Global wealth managers, despite a steadier revenue climate, face a fierce battle to create value for their clients as competition becomes more global, developing markets present new challenges, and the significance of conventional offshore banking decreases, according to a report released today by The Boston Consulting Group (BCG), a leading global management consulting firm.
According to the report, Searching for Profitable Growth: Global Wealth 2005, these and other dynamics are redrawing the industry's landscape and influencing the ways in which wealth managers can best improve their businesses amid an intensely competitive environment. The report, BCG's fifth in an annual series, examines the development of global wealth markets in 2004 and explores key levers for future growth in the wealth management industry. It is based primarily on three sources: BCG's proprietary global market-sizing model, a comprehensive survey of approximately 100 leading wealth managers, and insights gained from BCG's project work with wealth managers and private bankers worldwide.
Global wealth is back on a solid growth path, following a period of recovery from losses early in the decade, the report says. Global assets under management (AuM) grew by more than 9 percent in 2004, to about $85 trillion, and should show real annual growth of roughly 4 percent through 2009. The wealthier investor segments will expand at a faster rate of about 6 percent real annual growth. There are now more than 7 million millionaires worldwide, of which more than 2 million are in Western Europe, 4 million in the United States, and the rest spread throughout Latin America, the Middle East, Eastern Europe, and the Asia-Pacific region.
Industry growth in North America and Europe will come mainly from the established wealthy segment (clients with AuM of more than $5 million), whereas in developing markets it will come from the emerging wealthy segment (clients with AuM between $1 million and $5 million). BCG says that China, India, and Russia are currently the most attractive developing markets. Although they are still small, their onshore investment climates are improving significantly -- greatly boosting their long-term potential.
The report points out that the needs and attitudes of wealth management clients have changed as markets have rebounded. Higher fees relative to returns have made clients more conscious of getting value for their money, and they are demanding greater price visibility and additional value-added services. These developments will require wealth managers to revisit both their business models and their traditional approaches to client service.
"Clients are searching for a combination of enhanced performance and security," says Christian de Juniac, co-author of the report and leader of BCG's global wealth-management practice. "Their asset mixes are changing as conventional portfolios are combined with alternative investments. Given increasing regulatory complexity and uncertainty about pensions, clients will require integrated, long-term solutions."
The report says that three core business models have emerged in the wealth management landscape. Global players are targeting numerous onshore and offshore locations and are building a portfolio of mature high-margin and emerging high-growth markets. Medium to large players are focusing on both onshore and offshore business at home, as well as on selected foreign locations. Small institutions and boutiques, which have limited scale, are focusing on product, customer, or geographic niches.
The trend to move onshore is increasing overall transparency in the wealth management industry, the report says. This tendency, combined with increasing investor awareness and slow consolidation in the industry, has put significant pressure on prices and margins.
The report further states that in order to remain competitive, wealth management institutions must focus on overall rigor and excellence by optimizing all relevant growth and efficiency levers. Broad initiatives are primarily those for enhancing revenue from existing clients, gaining revenue from potential new clients, and improving overall cost position. But BCG says that wealth managers need to place special focus on specific elements of these initiatives. Top priorities include sharpening pricing strategies, improving management of small clients, reducing overall client attrition, and raising the performance of relationship managers.
"Among the most important growth levers for wealth management institutions are increasing share of wallet and retaining existing clients," says Victor Aerni, co-author of the report and a BCG vice president. "The quality of a client's experience at a wealth management institution is the foundation of these levers. Yet only a few institutions have succeeded in properly understanding clients' needs. Perfecting the client experience will be one of the most important issues for wealth management institutions over the next few years."