Brave new world private banking

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Brave new world private banking

  1. 1. Brave new world Outlook for the global private banking industry A report from the Economist Intelligence UnitCommissioned by
  2. 2. Brave new world: Outlook for the global private banking industryContentsPreface 2Executive summary 31. A fearful new world? 52. An ethical new world? 103. A less profitable new world? 13 Winning back trust 144. An emerging new world? 155. Conclusion: A brave new world? 186. Appendix: Survey results 19 © The Economist Intelligence Unit Limited 2012 1
  3. 3. Brave new world: Outlook for the global private banking industry Preface Brave new world is an Economist Intelligence Peter Flavel, CEO of private wealth management, Unit (EIU) report, commissioned by Bank Negara Asia, J.P. Morgan Malaysia in support of the MIFC initiative. The EIU Juan Garrido, global head of investment solutions, performed the research, conducted the interviews BBVA Global Private Banking and wrote the report independently. The findings and views expressed in this report are those of the Shiv Gupta, managing director of private banking, EIU alone and do not necessarily reflect the views India, Royal Bank of Scotland of the sponsor. Anuj Khanna, managing director and CEO of wealth management, South Asia, Pictet Cie Justin Wood was the author of the report and Sudhir Vadaketh was the editor. Phil Davis assisted Mark Mobius, executive chairman of emerging with further interviews. Gaddi Tam was responsible markets, Franklin Templeton for design and layout. The cover image is by Ivan Nigel Putt, head of ultra high net worth, Lloyds Loh. TSB Private Banking Our sincere thanks go to the following Jeroen Rijpkema, CEO, ABN AMRO Private Banking interviewees (listed alphabetically) for their time Iain Tait, head of UK private clients, London and insights: Capital Ivan Carrillo, CEO, Creuza Advisors Rohit Walia, executive vice chairman and CEO, Bruno Daher, co-CEO of the Middle East and head of Bank Sarasin Alpen private banking for MENA, Credit Suisse Didier Duret, chief investment officer, ABN AMRO Private Banking November 20122 © The Economist Intelligence Unit Limited 2012
  4. 4. Brave new world: Outlook for the global private banking industry Executive summarySeveral major crises, from the financial panic interviews with senior private banking executives,that began in 2008 to sovereign distress in the attempts to answer these questions.euro zone, still cast long shadows over the globaleconomy. Central banks in developed markets are The key findings of the research include:resorting to ever more unconventional measuresto stabilise their economies. While the outlook l Since the global financial crisis, investorsfor emerging economies is brighter, they too face are struggling to model risk and calculatetheir own set of challenges, from inflation to a the value of assets. For investors, the newcontinued dependence on exports to the West to economic landscape is challenging anddrive growth. confusing. Core assumptions that were used to manage wealth in the past, such as whatFor investors, and the private bankers who advise constitutes a risk-free asset, have been turnedthem, this landscape is challenging and new. upside down. Thoughts around financial riskOld certainties have evaporated. Investment and political risk are being comprehensivelystrategies, and indeed the whole private banking re-examined.landscape, are in a state of rapid change as theworld learns to live with the realities of this new l Amidst uncertainty, risk aversion is runningpicture. high. Investors are prioritising capital preservation, and our survey shows thatIn these uncertain times, what sorts of assets private bankers are advising their clients to beglobally are high net worth individuals (HNWIs) overweight in asset classes that are relativelyinvesting in? Do they consider developed or low risk. Indeed, 45% of private bankers areemerging markets as safer havens for their recommending their clients overweight cash.money? What factors, including taxation Conversely, hedge funds and other riskierand regulatory environments, will drive the assets are out of favour.growth of private banking around the world? Isdemand for ethical, social-venture, and sharia- l The search for yield is driving investors tocompliant investments rising? What are the main emerging market fixed-income securities.macroeconomic risks to client portfolios? And how Private bankers say that many of their clientsare these trends affecting the industry as a whole? are trying to combine a risk-averse approachThis report, based on a survey of 160 private with a search for decent yield. In the currentbankers around the world and a series of in-depth environment of extremely low interest rates, © The Economist Intelligence Unit Limited 2012 3
  5. 5. Brave new world: Outlook for the global private banking industry finding relatively safe securities that offer a non-Muslim investors too. One problem with return is far from easy. One way some are trying making investment portfolios sharia-compliant to achieve this is by investing in emerging is a lack of securities to buy, most notably in market fixed-income securities on an unhedged fixed income. basis, in the belief that the more robust l Life is getting tougher for private bankers financial health of emerging market economies due to rising costs, weaker revenues and less will see their currencies rise in the longer term. stable client relationships. Authorities are l Concerns over inflation trump those over imposing greater regulatory and compliance deflation. Despite the focus on the safety of costs on banks. At the same time, higher risk cash, our survey suggests that more bankers are aversion means clients are trading less than worried about inflation than deflation (certainly in the past, putting pressure on revenues. A for those based in emerging markets). This view general loss of trust among many clients in is prompting many to recommend that their the abilities and motivations of their wealth clients begin to moderate their risk aversion managers makes the situation all the more and invest more in assets such as equities and challenging. This will force private banks commodities—albeit cautiously. to change their business models and raise their service levels, and is