Business insights The European Wealth Management and private banking market outlook

FINANCE

The European Wealth Management and

Private Banking Market Outlook

Optimizing customer value in a demanding marketplace

By Barbara Kubis-Labiak

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Barbara Kubis-Labiak

Barbara has a BA (Hons) in Business and Management and is currently at the end of her

MSc in International Finance degree. Barbara started her career working as an intern for

the European Commission in Brussels, and then in 1999 she joined Datamonitor

Financial Services department as an analyst. Barbara's work at Datamonitor involved

various projects and reports, including the FinTab project, where she helped to develop

an online data resource covering the insurance, banking, investments and payment cards

sectors. Barbara also authored a number of reports: Retirement Provision in Germany

2001-2008, Retirement Provision in Germany 2002, European Mutual Funds 2001, UK

Wealth Management, Distribution of life insurance and pensions in Europe 2002 and

Central and Eastern European Life and Pensions 2002, as well as consultancy projects,

for example Motor insurance distribution in central Europe, Competitors in occupational

pensions in Germany, Bausparkassen in Germany and many others.

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Table of Contents

The European Wealth Management and Private

Banking Market Outlook

Optimizing customer value in a demanding marketplace

Executive Summary 10

European wealth management and private banking market overview 10

Customer focus: incorporating lifestyle services 11

Fee structures and advertising strategies 11

Tackling the strategic issues in wealth management 12

Chapter 1 Introduction 16

Report structure 16

The European wealth management and private banking market overview 16

Customer focus: incorporating lifestyle services 16

Fee structures and advertising strategies 16

Tackling the strategic issues in wealth management 17

Chapter 2 The European Wealth

Management and Private Banking

Market Overview 20

Summary 20

UK mass affluent customers 21

Market drivers 21

Wealth creation and reduction factors 22

GDP and other economic factors 22

Liquid wealth concentration 24

Market overview 25

Regional analysis 27

The influence of income 29

Competitors 31

Private client wealth managers 32

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Stockbrokers’ primary focus is on direct equity investment 33

Retail asset managers 35

Future hurdles 36

Retail banks 37

Online banks 39

IFAS are key competitors 40

Fund supermarkets 42

European mass affluent customers 44

France has the most affluent individuals in Europe 45

Number of European mass affluent individuals segmented by

country 46

Market trends 49

Banking services 49

Safety and advice 50

The housing boom 50

Competition 51

Retail banks and bancassurers 51

Financial advisers 52

Brokerage services 53

Cross-border strategies 53

Europe 54

The Middle East 55

Asia 56

Drivers of cross-border activity 57

Organic growth 57

Onshore 58

Brand 58

Banking on proven business 58

Banks demonstrating cross-border organic growth 59

Mergers and acquisitions 59

The Middle East 60

Deutsche Bank 60

Emerging markets 62

Asia 62

Middle East 62

Central and Eastern Europe 63

UK expansion 64

Offshore markets 64

Chapter 3 Customer Focus: Incorporating

Lifestyle Services 68

Summary 68

Introduction 68

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Lifestyle services 69

Lifestyle services in the wealth management proposition 69

Third-party lifestyle services 70

Benefits of including lifestyle services into the wealth management

proposition 71

Associated difficulties 72

Conclusions 73

Chapter 4 Fee Structure Analysis and

Advertising Strategies 76

Summary 76

Introduction 76

Fee structures 77

Overview 77

Affluent wealth managers 77

Lower HNW wealth managers 78

Upper HNW wealth managers 78

Transaction and handling charges by investment type in the UK 79

Tier structures 79

Transparency issues 80

Performance-related fees 80

Advertising strategies 82

Chapter 5 Tackling the Strategic Issues in

Wealth Management 84

Summary 84

Introduction 85

Wealth management in retirement in the UK 85

Market overview and developments 85

Different needs and attitudes 86

Future retirees in the future 87

Pensions in the UK 88

Self invested personal pensions (SIPPs) 91

The facts 92

Executive pension plans (EPPs) 95

Small self-administered schemes (SSAS) 97

Unapproved retirement benefit schemes 98

Unfunded unapproved retirement benefit schemes 99

Funded unapproved retirement benefits schemes 99

Assets under management 99

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Pensions for the wealthy in Europe 100

