The pace of global economic growth may have slowed since the financial crisis, but the creation and concentration of private financial wealth has revved up.
Times are booming for high-net-worth individuals and the private bankers who serve them with increasingly sophisticated products. Global wealth held by individuals and households expanded 14.6% to $152 trillion in 2013, according to Boston Consulting Group’s (BCG) latest annual survey of the private banking industry. It sees the figure hitting $198 trillion by 2018.
Of the $20 trillion in incremental wealth created, BCG said, 75% was from returns on existing assets (mainly stocks) and 25% was newly created wealth (chiefly savings from Asian countries). Most notable is growth in the ultra-high-net-worth (UHNW) segment, according to Organization for Economic Cooperation and Development data. The financial crisis hit investment portfolios hard and temporarily reversed that trend, but it’s been newly fortified by the strong recovery in markets.
John Mathews, head of UHNW business for UBS’s Wealth Management Americas division, says the segment, pegged at $100 million-plus, is growing more than twice as fast as any other client demographic, resulting in a surge of demand for financial planning, investment management, lending and financial concierge services provided by private banking.
UBS is the world’s biggest global private banker, with a large presence in the US (which is still the world leader, with $46 trillion in private financial wealth) and dominant positions in Europe and Asia—the fastest-growing region. Assets under management by the bank surpassed $2 trillion last year.
But despite a brisk business, private bankers also face challenges as their costs climb and competition intensifies. While BCG’s study of 140 private banks showed total assets under management up 11% and revenue up 8%, it also reported costs rising 3.5%. Competition among local banks, universal banks, brokerages, advisers and family offices is fierce, and strong returns in equity markets may mask vulnerabilities in the industry. The average return on assets for private banks and wealth managers was just 23 basis points in 2013—a roughly 30% decline from pre-crisis levels. The average cost/income ratio for the private banks surveyed by BCG was 70%.
“In all regions of the world and for all business models, there is pressure on margins,” says Anna Zakrzewski, a partner with BCG in Zurich. She notes that regulatory, risk management and technology costs have risen dramatically. Clients’ expectations vary across markets. “There is no one-size-fits-all globally,” she says.
Higher costs and client demands have increased the need for scale in private banking. While behemoths like UBS, Credit Suisse, JPMorgan and Citi Private Bank can afford the tech investments needed for compliance and customer service across markets, many smaller players cannot. “Scale was always important in the brokerage world, but it’s becoming that way in private banking too,” says Alois Pirker, a senior analyst with Aite Group and former adviser with UBS.
In all regions of the world and for all business models, there is pressure on margins.
~ Anna Zakrzewski, Boston Consulting Group
Banks need advanced data systems to pinpoint market segment services and provide clients with top-notch digital resources. Credit Suisse has undertaken a massive restructuring of its digital platform. Citi Private Bank has upgraded its “In View” digital application for clients. “A big firm that can do that has an advantage,” says Pirker. “Smaller firms will struggle.”
At the same time, challenges have also resulted in larger players’ scaling down their operations, sacrificing reach for a more targeted approach. Bank of America Merrill Lynch sold its international wealth management business to Swiss bank Julius Baer two years ago to focus on North America. In March of this year, Royal Bank of Scotland agreed to sell the international operations of its Coutts & Company private banking business to Switzerland-based Union Bancaire Privée. Bank analysts expect further reshuffling.
Other private banks have honed their expertise. Geneva-based Pictet, for instance, has zeroed in on entrepreneurship. The group held its first Entrepreneur Summit in Geneva
in September 2014; it also sponsors The Entrepreneurs, a weekly business briefing published by online magazine The Monocle.
“Banks can’t jump on every opportunity at once. They have to focus on a few and do it right,” says Zakrzewski.