likely to force l Concern about ethical business practices has consolidation in the industry. yet to translate into wholesale demand for ethical portfolio allocations. Much has been l Private banks are increasing their focus written about the unethical practices that gave on high-growth emerging markets... The rise to the recent financial crisis. Yet our survey Economist Intelligence Unit calculates that shows that only 26% of HNWIs around the emerging markets’ share of global GDP has risen world are currently allocating capital to ethical from 27.5% in 2000 to 45% today. We forecast About the or sharia-compliant investment classes. But that this will rise to just over 50% by 2015. survey bankers report that demand for these types of The amount of private wealth generated is investments is rising, albeit from a relatively increasing in tandem with this, leading to huge The research involved low base. Some 31% of private bankers expect opportunities for the private banking industry. surveying 160 senior a double-digit annual percentage increase in executives from private l …but whether this means that wealth ethical investments over the next five years. banks around the management will shift to newer centres like world. More than half Meanwhile, 22% expect a double-digit annual Singapore and Hong Kong remains unclear. the respondents are in percentage increase in social venture capital Some argue that wealthy emerging-market the C-suite or sit on the investments. board. In terms of size, investors will want their money to be invested 39% work at companies l Interest in sharia-compliant investments is close to home where the wealth is being whose global annual rising, but again from a relatively low base. created. Others argue that the traditional revenues exceed US$1bn. Some 25% of private bankers surveyed expect centres such as Switerland, New York and The respondents are a double-digit annual percentage increase in London will be hard to displace given their spread between Asia- sharia-compliant investments over the next history, trusted business climate, and deep pool Pacific (31%), Middle East and Africa (29%), five years. Such investments are plainly of of skills and knowledge. Our survey suggests North America (22%) interest to Muslim investors, but much debate that both trends are apparent. Emerging and Western Europe centres on whether Islamic investing offers a centres of wealth management will keep rising, (18%). superior risk/return profile that should attract but old centres will continue to do well.4 © The Economist Intelligence Unit Limited 2012
  6. 6. Brave new world: Outlook for the global private banking industry 1 A fearful new world?The global financial crisis that began in 2008 volatile capital flows, and retreating banks are allcontinues to cast a long shadow over the global taking their toll.economy. Economies in the West remain mired indebt, with high unemployment, deficient demand For investors, the future looks less certain thanand low levels of confidence. Governments and ever. Choosing where to invest and what to investpolicymakers are struggling to stem the crisis. in have become highly challenging.Debate rages about the costs and benefits of “The last few years have caused a great deal ofausterity measures, and the pace at which confusion among families in terms of setting theirgovernments should tackle their ever-growing investment objectives,” observes Nigel Putt, headfiscal deficits. of ultra high net worth investors at Lloyds TSBIn the meantime, central banks are resorting to Private Banking in Switzerland. “Core assumptionsever more unconventional measures to stabilise that were used to manage wealth in the past [suchtheir economies. With interest rates already as what constitutes a risk-free asset] have beenat record lows in many countries, and with turned upside down. Everyone is struggling togovernments constrained in their ability to spend, model risk and to calculate the value of assets. Themore and more nations are applying the last thinking around financial risk and political risk arepolicy lever available to them, that of quantitative all being re-examined.”easing. The US, the EU, Switzerland, Great Britainand Japan are all increasing their money supply at Shiv Gupta, managing director of private bankingan unprecedented rate. in India at the Royal Bank of Scotland, agrees. “We live in a much more volatile world now, with a highIn emerging markets, the picture is much brighter. degree of schizophrenia among investors towardsWith healthier balance sheets, these economies risky assets,” he says. “Moments of high optimismhave been able to continue growing at decent turn to moments of risk aversion and extreme fearspeeds. Over the past year, the emerging world in no time at all.”as a whole has grown by around 5%, comparedto just 1% in the developed world. And yet, now, Mr Gupta believes the private banking industry iseven emerging markets are feeling the pain of the thus going through a period of intense change,fragile global economy. Weak demand for exports, as the expectations clients have of their advisers © The Economist Intelligence Unit Limited 2012 5
  7. 7. Brave new world: Outlook for the global private banking industry is rapidly changing. “We’re moving to a ‘new relatively low risk. Indeed, 45% of private bankers normal’, but nobody is quite clear yet what this are recommending their clients be overweight in new normal will look like.” cash. Reflecting a greater focus on fixed income, a similar number (48%) are advising investors to be overweight in corporate bonds (see chart 1). Hunger for safety Amongst the uncertainty, it’s clear that risk At the other end of the spectrum, bankers are aversion is running high in the current climate. steering their clients clear of hedge funds as well Our survey shows that private bankers are advising as sovereign debt in developed markets. This their clients to be overweight asset classes that are is perhaps expected, given the ongoing fiscal Chart 1 Which of the following assets do you currently advise your clients to overweight? (%) Low Medium High concentration concentration concentration Corporate bonds 24 28 48 Cash 30 25 45 Active equities 31 34 35 Emerging market equities 39 31 31 Real estate 35 39 26 Emerging market sovereign debt 44 33 23 Commodities 44 34 23 Private equity 48 32 20 Passive equities 42 40 18 Hedge funds 63 21 15 Developed market sovereign debt 60 26 156 © The Economist Intelligence Unit Limited 2012
