011 (%) (percentage points) 45.6 44.1 52.0 −5.6 Global cost split, Two-year change 49.7 −5.5 7.9 7.9 +0.1 2009–2011 (%) (percentage points) 7.7 9.4 9.4 +0.2 9.2 49.9 19.9 20.1 +0.9 −3.3 19.2 2.1 2.2 56.4 2.2 38.5 −0.0 50.4 +5.2 53.2 −2.6 −0.1 9.9 2.0 13.2 2.0 14.3 1.9 +4.4 6.1 6.4 +0.7 5.7 2009 2010 2011 10.2 10.4 −0.4 10.8 CIR (%) 72.5 74.9 77.8 +5.3 17.7 17.7 +1.3 16.4 Onshore banks cost split, Two-year change 1.7 1.8 1.9 33.2 +0.2 +2.9 2009–2011 (%) (percentage +0.3 points) 1.3 12.3 1.6 12.0 1.6 +1.0 11.0 55.2 +1.9 2009 2010 2011 62.1 57.4 57.1 +2.3 CIR (%) 77.8 76.6 74.5 −3.3 4.6 +0.4 4.4 5.0 11.4 11.5 12.2 + 0.7 Sales and front-related costs Risk management Investment advisors 14.9 1.4 14.3 1.4 14.2 1.4 −0.7 Other non-front-related costs 25.7 −0.0 −3.0 Asset management 11.5 0.9 +0.3 Share of total front-related costs, 2011 10.1 1.0 8.9 1.2 −2.6 Operations and IT Share of total non-front-related costs, 2011 2009 2010 2011 Legal and compliance CIR (%) 80.0 77.2 70.1 −9.9 Source: BCG Wealth Manager Performance Database, 2012. Note: This analysis was based in U.S. dollars; averages were weighted by client assets and liabilities. CIR = cost-to-income ratio. Numbers may not add up to 100 because of rounding. 1 Includes accounting, finance, and control; human resources; communications and marketing; and other central functions. 2 Includes institutions from Switzerland, Andorra, Singapore, Hong Kong, and Latin America.16 | The Battle to Regain Strength
  19. 19. ments have resulted in a slightly higher share For a number of European offshore banks,of legal, compliance, and risk management booking centers were also a significant costcosts. driver. In our sample, these banks did busi- ness in an average of four booking centers,Offshore private banks’ front-office costs as a with some players present in as many as 13share of total costs were significantly lower centers. However, with 82 percent of AuM (onthan at onshore institutions in 2011—52.0 average) booked at one key center, the re-percent versus 62.1 percent—mainly attribut- maining centers were often below criticalable to a more passive service model with re- mass, suggesting that a leaner structuregard to managing client relationships. Howev- would be beneficial. Banks need to considerer, non-front-office (corporate center) costs the value of each booking center in terms ofhave gradually risen owing to more-complex meeting client needs.transactions and higher legal, compliance,and risk-management expenses, leading tohigher CIRs. For onshore private banks, cor-porate-center costs have shown a downwardtrend, with cost-reduction programs and out-sourcing starting to pay off. The Boston Consulting Group | 17
  20. 20. ALTERNATIVE BUSINESSMODELSNEW PRESSURES ON WEALTH MANAGERS O ver the past several years, a handful of wealth management business models outside the mainstream have taken advan- Kingdom, 13 percent in Switzerland, and less than 5 percent in the United States. In most other developed countries, they account for tage of the disruption caused by the financial under 3 percent of the market—and even less crisis and the willingness of clients to con- in Asia and Latin America, although the busi- sider new alternatives. Traditional wealth ness is developing rapidly. EAMs compete managers should aim not only to defend their with private banks, but they also depend on turf but also to profit from evolving client them for custody and transaction services as preferences by adapting their own business well as for certain products and reporting models—incorporating different elements tasks. In parallel, although some private from those of unconventional competitors banks view EAMs strictly as a threat, others and making sure that they keep their finger see them as a platform or sales channel for on the pulse of what their clients want. (See their own products and services that can the sidebar “Client Discovery Never Ends.”) boost operational leverage. Each of the three alternative business models But EAMs are under increasing pressure, too. described below is exerting pressure on es- For example, the regulatory changes taking tablished wealth managers, albeit to varying place are likely to be more abrupt for degrees. EAMs—especially if they become subject to banking regulation laws in their markets. In External Asset Managers (EAMs). Also addition, models of remuneration between known as independent financial advisors or banks and EAMs are under scrutiny, as are registered investment advisors, these players retrocessions (payments from product were in a prime position following the crisis suppliers). Still, EAMs seem well positioned to capture clients who had become disen- to continue challenging traditional wealth chanted with private banks. And although managers. their influence varies widely by market, they have gained momentum overall. The EAM EAMs argue that they are more dedicated to value proposition revolves around personal the client and better able to provide unbiased relationships backed by customized, indepen- advice (their retrocession deals notwithstand- dent advice. ing). Moreover, successful relationship manag- ers often opt to become EAMs, viewing that EAMs represent about 20 percent of the role as having fewer restrictions and better wealth management market in the United income potential.18 | The Battle to Regain Strength