Multi-manager investment structures 102

Overview 103

Competition 107

Property investment 108

Overview 108

Real estate investment trusts 108

Real estate derivatives 108

Property funds 108

Lease structures in Europe 109

Property investments for wealthy individuals 111

Proportion of pan European wealth managers offering exposure to

property investments 111

Future prospects 114

Hedge funds 114

Overview 114

Regulations 115

UCITS 3 116

UK 116

France 116

Germany 117

Italy 118

Spain 118

Performance 119

Fee structures 120

Internal compliance 121

Distribution factors 122

Chapter 6 Appendix 124

Definitions 124

Advisory portfolio management 124

Asset management 124

Bull market 124

Bear market 124

CAGR 125

Discretionary portfolio management 125

Equity fund 125

Execution only stock broking 125

First/second/third tier fee 125

Fund supermarket 126

Hedge funds 126

Independent Financial Advisor (IFA) 126

Liquid assets 126

Liquid asset bands 127

Liquid assets 127

Lower high net worth competitor 127

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Upper high net worth competitor 127

Mass affluent 128

Mass market 128

Non-core competitor 128

Premier bank 128

Private banks 128

UCIT 129

List of Figures

Figure 2.1: Identifying the dynamics of mass affluent wealth creation 21

Figure 2.2: Change in the savings and investment assets between 1997 and 2002 24

Figure 2.3: The mass market, mass affluent and high net worth share of total retail liquid assets

in 1997 and 2002 25

Figure 2.4: Number of UK mass affluent individuals with liquid assets between £30,000-

£200,000, 1997—2002e

26

Figure 2.5: Aggregate liquid assets of UK mass affluent individuals with liquid assets between

£30,000-£200,000, 1997—2002e 27

Figure 2.6: Asset concentration, 1997—2002 44

Figure 2.7: Individuals holding between €50,000 and €100,000 in liquid assets account for more

than 56% of the European mass affluent population 47

Figure 3.8: Lifestyle services in the wealth management proposition 69

Figure 5.9: Overview of multi-manager investment structures 105

Figure 5.10: Key drivers behind the multi-manager trend 106

List of Tables

Table 2.1: Standard average house price versus house price growth segmented by region, 1997—

2002 28

Table 2.2: Growth in average house prices per region, Q4 2002 to Q3 2003 29

Table 2.3: Number of individuals with pre-tax earned income over £50,000 and total value of

pre-tax earned income for this segment, 30

Table 2.4: Proportion of total UK population in each region compared to proportion of total

£50,000+ segment in each region, 2000 30

Table 2.5: Thresholds and costs for the big four’s premier banking offerings, 2003 33

Table 2.6: Beneficial ownership of UK shares, £billion, 1998—2002 35

Table 2.7: UK personal deposit account balances by competitor, 1997—2001 37

Table 2.8: Current account rates for selected retail and online banking players, December 2003

40

Table 2.9: Top 10 UK IFAs by turnover, 2002 41

Table 2.10: Number of funds and fund managers offered by selected fund supermarkets, 2003 42

Table 2.11: Number of European mass affluent individuals as a proportion of total population,

segmented by country, 2002e 45

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Table 2.12: European liquid assets as a proportion of total assets, 1997 and 2002 45

Table 2.13: European mass affluent individuals and liquid assets, 1997—2002 46

Table 2.14: Number of European mass affluent individuals segmented by country, 1997—200247

Table 2.15: Value of mass affluent liquid assets segmented by country, 1997—2002e 48

Table 2.16: Banks demonstrating cross-border organic growth, 1997—2001 59

Table 2.17: Banks that have merged or acquired to cross borders, 1996—2002 61

Table 4.18: Transaction and handling charges by investment type, 2002 79

Table 5.19: Number of full and insured plans in force with non-insurance companies, by SIPP

competitor, 2003 94

Table 5.20: Number of full and insured plans in force with insurance companies, by SIPP

competitor, 2003 95

Table 5.21: Proportion of pan European wealth managers offering exposure to alternative

investment vehicles 111

Table 5.22: Proportion of pan European wealth managers offering exposure to property

investments, classified geographically 112

Table 5.23: Major barriers to the property investment in Europe 112

Table 5.24: Pan European wealth managers’ expectations for changes in private client’s exposure

to property over the following two years 113

Table 5.25: Customers’ primary motivation for investing in alternative investments, % of wealth

manager responses, total Europe 120

Table 5.26: Percentage of wealth managers offering hedge funds or envisaging doing so in the

next two years, 2003 122

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Executive Summary

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Executive Summary

European wealth management and private banking

market overview

‰ Significant proportions of mass affluent individuals’ total assets can be held in

alternative and non-liquid form. In the UK mass affluent sector, one of the most

important asset classes in this respect is property. Residential house prices have

experienced extraordinary growth in the UK in recent years and ensured that real

estate has become both an important component and source of mass affluent wealth.