  8. 8. Brave new world: Outlook for the global private banking industrytroubles and credit rating downgrades in Europe interesting time for the debt markets. Withand the US. many banks trying to shrink their loan portfolios and increase their capital, corporate borrowersThis risk-aversion is fairly consistent across the are finding it easier to raise money in the bondworld. Private bankers everywhere say their clients markets. The investment preferences of theare deeply in favour of fixed income securities, and world’s wealthy are thus filling a gap left byare avoiding more risky asset classes. retreating banks. In Asia (ex-Japan), for example, international bond issuance in US dollars, eurosRohit Walia, executive vice chairman and CEO and yen in the first nine months of 2012 exceededat Bank Sarasin Alpen in Dubai, says his bank’s US$106bn—a number that is already 20% greaterclients based in the Middle East have at least 50% than the previous full-year record for Asia (ex-of their portfolio in fixed-income securities, a level Japan) set in 2010.1he reckons will stay fairly constant for the next12 to 18 months. The conservatism also showsitself in a strong preference for investing in local Hunger for yieldmarkets rather than less familiar foreign ones. Importantly, though, while investors are currently prioritising capital preservation, they are trying“The Arab Spring hasn’t really had much impact to combine a risk-averse approach with a searchon the countries in the Gulf Cooperation Council for decent yield. In the current environment of[GCC], so investors are confident to put their extremely low interest rates, finding securitiesmoney in the region,” notes Mr Walia. Conversely, that are both relatively safe and offer a return ishe adds, “The appetite for other markets has taken far from easy.a hit because many investors got badly burnt.” This hunt for yield often translates into aIn London, Iain Tait, head of UK private clients at preference for fixed income in emerging marketsLondon Capital, a wealth management business, rather than developed markets, given the former’ssays his clients currently have around 55% of relatively higher yields. Many bankers are alsotheir portfolios in fixed income. “Most clients are advising wealthy investors to take the currencyfocusing on capital preservation,” he says. “Gone exposure on an unhedged basis, in the belief thatare the days when clients were looking to double the more robust financial health of emergingtheir money every 10 years.” market economies will see their currencies rise in the longer term.In Asia, Anuj Khanna, managing director andSouth Asia CEO of wealth management at Pictet “Given that deposit rates on cash are near zero forCie, a Swiss private bank, sees a similar pattern. many currencies, investors are definitely looking“Our clients are risk-averse at the moment, for yield, but in a protected, conservative way,”and that matches the advice we’ve been giving says Bruno Daher, co-CEO of the Middle East andthem,” he says. “We’ve been recommending a head of private banking for MENA at Credit Suisse.high allocation to cash, gold and to investment “They do like to be in emerging market currencies,grade, high quality fixed income. Since the ECB’s and they are starting to think about things likeannouncement to buy sovereign debt [in July commodities to try to take on a little more risk and2012], we’ve been advising more exposure to risk add a little more yield to what is essentially still aassets, but in a conservative way, so things like conservative approach.”gold-mining stocks and defensive stocks with agood dividend yield.” The ongoing programmes of quantitative easing around the world are adding impetus to the search 1 “Asian bond issuance hitsThe high preference for fixed-income securities, for yield as investors start to worry about the new record high”, Financialparticularly corporate bonds, comes at an potential inflationary impact of printing money. Times, September 24th 2012. © The Economist Intelligence Unit Limited 2012 7
  9. 9. Brave new world: Outlook for the global private banking industry With the global economy still weak and flirting because the transmission mechanism between with recession, the prospects for deflation are banks and the real economy is broken, but it will undoubtedly real, but many believe inflation will result in competitive devaluation and gold will lap become a more significant problem. that up. In five or ten years’ time, when inflation kicks in, in earnest, gold will become a long- In our survey, private bankers still regard euro standing store of value again, replacing its current zone instability as the biggest risk to client role as an alternative currency.” portfolios, followed by a recession in developed markets. However, a quarter of respondents If inflation does rise, then investors will need to cite inflation as a major threat, whereas only reassess their allocation strategies. Asset classes 8% believe deflation is a serious concern (see such as equities and commodities are likely to do chart 2). This picture varies according to where much better, and it is for this reason that some respondents are based. In Asia, for example, bankers are starting to advise their clients to bankers consider inflation to be the biggest risk increase their exposure to higher risk assets, of all as new money created in the West floods into albeit with great care. emerging markets and into commodities. Our survey results suggest that the appetite for “Although disinflation may persist for a number risk assets is stronger in North America than in of years, clients are starting to come round to Europe. Indeed, 68% of bankers in the US feel that the idea that inflation will eventually rear its ugly equities will see the strongest demand among head,” says Mr Tait at London Capital. “We are asset classes in the year ahead. Conversely, in very bullish on gold. Printing money won’t work Europe, a similar number (67%) feel that fixed Chart 2 What are the biggest risks to your client portfolios? (select two) (%) Euro zone instability 53 Recession in developed markets 32 US dollar crash 31 Inflation, including oil/commodity price shock 25 Slowdown in the Chinese economy 24 Global geopolitical instability 23 Deflation 88 © The Economist Intelligence Unit Limited 2012