  21. 21. CLIENT DISCOVERY NEVER ENDSIn such times as these, when many move to another bank. On average, ainvestors are more risk-averse and price- strong-performing RM is able to move 15 tosensitive—and increasingly demanding of 20 percent of his or her client book to thethose who manage their money—it is more new bank within 18 months. Moreover, incritical than ever for wealth managers to Asia, security, stability, secrecy (for offshoreknow exactly what their clients want and services), and seamless banking servicesneed. A recent BCG survey of high-net- were highlighted in our survey as crucial,worth (HNW) and ultra-high-net-worth allowing for some variation among markets(UHNW) individuals revealed some key as to which qualities are most important.insights. Relationship Managers. Clients in allFirst, although patterns of what clients in regions expect reliability, trustworthiness,these segments seek are largely consistent and full transparency from their RMs.globally, there are some general differences Another key factor is product knowledgebetween those in Asian emerging markets and, naturally, the quality of overalland those in mature, Western markets. For investment advice. Since the RM is oftenexample, Asian HNW clients are generally the only person to have face-to-face contactyounger, and are still focused on wealth with the client, RMs should always beaccumulation as opposed to wealth approachable through multiple channels.preservation. They also tend to be entrepre- The personal touch in private bankingneurs who are comfortable with a high continues to be paramount.number of trades and transactions, andwho want to have substantial input when Channels and Interfaces. Other than RMinvestment decisions are being made by contact, online banking is the mostthe bank or relationship manager (RM). important channel for HNW clients in the lower wealth segments, whereas a bank’sBy contrast, our survey showed that their call center and potential social-mediaWestern counterparts have, to a greater presence appear less significant. Overall,extent, gained their wealth either as senior Asian UHNW clients are more technologycompany executives or through inheritance driven, generally speaking, than their(often involving multigenerational wealth). Western counterparts.Despite these variations, however, there aregeneral trends in what HNW and UHNW Products. Our survey showed that clientsclients expect in four domains: private seek wealth management institutions thatbanks (overall), specific relationship can provide in-house discretionary andmanagers, channels and interfaces, and advisory mandates, financial and estateproduct offerings. planning, and credit finance. Most other traditional wealth-management productsBank Selection. According to our survey, are typically part of the overall offering, butthe most important criteria in choosing a are not differentiators for the average HNWwealth manager are referrals from friends or UHNW client, and do not have to beand family, brand reputation, and product offered in-house. For some clients, theoffering. The key reasons for switching availability of basic banking products is stillproviders are price (vis-à-vis the level of important.investment performance), overall poorreturns, and poor reporting quality in termsof accuracy, depth, user-friendliness, andcustomization. In Asia, where the loyalty ofclients to RMs tends to be greater than inEurope, clients often follow when their RMs The Boston Consulting Group | 19
  22. 22. For established wealth managers, there are their large asset bases allow them to negoti- now two options: compete against EAMs by ate favorable terms with each one. At the offering more tailored advice and better ser- same time, UHNW clients need consolidated vice, or view them as attractive business-to- reporting across all assets and banking rela- business clients and find better ways of col- tionships, as well as holistic risk assessment laboration. In order to field a compelling and independent advice. The ability to pro- offering for EAMs, wealth managers need to vide comprehensive service is the key differ- improve reporting capabilities as well as their entiating factor for family offices—and the own online and IT platforms. They also need main reason why they are growing. to provide EAMs with a comprehensive range of products and services. These can include The resulting imperative for traditional tax and legal support to help EAMs comply wealth managers operating in the UHNW with new regulations; market-specific product segment—few of which have built true fami- offerings to help EAMs enhance their client ly-office capabilities—is to further develop books; and alternative pricing models to aid their offerings. To provide a compelling alter- EAMs in providing the transparency that cli- native to family offices, wealth managers ents increasingly demand. By courting EAMs must ensure that they can provide dedicated, with a dedicated offering, traditional wealth tailored service based on a holistic view of managers can effectively create a new distri- the client’s wealth. To deliver rapid responses bution channel for their own products and to client requests, a team approach—along services. with crisp execution and strong reporting ca- pabilities—is critical. Investment advice should cover company affairs (M&A and capi- Clients continue to show a tal transactions), succession planning, media- tion of family conflicts, and philanthropy. growing affinity for managing Family offices, too, can be a potential busi- ness-to-business client for wealth managers. their own wealth