‰ A number of market drivers denote the environment for wealth creation including

house price growth, GDP growth, stock market growth and average earnings. For

example, the buoyant growth in residential house prices immediately stands out as a

key factor in wealth creation, rising at a CAGR of 11.9% between 1997 and 2002.

‰ The distribution of liquid assets has continued to become more concentrated in the

hands of affluent individuals. Mass affluent individuals’ share of retail liquid assets

increased from 34.2% to 36.4% between 1997 and 2002, suggesting that they have

fared better overall than mass market investors in the market downturn.

‰ Mass affluent individuals make up nearly 11% of the total UK adult population.

With 5.1 million individuals, the mass affluent segment is considerably larger than

the High Net Worth (HNW) segment, which only accounted for 1.2% of the total

UK adult population in 2002.

‰ London and the South East have by far the greatest concentration of individuals

earning over £50,000 in pre-tax earned income relative to population size. London

accounts for 12.1% of the UK population but comprises 22.7% of the £50,000-plus

income segment.

‰ During the period 1997—2002, affluent individuals in major European countries

continued to increase their share of total retail liquid assets from around 31% in

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1997 to around 34% in 2002, while the proportion held by HNW individuals

increased even more dramatically from 21% to 28% over the same period.

‰ With the contraction of the traditional European, U.S. and offshore wealth

management markets, wealth managers have been forced to look elsewhere in order

to restore flagging revenues.

Customer focus: incorporating lifestyle services

‰ In their efforts to provide superior levels of service some private banks and wealth

managers in particular family-run offices at the ultra high net worth level have long

provided specific non-financial services to their clients mainly as a component of

their customer service proposition.

‰ While some wealth managers are focusing on doing more in terms of lifestyle

services, for the vast majority these types of service tend to remain quite discrete

and are rarely marketed as another element in the offering.

‰ There are a number of factors fuelling the growth in client demand for lifestyle

services including growing affluence of individuals and increasingly busy lifestyles.

‰ By offering to help wealthy clients in their aspirations to purchase luxury items

wealth managers can maintain a role in the management of non-financial assets

alongside financial assets and generate revenues in areas such as advice on how to

structure and finance purchases.

Fee structures and advertising strategies

‰ Affluent wealth managers have, on average, 46% higher thresholds for discretionary

portfolios than for advisory portfolios. In contrast, lower HNW managers have

marginally higher (6%+) thresholds for advisory portfolios compared to

discretionary portfolios.

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‰ There are major differences in the make up of annual asset based fees and the actual

transaction costs set by UK wealth managers. Tier structures dominate the UK

wealth management industry with a minority offering flat fees and even fewer

allowing an element of negotiation in the pricing.

‰ Poor fund performance over the past couple of years has left investors disillusioned

with their wealth and investment managers, particularly when those managers

continue to receive substantial salaries despite losing their clients vast sums of

money.

‰ Following the recent fall in equity prices, wealth management customers with

‘distressed’ portfolios are likely to question the value of the service they receive.

‰ In the UK, approximately one third of affluent wealth managers charge an annual flat

fee for discretionary portfolios (usually between 0.50% and 1.25%).

Tackling the strategic issues in wealth management

‰ In December 2002, the UK Government launched its Green Paper on pensions and

pension tax rules. Amongst the proposals, the Government is considering rising the

minimum retirement age at which an individual can draw a pension, from 50 to 55 by

2010.

‰ Wealth managers looking to target retired individuals as a client group must

recognize and respond to the considerable differences in attitudes and needs within

this segment.

‰ Retired executives, for example, are likely to be much more financially aware and

liable to take a much greater interest in their retirement package, while the self￾employed tend to look towards investing in their business with the aim of selling or

passing on the business at a later stage.

‰ Wealthy consumers have a greater volume of assets to invest and also have more

complex financial needs than ordinary individuals resulting in the introduction of

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new pension products to meet these needs, while also allowing the government to

benefit from the extra tax revenue that such wealthy individuals create.

‰ Unfavorable market conditions have been a primary factor in the development of

multi-manager investment structures by European wealth managers. The prolonged

market downturn of recent years has significantly impacted wealth managers’

investment performance, denting revenues and forcing them to consider the logic of

running all investment management in-house given the cost this typically entails.

‰ Property funds offer an efficient investment opportunity for wealthy clients to

diversify their portfolios.

‰ Recent research using UK property investment data has revealed a poor correlation

between returns from property investments and traditional investment classes,

further signifying the wisdom of investing in real estate to diversify a portfolio.

Property may also provide some means of hedging against inflation.

‰ In the UK, hedge funds are not available to the general public - only to ‘qualified’

private investors and they cannot be advertised to private clients. The Financial

Services Authority controls the regulation of hedge fund distribution.

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