  10. 10. Brave new world: Outlook for the global private banking industryincome will be the most sought-after investment. already a major threat. “Real levels of inflation areThis perhaps reflects the relative strength of the far higher than the official reported levels,” heUS economy, and a greater chance for inflation to says. “In an environment of quantitative easingtake hold compared to the depressed character and inflation, equities will do much better thanof the euro zone. In Asia and the Middle East, fixed income.”bankers are expecting the demand for property tobe much stronger than their peers in other parts of Didier Duret, chief investment officer at ABN AMROthe world, although as one interviewee notes, this Private Banking, says he can already see clientsis typical of investors in these regions no matter beginning to acknowledge the need to changewhat the state of the economy. tack. “Cautiously, more and more clients are willing to move into better yielding instruments likeMark Mobius, chairman of the emerging markets private equity and real estate investment trusts,”group at Franklin Templeton Investments, a he says. “There is an outflow from liquid assets andfund management business, believes inflation is safe haven bonds like US and German debt.” © The Economist Intelligence Unit Limited 2012 9
  11. 11. Brave new world: Outlook for the global private banking industry 2 An ethical new world? Arguably, some of the causes of the recent financial digit annual percentage increase in social venture crisis stemmed from questionable corporate capital investments. behaviour, and investment decisions and business strategies that lost touch with society. So, in this Juan Garrido, global head of investment post-crisis world, are wealthy investors taking a solutions at BBVA Global Private Banking in stronger interest in the social and ethical character New York, sees a definite rise in the demand for of their investment strategies? socially-responsible investing (SRI). “Clients are increasingly asking for a range of services with The picture is mixed. Some bankers report that, the ability to generate social impact, including in times when investors are focused on capital philanthropy and social investment,” he says. preservation, their desire to be more socially “BBVA has set up a number of impact investment responsible becomes less of a priority. Ivan Carrillo, and social investment funds in the past few years.” CEO of Creuza Advisors, a multi-family office in Peru, says his firm has only been asked once to Jeroen Rijpkema, CEO of ABN AMRO Private adjust a portfolio for ethical reasons—in order to Banking, sees similar trends. “Over the past four avoid an investment in a bank that the client felt years, the volume of SRI investments we manage had unsavoury working practices in Africa. “Our has nearly doubled,” he says. Just like BBVA, ABN clients want to preserve money and make money, AMRO is also setting up social impact investment so sustainability is at the back of their minds at funds. Part of the rationale, he notes, isn’t just to the moment,” he says. Our survey suggests that be a good citizen, nor even to gain diversification, attitudes such as these are more prevalent in but because social investments can offer superior emerging markets than in developed ones. risk-return potential. ABN AMRO believes, for example, that microfinance businesses give bond- However, others see interest growing. In our like volatility but with twice the return. survey, private bankers say they expect the annual increase in the amount of money directed towards While this may be true, our survey suggests that ethical and social investments to increase by an many investors, as well as their private bankers, average of 9.1% a year for the next five years. are unaware of such insights. Only 31% of private Some 31% of respondents expect a double- bankers are actively recommending social and digit annual percentage increase in ethical ethical investments (including sharia-compliant investments. Meanwhile, 22% expect a double- ones), and even fewer investors (26%) are10 © The Economist Intelligence Unit Limited 2012
  12. 12. Brave new world: Outlook for the global private banking industryallocating their capital to such ideas (see chart 3). a superior risk/return profile that should attract 2 “Islamic Investing”,And when investors do choose ethical and sharia- non-Muslim investors too. Christian Walkshäusl and Sebastian Lobe, Review ofcompliant investments, the rationale is rarely Financial Economics, Marchdriven by a desire to achieve better returns (see For example, some commentators argue that, 1st 2012chart 4). because Islamic finance avoids companies with excessive leverage, investment performance isSharia shining generally better. Certainly the past few yearsWithin the universe of investments driven by have seen Islamic equity indices outperformethical and religious considerations, our research conventional indices, in large part due to thesuggests that interest in sharia-compliant fact that banks and financial institutions areopportunities is also rising. A quarter of private eliminated from a portfolio after applying anbankers surveyed expect double-digit annual Islamic investment filter. Many banks, especiallypercentage increases in the amount of money in the West, have struggled since the financialdirected towards sharia-compliant investments crisis, and so removing them from a portfolio hasover the next five years. Such investments are been beneficial. However, the jury is still out onplainly of interest to Muslim investors, but much whether sharia-compliant investment approachesdebate centres on whether Islamic investing offers will continue to deliver superior returns.2 Chart 3 To what extent do you agree or disagree with the following statements? (%) Strongly agree Neutral Disagree or and agree strongly disagree I have a good understanding of the risk-reward profile of ethical 66 22 11 investments My clients have a good understanding of the risk-reward 40 35 25 profile of ethical investments I have a good understanding of the risk-reward profile of social 50 32 18 venture capital My clients have a good understanding of the risk-reward 27 35 38 profile of social venture capital I have a good understanding of the risk-reward profile of shariah- 39 23 38 compliant investments My clients have a good understanding of the risk-reward profile of 24 27 49 shariah-compliant investments I recommend ethical/shariah- 31 24 45 compliant products to my clients My clients are investing in ethical/ shariah-compliant products 25 23 52 © The Economist Intelligence Unit Limited 2012 11
