With its established industry players, a highly structured banking system and transparent regulatory regime, the UK private banking and wealth management sector has always represented a unique hub for investors, both domestically and internationally. Valentina Romeo speaks to four banks about how they are future proofing themselves.
The UK’s economy is showing small signs of recovery, the Retail Distribution Review implementation has passed without significant issue and London continues to act as a magnet to the world’s wealthy.
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But discussions from PBI’s recent London conference suggest that while the signs for the UK’s wealth management industry are brighter, it’s not out of the woods yet. Lead by financial services, which makes up over 14% of GDP, the British economy continues to be dominated by the services industry which is growing at a fast pace.
More than 20% of UK-based high net worth individuals (HNWIs) derive their wealth from the financial services sector, which is more than twice the rate of any other sector in the UK, according to Ledbury Research.
"UK’s comparative advantage is based on things like language, legal framework, time zone, not necessarily on cost of labour.
Services in general, not just financial services, are abounding and leading the way for a sustainable future", says Eric Barnett, CEO at SG Hambros Bank.
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By GlobalDataBarnett says it would be interesting to see how the trend of continuing decline in the UK manufacturing sector can be reversed to stimulate wealth creation. The sector is expected to pick up later in the year and continue during 2014 due to improving economic conditions in the Eurozone and more export activity.
Global consultancy WealthInsight says that there were just over 736,000 HNWIs in UK in 2012 holding $2.8trn in wealth which equates to 23% of total individual wealth held in the country. It goes on to predict that UK HNWI’s wealth will grow by 55% to reach $4.3trn by 2017 and HNW volume to increase by 43% reaching more than a million people.
"You are starting to see the green shoots in the UK economy, and this is reflected in the growth of wealth. We see an increasing trend of growth not only in the HNWIs, but also a large number of people who want to save and put aside, because they are going to live longer", says Sally Tennant, CEO at Kleinwort Benson.
Tennant highlights the growing importance of entrepreneurship as a major source of wealth for UK HNWIs. Among the core business sectors, "technology entrepreneurship, not just real estate or financial entrepreneurship, represent another emerging and successful sector in the UK businesses", she says.
Almost half (49%) of UK UHNWIs have made their money through entrepreneurship in technology, according to WealthInsight’s research. The wealth management industry of the UK generates 1% of GDP and employs around 12.5% of the total financial services industry, influencing the wealth of 9% of the
UK population, WealthInsight estimates. However, after many years of continuous growth in HNWIs and successful client services, the UK wealth management market is facing an unprecedented combination of challenges.
The mixture of intense regulation, market turbulence and trust challenges has pushed the industry to an inflection point: firms which fail to adapt their business models to welcome clients’ changes and new competition will struggle to maintain profitability and scale.
In the three years from 2008, costs rose faster than revenues in the wealth sector for the first time in 20 years. "If you take it over 20-30 years, HNWI wealth has grown at a faster rate globally and in the UK than in the economies in which they operate. What has changed in the last few years is that the wealth creation is probably at a lower level than it was pre-crisis, but costs of running the business have
shot up", Barnett notes.
Coutts & Co CEO Michael Morley says that clients recognise that there was always a cost associated with advice if it was going to be of value to them and that conflicts of interest may arise through commissions. "Our clients appreciate that in order to help them realise their long-term financial objectives, advice should be ongoing, rather than a one-off event," he says.
More generally, while regulatory demands may have increased, now more than ever, clients see the UK as an ever safer jurisdiction for their assets and a thought leader in banking regulation", he adds. (See our FCA interview on page 9)
Wealth managers are optimising their operations as they expand into new markets in order to meet the evolving and demanding needs of their clients.
"We place the client at the heart of our business, so measures which capture client satisfaction are vital. We constantly ask ourselves whether we are having intelligent conversations with clients", says Morley.
"We believe that if we focus on the quality of our interaction with clients, traditional measures of business success will naturally follow", he says.
Concerning clients’ trust, there is a big emphasis on transparency, especially around investment decisions and impact.
"I think that the inflection point is the fact that clients are no longer willing to accept the lack of open disclosure around performance, risk and fees. Clients want this transparency to assess where they are getting value for money and better understand their financial health", says Tennant.