online. Online Wealth Managers. In the past, online wealth managers were basically online Family Offices. As the name suggests, this brokers, focusing solely on executing transac- business model is dedicated solely to serving tions. Today, these players have begun the needs of one (or potentially several) offering online advice, research, portfolio families—a growing niche given the complex- management, and investment products. They ity and breadth of some family fortunes. can cover every step of the advisory proc- Family offices are most developed in the ess—from assessing risk profiles and generat- United States and Europe—where a total of ing model portfolios to implementing a about 10,000 offices manage more than defined asset allocation and providing $5 trillion in assets—as well as in the Middle reports. Their offerings are becoming more East. More recently, family offices have begun user-friendly, and clients continue to show a to appear in Asia. growing affinity for managing their own wealth online. In a study conducted by BCG, 80 percent of UHNW families said that their main goal was For now, online approaches are being em- wealth appreciation. Most have their wealth braced mainly by clients in lower-wealth spread across multiple jurisdictions, which of- household segments, as well as by those who ten leads to complex legal structures and are self-directed or technology-savvy. Still, the complicated tax situations. Overall, UHNW need for online wealth management is ex- families want a highly professional and so- pected to grow across all wealth bands. The phisticated wealth manager with access to a value proposition of online wealth managers wide range of investment opportunities and centers around 24-7 access and the client’s an ability to potentially advise several gener- ability to maintain complete control over his ations. Moreover, these clients often have or her investments, with no intermediaries. In multiple private-banking relationships, and addition, online wealth managers usually20 | The Battle to Regain Strength
  23. 23. have a competitive edge in pricing, which meaningful steps in this direction. One hastheir clients can use to negotiate better deals created a separately branded online platformwith traditional private banks. that allows clients to invest in discretionary- mandate-like investments. Another has madeThe key for traditional wealth managers is to virtually every element of its traditional advi-significantly improve the integration of their sory process available online. However, someonline channels into their overall offerings in smaller, more traditional private banks havea way that enables delivery of a unique and largely overlooked the importance of thisseamless client experience. Several main- channel and may be missing wealth managers have already taken The Boston Consulting Group | 21
  24. 24. TRENDS SHAPINGTHE INDUSTRYA CALL TO ACTION T he landscape in wealth management will change fundamentally over the next ten years as competitive dynamics, regulatory opportunity unless they are among the few that are already well positioned in these mar- kets. Indeed, emerging markets are still very oversight, client behavior, and technology diverse in terms of their nature, size, and ma- continue to evolve. A broad set of trends is turity levels. Some, such as Brazil, are already already in motion. Only players that adapt to characterized by clear and transparent regu- these trends—particularly the trends outlined lation, highly developed capital markets, and below—and seize the opportunities that they savvy private-banking clients. present will be able to thrive and achieve leading competitive positions. Wealth managers, if they hope to succeed in emerging markets, must first define their Emerging markets will fuel the growth of strategies, operating models, and ambition global wealth. In India and China, for exam- levels. They also need to consider the follow- ple, private wealth is projected to increase at ing realities: CAGRs of 19 percent and 15 percent, respec- tively, from year-end 2011 through 2016—sig- •• Building a business in emerging markets nificantly faster than the global forecast of requires patience and persistence—and about 4 to 5 percent annually. China alone potentially several years of investment will account for 35 percent (about $10.1 tril- until breakeven points are reached. lion) of the overall increase in global wealth over this period, while India will account for •• Business models must be customized to 10 percent (about $2.7 trillion). each market and differentiated from those of local players, especially regarding Both the vibrant growth of wealth and in- product mix and sales models. creasing client sophistication in emerging markets are likely to foster the development •• Given that the underlying economics are of onshore investment opportunities and new different in emerging markets, businesses wealth-management sectors. Growth will oc- and ambition levels need to be linked to cur in local domestic business (onshore) as product usage, trading behavior, and price well as in cross-border business (offshore), levels. with onshore business growing at higher rates but also being more complicated and expen- •• Finding and keeping local talent is a key sive to enter. Yet traditional wealth managers success factor. This is a particular chal- will still have a difficult time capturing the lenge for foreign banks that need to22 | The Battle to Regain Strength