  13. 13. Brave new world: Outlook for the global private banking industry Chart 4 What is the most important factor driving client appetite for ethical investments, social venture capital, and sharia-compliant investments? (%) Private ethical considerations 29 Public ethical considerations 24 (to be seen to be doing good) Portfolio diversification 23 Investment returns 18 Other 6 Demand for Islamic financial products is highest that the universe of potential investments can be in the Middle East, especially in GCC countries. rather limited,” he says. Other observers agree “We are getting increasing numbers of requests with him. While the range of equity investments to work with family offices in the Middle East to open for Muslim investors is quite large, the range set up vehicles such as private label funds that are of debt securities remains relatively small. In sharia-compliant,” says Mr Daher at Credit Suisse. an environment where investors are risk averse and favour fixed income, as is the case today, a At Lloyds TSB, Mr Putt says his bank is also working shortage of sharia-compliant debt securities can with families in the GCC who are strict adherents create difficulties. to sharia investing. “The problem they face is12 © The Economist Intelligence Unit Limited 2012
  14. 14. Brave new world: Outlook for the global private banking industry 3 A less profitable new world?For private bankers, it is not only the investment in the abilities and motivations of their wealthlandscape and the appetites of their clients that managers. Following the crisis, many investorshave changed since 2008. Just as significant perceived their bankers as profit-maximisingare sweeping changes to the way their industry “product pushers” rather than genuine, impartialoperates and is organised. Few disagree that life advisers with their clients’ best interests at heart.is getting tougher, and profit margins are getting Such sentiment has made it harder to retain clientthinner. relationships and to win business from them.In the aftermath of the financial crisis, authorities During the good years, many banks came tohave ratcheted up compliance and regulatory rely on ever-rising markets, and the positiverequirements. Many governments are cracking performance of client portfolios, as the basis ofdown on what they perceive as tax evasion and their relationship. In today’s world of volatilityfraud. The US, for example, has grown much more and weak economic growth, relationships builtaggressive in the way it deals with offshore tax on ever-improving asset prices will be harder tohavens, and is starting to hold private bankers maintain. Some of the wealthiest investors, theaccountable for their US clients’ tax compliance. ultra high net worth clients, have decided to setMany other regulations, such as anti-money up their own family offices to manage their wealth.laundering rules, have also been tightened. While these family offices still need bankingWhile few bankers argue against such rules, these services, the scope of their business has narrowedregulations do raise the cost of compliance and dramatically.make life much harder for private banks. Given this picture of rising costs, weaker revenues,Even as costs are rising, revenues are also under and less stable client relationships, privatepressure. Private banking clients are trading less banking margins are under pressure. Researchthan in the past, thanks to higher risk aversion. from Scorpio Partnership, a consultancy thatAnd when they do trade, often it is in securities advises private banks, shows that the averagesuch as fixed income that earn less revenue for cost-to-income ratio at the world’s private banksbanks. rose from 63.7% in 2007 to 80% in 2011.3The picture is made even more challenging thanks Opportunity in adversity? 3 Scorpio Partnership Privateto a general loss of trust among many clients Mr Daher at Credit Suisse acknowledges that Banking Benchmark 2012 © The Economist Intelligence Unit Limited 2012 13
  15. 15. Brave new world: Outlook for the global private banking industry private banks are facing several challenges but struggle to build the scale needed to invest in also believes that some will force the industry to things such as compliance systems and better IT improve. “Regulations that demand you know your that this new world demands. Even for large firms, client better, for example,” he says. “Good private competition in this landscape of constrained banks should be doing this anyway. The new profitability will be tough, forcing some to environment will force banks to be more efficient withdraw. In August 2012, for example, Bank and better.” of America Merrill Lynch announced that it was selling its overseas wealth-management business For many banks, the new environment is an to Julius Baer, a Swiss private bank, for US$882m. opportunity to re-think traditional business models, and to use those models to differentiate Gaining size and scale is not a prerequisite for one company from another (see box: Winning survival. But for those firms that choose to back trust) Another trend that is likely to grow stay small, the future demands a process of is industry consolidation. Many private banks reinvention, whereby they identify certain niches and investment advisory firms are small and will in which to specialise. Winning back trust Given the poor performance of many portfolios “The world is too complex and the markets too during the global financial crisis, many investors volatile to have just one banker alone,” says have become disillusioned with their private Peter Flavel, CEO of J.P. Morgan’s private wealth banks. Feelings are widespread that banks not management business in Asia. “It’s all about only gave poor advice, but also that they used being better advisors by using a team approach. their wealthy clients to offload bank products, The client gets disciplined delivery of better especially structured finance securities, with quality service, and because