As the number of high net worth individuals continues to grow at breakneck speed, private banks are beginning to expand into emerging economies. Kamal Mehta looks at what these new clients want and what the banks need to provide.
Kamal Mehta is a freelance journalist based in the UK.
The global wealth market, currently estimated at $85 trillion, is expected to reach $100 trillion by 2009. Millionaires are being created at a blistering pace around the world, and while the US remains home to the largest number of wealthy people, the most rapid growth in wealth creation is taking place in Asia, Central and Eastern Europe, and the Middle East. High net worth individuals – usually defined as individuals with at least $1 million in net assets – are looking for places to park their money and the world's private bankers are on hand to advise them on investment opportunities ranging from hedge funds to the purchase of fine art.
A growing need
The most exciting prospects are to be found in Asia, especially when you throw in the enormous potential of India and China. The number of HNWIs in Asia grew by 7.3% from 2004 to 2005, according to the 2006 World Wealth Report by Merrill Lynch and Capgemini. In Europe, the growth rate was 4.5%. With private banking services used by only one of five wealthy Asians in the more mature markets of the region, such as Hong Kong and Indonesia, the scope for growth is impressive. Société Générale Private Banking India puts the comparable figure there as one in 10.
Wealth management in China and India is in its nascent stage, particularly in China, where regulations have hampered international banks, but it is developing rapidly. According to a report by consultant firm Mercer Oliver Wyman, China's wealth management market is predicted to rise from $335 billion last year to $2 trillion by 2015. The number of HNWIs in India increased by 19.3% from 2004 to 2005, says the Merrill Lynch-Capgemini report.
Michel Longhini, chief executive, Asia, for BNP Paribas Private Bank, says that buoyancy in the region is characterised by "the volume effect as well as the transaction effect." The latter is derived from the relative sophistication of Asian clients, who are innovative and aggressive in their search for maximum returns. The new millionaires are largely self-made and their attitude is entrepreneurial – they are quite happy to take a few risks with their investments and expect bankers to deliver on all asset classes.
Central and Eastern Europe has a far less dynamic wealth management market – there are still only a small number of HNWIs outside of Russia. But booming stock exchanges have helped create enough lucre to tempt private banks and the wealthy are becoming more receptive to their services. Says Harald Friedrich, Sal. Oppenheim's Head of Private Banking for Central and Eastern Europe: "In the first 10–12 years after the economies started opening up, as soon as money was earned, it went offshore. Now, people don't want to hide their money. They want to optimise their returns according to the local legal framework."
Sal. Oppenheim opened offices in Prague a year ago and is due to set up shop in the cities of Warsaw and Budapest, and its typical client in the region has a net worth of €2–5 million, although some are "way, way, above", says Friedrich.
Russia is a somewhat different kettle of fish. According to UK wealth management consultancy Scorpio Partnership, Russian HNWIs controlled liquid assets of between $300 and $350 billion last year (Poland was second with $73 billion), and sending money offshore is still the preferred route for Russian millionaires – a natural choice given the sometimes murky origins of earnings. Says one regional banker who did not want to be named, "Compliance is getting better and there's less money laundering, but it can be hard [for the private banker] to know the ultimate source of the funds." Nevertheless, a survey by PricewaterhouseCoopers Russia forecasts a growth of 30–50% a year in the private banking sector.
Flush with funds from high oil prices and strong stock market performances, the Middle East has had some of the fastest rates of wealth growth – HNWIs were created at the rate of 19.7% in 2005, according to the Merrill Lynch-Capgemini report. While large institutions such as Citibank, Standard Chartered and HSBC have long had a presence in the region, other international banks have woken up to the potential of its wealth creation capabilities and are building capacity. Many, such as Credit Suisse, Deutsche Bank, Lloyds and Julius Baer, have set up shop in the Dubai International Financial Centre, created in 2004 as an onshore financial free zone. In addition to tapping into the local markets – which remain small in absolute numbers – these banks have been looking toward harnessing the wealth of the large number of expatriates in the region.
These are boom times for private bankers. But there are challenges aplenty, the biggest being that of attracting and retaining clients. With competition rife, particularly in Asia, the need to differentiate a bank's services and create tailor-made solutions for clients is paramount. In many of the emerging areas of wealth, HNWIs are not convinced of the need of a private banker's services and would rather plough the money back into their own businesses. Or put it in property. While many have started to see the advantages of a diversified portfolio, it is going to take time and patience on the part of the private banks to build onshore markets. Bankers expecting quick results may be in for a rude shock.
And time may prove a slippery thing in the event of an economic downturn. "The level of investment of private banks [in Asia] is huge. Everyone is looking for growth markets, and there is definitely an impact on turnover and pricing," says Longhini of BNP Paribas. Right now, there is enough business to absorb the growing number of players, but if economies slow and the cost base stays the same, the situation could turn ugly. And revenue structures in a number of these countries are less secure than in the west, as clients tend to want their assets managed on an advisory rather than a discretionary basis.
The task of employing and training the right people is the flip side of the problem. As private banks increase capacity dramatically, they are facing a shortage of talent on the ground. The problem becomes acute as clients get more sophisticated and expect their wealth managers to be able to advise them on a broad spectrum of wealth maximising products. And few are happy to have bankers thrusting the bank's own products at them.
Cultural nuances also need to be digested. In the Middle East, for example, local Muslim clients will look to their wealth managers to offer them Shari'ah-compliant investments. And in most emerging markets, understanding the importance of family is crucial. The wealth of many HNWIs in these regions is tied up with family fortunes and bankers need to understand the intricacies of the familial ties, particularly when it comes to designing strategies for inter-generational wealth transfer.
Each market has its idiosyncrasies and the mark of the successful private bank is going to be an ability to negotiate the peculiarities of each region, and recognise and cater to the multiple and varying needs of HNWIs even within the same region.
The wealthy in emerging markets, as elsewhere, want wider investment choices and are looking for more complex products. An ability to listen, to understand investor psychology and respond creatively will go a long way in the wealth management industry – especially when the going gets tougher.