they get better little regard for whether such investments would service we win a higher percentage of their be in their clients’ interest or not. discretionary mandates.” In the new environment of investor mistrust, Anuj Khanna, managing director and CEO, many banks are now looking hard at ways to South Asia, of Pictet Cie, a Swiss private bank, win back client confidence and to improve their says the feelings of mistrust are widespread service. J.P. Morgan’s Private Bank, for example, among bankers too. “There is a high level of is using an approach to client management that disenfranchisement among bankers at some of it hopes will set it apart from its competitors. At the big houses that they are being forced to put many banks, wealthy investors have one main the interests of the bank ahead of the interests point of contact, a relationship manager, who is of their clients,” he notes. “That conflict often the interface between the client and the bank. arises because banks are under pressure to meet This relationship manager puts their clients in quarterly earnings targets.” front of investment specialists as he or she sees fit. J.P. Morgan instead operates with two points But, says Mr Khanna, because Pictet is privately of contact for every client, supported by other owned, his bankers are not under such short- specialists covering estate, tax planning and term pressures. As such, Pictet is positioned to credit advice—each being dedicated members take a much longer-term view when it comes of the client coverage team. One of them is a to managing client relationships, without the traditional relationship manager; the other is immediate pressures of delivering profits from an investment specialist. Both are expected to those relationships. This philosophy, he says, is manage the client equally. helping Pictet not only win and retain clients, but also hire many of the disenfranchised bankers.14 © The Economist Intelligence Unit Limited 2012
  16. 16. Brave new world: Outlook for the global private banking industry 4 An emerging new world?Looking at the global economy, it is clear that Back in 2009, emerging markets had privatedeveloped markets in the West are growing at a wealth of US$27.2trn, or 24% of the global total,much slower pace than those in emerging markets according to the Boston Consulting Group (BCG).(Asia ex-Japan, the Middle East and North Africa, But by 2016, BCG expects wealth in these regionsEastern Europe and Latin America). This has been to rise to US$54.5trn, or 36% of the global total.4the case for a number of years already, but giventhe fall-out from the global financial crisis, the Similarly, in 2008 emerging markets had 1.9mgrowth differential has widened and is likely to millionaires, or 22.4% of the global total,stay that way. The EIU calculates that emerging according to a study by Cap Gemini and RBCmarkets’ share of global GDP has risen from 27.5% Wealth Management. By 2011, that figure hadin 2000 to 45% today. We forecast that this will rise grown to 2.6m, accounting for 23.5% of theto just over 50% by 2015 (see chart 5). global total.5 Chart 5 Emerging markets’ share of global GDP (%) 60 50 40 30 20 4 “Global Wealth 2012: The 10 Battle to Regain Strength”, Boston Consulting Group, 0 2012 1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 5 “World Wealth Report Note: Nominal GDP in US$ at market exchange rates Emerging markets = Asia ex-Japan, the Middle East and North Africa, Eastern Europe and Latin America 2012”, Cap Gemini and RBS Source: Economist Intelligence Unit Wealth Management, 2012 © The Economist Intelligence Unit Limited 2012 15
  17. 17. Brave new world: Outlook for the global private banking industry5 “The International Art The rise of wealth in the emerging world is evident had mixed opinions about the changing map ofMarket in 2011: Observations in many different guises. Consider the market for money management.on the Art Trade over 25 fine art. A report released in March 2012 showsyears”, commissioned by Mr Walia at Bank Sarasin Alpen feels that his clientsTEFAF Maastricht, March that China has become the biggest art market in the world. According to the research, China’s share in the Middle East still have a strong preference for16th 2012 of the market rose from 23% in 2010 to 30% last booking their wealth in places like Geneva. While year. The US, with just 29%, has been pushed into they may well be investing their money in the GCC, second place.6 when it comes to managing those investments they appreciate the depth of experience and skills found in traditional banking centres. “There’s also New centres of wealth management? a strong sense of tradition, and that takes a long Given these trends, will the places where wealth time to break down,” he says. is managed migrate to the emerging markets too? Will the established centres of private banking in Conversely, Peter Flavel, CEO of J.P. Morgan’s Switzerland, London, Luxembourg, and New York private wealth management business in Asia, see their long-held dominance challenged by a new believes that his clients in Asia favour the generation of financial hubs? emerging hubs of Singapore and Hong Kong. “The role of these places will keep rising, there’s no Given the economic growth in emerging markets, doubt in my mind,” he says. “The authorities have it is no surprise to see that private bankers expect done an excellent job building the right kind of their business to grow much faster in such places. environment for the industry to thrive. And Asia is Our survey shows that over the next five years they where the wealth is being created fastest. It makes expect their business to grow by 6.3% a year in sense for wealth managers to be here too.” developed markets, but to expand by 9.8% a year in emerging markets (see chart 6). Our survey asked bankers what criteria they considered to be most important in determining However, just because clients and their wealth are where clients choose to do their private banking increasing in new parts of the world, it does not (see chart 7). Of most importance was political necessarily mean that their money will also be stability. Given geopolitical concerns in the managed there. The interviewees for this report Middle East—and in Asia too, such as the dispute Chart 6 What is the expected annual growth rate of your business over the next five years in the following markets? (%) Emerging markets 9.8 Frontier markets 8.1 Developed markets 6.3 Note: As specified in the survey questions, “Emerging markets” include Brazil, Russia, Korea, Indonesia, Malaysia, South Africa, Turkey, and Taiwan; “Frontier Markets” include Saudi Arabia, Bahrain, Qatar, Jordan, Vietnam, Kuwait, UAE, and the CIS countries16 © The Economist Intelligence Unit Limited 2012
  18. 18. Brave new world: Outlook for the global private banking industry Chart 7 How important will these factors be in determining where clients choose to do their private banking in the future? (%) Low Medium High importance importance importance Political stability 2 10 88 Regulation and legislation, including privacy considerations 7 16 77 Taxation (including incentives) 7 21 72 Well developed ancillary services (eg, advisors, trust companies, legal firms, rating agencies, consultancy 4 25 72 firms, tax and accounting firms) Economic growth in destination city/region 9 24 67 Diversity of asset classes offered in destination city/region 6 35 59 Inter-linkages with other markets 8 37 55 Entrepreneurial climate of destination city/region 12 39 50 Long history of private banking in destination city/region 17 37 45 Vibrancy of destination city/region 16 46 39between China and Japan over the Senkaku (or this is the case, then it suggests that new centresDiaoyu) Islands—the older centres perhaps have an do have the opportunity to rise and become rivalsadvantage in this regard. to the incumbents, assuming they can address the other important factors, notably the quality ofInterestingly, however, less than half the bankers legislation and regulation, having a well-developedin the survey thought that having a long history of ecosystem of lawyers and accountants, having lowprivate banking was an important consideration. If taxation and so on. © The Economist Intelligence Unit Limited 2012 17
  19. 19. Brave new world: Outlook for the global private banking industry Conclusion A brave new world? The future suggests that both investors and their centres of wealth management will also shift from private bankers will need to be bold if they are to traditional centres such as Switzerland, London succeed. The world is in the midst of an extended and New York to new ones such as Singapore and period of uncertainty, volatility and change. Hong Kong. The investment habits of investors before the Some argue that wealthy emerging-market global financial crisis are no longer applicable. investors will want their money to be invested Equally, the banking models that predominated close to home where the wealth is being created. before the crisis are no longer relevant. Bankers Others argue that the traditional centres will be and their clients are moving into a “new normal”, hard to displace given their history, deep pool and feeling their way as they go. Both parties are of skills and knowledge, and trusted business likely to see their performance suffer. On the part climate. Our research suggests that both stories of investors, returns will be lower. On the part of are true. Emerging centres of wealth management bankers, profits will be harder to achieve. will keep rising, but old centres will continue to do well. The key to winning business will be the ability But in adversity lies opportunity, for those who are of financial centres to respond to ever-changing bold enough to grasp it. HNWIs who are living in industry trends. fear, concerned only with capital preservation, will miss the opportunities. Likewise, banks that fail to Many parties on both sides of the private banking respond to this new reality will also lose out. business are responding to the challenges before them. Investors are reassessing their approach Meanwhile, as global economic growth shifts to risk and valuation. Banks are adjusting their from developed Western markets to emerging service models. In this brave new world, these will economies, opinions are mixed as to whether be the ones who succeed.18 © The Economist Intelligence Unit Limited 2012
  20. 20. Brave new world: Outlook for the global private banking industry Appendix: Survey resultsNote: Percentages may not total 100 due to rounding or the ability of respondents to choose multipleresponses Are you in private banking? (% respondents) Yes 100In which country are you personally located?(% respondents)USA 19India 10South Africa 8 37United Arab Emirates 7Norway 5Australia 4Singapore 4Canada 3Finland 3Ghana 3Indonesia 3Kenya 3Pakistan 3Denmark 2Netherlands 2Philippines 2Sri Lanka 2Jordan 2New Zealand 2Qatar 2Zimbabwe 2Bahrain 1Bangladesh 1Sweden 1Switzerland 1UK 1Germany 1Ireland 1Kuwait 1Lebanon 1Luxembourg 1Nigeria 1Saudi Arabia 1 © The Economist Intelligence Unit Limited 2012 19
  21. 21. Brave new world: Outlook for the global private banking industry In which region are you personally located? (% respondents) Asia-Pacific 31 Middle East and Africa 29 North America 22 Western Europe 18 In which country is your organisation headquartered? (% respondents) USA 18 India 7 South Africa 6 Norway 6 Switzerland 6 UK 6 Australia 4 United Arab Emirates 4 Pakistan 3 Canada 3 Denmark 3 Ghana 3 Kenya 3 Netherlands 3 Finland 2 Philippines 2 Sri Lanka 2 Bahrain 2 Germany 2 Indonesia 2 Jordan 2 Zimbabwe 2 Bangladesh 1 Nigeria 1 Qatar 1 South Korea 1 Sweden 1 Taiwan 1 China 1 France 1 Ireland 1 Kuwait 1 Lebanon 1 1 Luxembourg 1 New Zealand 1 Saudi Arabia 1 Singapore 1 Turkey 120 © The Economist Intelligence Unit Limited 2012
  22. 22. Brave new world: Outlook for the global private banking industryWhat are your companys annual global revenues in US dollars?(% respondents)$500m or less 47$500m to $1bn 15$1bn to $5bn 9$5bn to $10bn 6$10bn or more 24Which of the following best describes your title?(% respondents)Board member 2CEO/President/Managing director 11CFO/Treasurer/Comptroller 9CIO/Technology director 4Other C-level executive 27SVP/VP/Director 9Head of business unit 10Head of department 4Manager 23Other 11. Which of the following assets do you currently advise your clients to overweight? Please rate on a scale of 1 to 5, where 1=Low concentration and 5=High concentration. (% respondents) Low concentration 1 2 3 4 High concentration 5Active equities 13 18 34 25 10Passive equities 16 26 40 14 4Emerging market equities 13 26 31 21 10Corporate bonds 12 12 28 34 14Commodities 22 22 34 20 3Developed market sovereign debt 28 31 26 13 2Emerging market sovereign debt 17 26 33 21 3Hedge funds 39 24 21 13 2Private equity 26 22 32 16 4Real estate 18 17 39 21 5Cash 10 20 25 28 17Others, please specify 19 4 19 19 38 © The Economist Intelligence Unit Limited 2012 21
  23. 23. Brave new world: Outlook for the global private banking industry 2. Which types of assets do you foresee will be in demand, moving forward? Select up to two. (% respondents) Equities 49 Bonds 45 Properties 37 Liquid assets 34 Commodities 20 Passion investments (eg, luxury collectibles, arts, jewellery, gems, watches, sports investments and other collectible assets) 7 3. Over the next five years what is the annual percentage growth rate you expect to see in client portfolios for the following investment types? (% respondents) 0-5% 5-10% 10-15% 15-20% Over 20% Not applicable Dont know Ethical investments 28 36 16 9 6 2 3 Social venture capital 31 36 15 5 2 7 4 Shariah-compliant investments (eg, investments structured in accordance to Sharia rules) 25 24 17 2 6 16 11 4. What is the most important factor driving client appetite for ethical investments, social venture capital and shariah-compliant investments? (% respondents) Private ethical considerations 29 Public ethical considerations (ie, to be seen doing good) 24 Portfolio diversification 23 Investment returns 18 Other, please specify 6 5. To what extent do you agree or disagree with the following statements? Please rate on a scale of 1 to 5, where 1 = Strongly agree and 5=Strongly disagree. (% respondents) Strongly agree 1 2 3 4 Strongly disagree 5 I have a good understanding of the risk-reward profile of ethical investments 27 39 22 9 2 My clients have a good understanding of the risk-reward profile of ethical investments 11 30 35 20 4 I have a good understanding of the risk-reward profile of social venture capital 14 36 32 12 6 My clients have a good understanding of the risk-reward profile of social venture capital 4 23 35 26 12 I have a good understanding of the risk-reward profile of shariah-compliant investments 18 21 23 17 21 My clients have a good understanding of the risk-reward profile of shariah-compliant investments 8 16 27 22 27 I recommend ethical/shariah-compliant products to my clients 13 18 24 16 29 My clients are investing in ethical/shariah-compliant products 10 16 23 23 2922 © The Economist Intelligence Unit Limited 2012
  24. 24. Brave new world: Outlook for the global private banking industry6. How would you rate the following markets as investment destinations for mitigating risk? Please rate on a scale of 1 to 5, where 1=Less preferred destination and 5=Most preferred destination. (% respondents) Less preferred destination 1 2 3 4 Most preferred destination 5I have a good understanding of the risk-reward profile of ethical investments 9 13 31 32 15My clients have a good understanding of the risk-reward profile of ethical investments 17 34 31 12 6I have a good understanding of the risk-reward profile of social venture capital 5 17 36 31 11My clients have a good understanding of the risk-reward profile of social venture capital 2 17 37 32 12I have a good understanding of the risk-reward profile of shariah-compliant investments 19 36 26 11 87. What is your likely annual growth rate over the next five years for the following markets? (% respondents) Under 5% 5-10% 10-15% 15-20% Over 20%Developed markets 49 37 7 4 3Emerging markets 9 58 20 8 5Frontier markets 29 46 15 8 38. How important will the following factors be in determining where clients choose to do their private banking in the future? Please rate on a scale of 1 to 5, where 1=Not important, 3=Somewhat important and 5=Very important. (% respondents) Not important 1 2 Somewhat important 3 4 Very important 5Taxation (including incentives) 3 4 21 30 42Regulation and legislation, including privacy considerations 2 5 16 36 41Long history of private banking in destination city/region 2 16 37 33 12Diversity of asset classes offered in destination city/region1 5 35 39 21Entrepreneurial climate of destination city/region1 11 39 34 16Economic growth in destination city/region1 8 24 30 37Vibrancy of destination city/region 5 11 46 26 13Political stability11 10 28 60Well developed ancillary services (eg, advisors, trust companies, legal firms, rating agencies, consultancy firms, tax and accounting firms)1 3 25 45 27Inter-linkages with other markets1 7 37 33 22 © The Economist Intelligence Unit Limited 2012 23
  25. 25. Brave new world: Outlook for the global private banking industry 9. What are the biggest risks to your client portfolios? Select up to two. (% respondents) Euro zone instability 29 Recession in developed markets 24 US dollar crash 23 Inflation, including oil/commodity price shock 18 Slowdown in the Chinese economy 6 Global geopolitical instability 6 Deflation 6 10. What are the incentives that would encourage private banks/family offices to re-locate? Select up to two. (% respondents) Tax incentives including exemption, waiver, low tax environment 65 Attractive business environment (including skilled talent, ancillary services, government support, international connectivity) 64 Availability of funding and seed capital 25 Lifestyle (spouse employment, children’s education, cost of living, property ownership) 17 Facilitative immigration policies (flexible employment, permanent residency) 17 Others, please specify 324 © The Economist Intelligence Unit Limited 2012
  26. 26. Whilst every effort has been taken to verify the accuracyof this information, neither The Economist IntelligenceUnit Ltd. nor the sponsor of this report can accept anyresponsibility or liability for reliance by any person on thisreport or any of the information, opinions or conclusionsset out herein.Cover image - Ivan Loh
  27. 27. LONDON NEW YORK HONG KONG26 Red Lion Square 750 Third Avenue 6001, Central Plaza GENEVALondon 5th Floor 18 Harbour Road Boulevard des Tranchées 16WC1R 4HQ New York Wanchai 1206 GenevaUnited Kingdom NY 10017, US Hong Kong SwitzerlandTel: (44.20) 7576 8000 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Tel: (41) 22 566 2470Fax: (44.20) 7576 8500 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 Fax: (41) 22 346 9347E-mail: london@eiu.com E-mail: newyork@eiu.com E-mail: hongkong@eiu.com E-mail: geneva@eiu.com

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