Keeping on top of tech
Industry commentators have noted in the past that the wealth industry has been a slow adopter of technology, which has put it at a disadvantage. Now things appear to be changing. Technology is an essential way wealth managers can improve their relationship with clients and assuring transparency in the service.
"For t he future, technology will be absolutely key and not just to access the balance sheet, but it will be critical for all the investments areas", Barnett says.
Barnett says that in the past few years, technology has had less effect on private banking, than retail banking, as the main selling point as most private banks were based on relationships and personal contact with the client. Because of that, a lot of clients were quite slow to use the online access, even
if they were actively users of the Internet.
"Behind the scenes, any bank that hasn’t been investing in technology is going to have problems down the road. You can’t run a manual process anymore. The way banks do their returns to their regulators these days is much more complex than it was 10 years ago, so you can do that manually, you have
to be doing it by technology", he notes.
UK wealth managers other concern is around client segmentation, especially related to the domestic clients’ base. One area of interest is female entrepreneurs.
According to WealthInsight, female UHNWIs in the UK rose at a faster rate than their male counterparts during the period from 2007 to 2012 as they increased by 7.2%, compared to male UHNWIs whose volumes rose by only 0.8%. This can in part be explained because of a lower base figure
of female entrepreneurs, although changes appear more widespread.
"If you compare with 10 years ago, I think there are many more female entrepreneurs, and there are many more women who are driving investments decisions and looking at finance", says Tennant.
Beating local bias
The UK’s weak economic recovery has made advising clients more challenging.
"The first six-months of 2013 have been challenging from a number of perspectives. While the macro-economic picture has seen recent data improvements suggesting a weak recovery is under way, UK clients remain relatively risk averse and are as likely to pay down debt as they are to invest in risk-on
assets", Morley says.
"For risk-averse investors, products such as customised deposits and structured investments offer more attractive returns than those available on deposits. Risk averse investors looking for income have historically turned to fixed-income markets. However, with yields on government bonds having fallen to record lows below the rate of inflation, quality sovereign bonds don’t hold the answer to wealth preservation", he continued.
Equities remain the largest asset class for HNWIs in the UK (28% of total HNWI assets), followed by business interests (24.5%), fixed income (16.5%), and real estate (17.6%). Equities are also expected to recover as an asset c lass for HNWIs, followed by real estate.
"We started 2013 looking for equities to outperform bonds. Bonds tend to gain in value in anticipation of quantitative easing, but soon fade and reverse course thereafter.
Equities on the other hand tend to benefit before and after. We expect this pattern to repeat itself, reinforcing our bullish stance on shares for 2013", says Morley. In addition to this, according to Morley, given an uncertain economic outlook, high yielding emerging-market bonds will provide better opportunities than equities to gain exposure to the developing world.
" One of the major investment that I see right now is clients looking for income, because in the low interest environment they’re not earning the same on their cash as they did in the past. And therefore their search for finding income is there especially when it comes of equity exposure", Tennant says.
"A lot of people are talking about preserving capital. The investment trend is on preserving purchasing power, and therefore a key theme is that inflation is going to rise, so you need to know where to invest to preserve purchasing power", she notes.
At the end of 2012, UK HNWIs held 30% (US$849bn) of their wealth outside their home country, which is in line with the global average of 20?30%. "Clients’ interest in emerging markets is growing. There is probably a higher allocation in the emerging market than there was previously and that will obviously
continue. On the other hand, most domestic clients will always have a fairly strong weighting to their own domestic markets which makes sense from a currency exposure point of view", Barnett says.
London’s special position
While much research focuses on the UK as a whole, London is increasingly being seen as a separate wealth centre to the rest of the country.
The UK capital is now home to more multimillionaires than any other city in the world. According to Oliver Williams, analyst at WealthInsight: "Despite the huge influx of foreign born multimillionaires London has seen in recent years, the largest nationality of multimillionaires living in the capital is still British".
WealthInsight estimates that 38% of UK millionaires, or 281,000 individuals, are concentrated in London. In GDP, property and HNWI generation, London is more akin to a foreign capital than it is to another British city.
"The reasons London has an advantage are clear: the UK is secure and well regulated; we have a skilled workforce, first class educational and jurisdictional systems, tax neutrality and a large network of double
tax agreements" Morley says.
"London can attract the world’s most talented and wealthy people for many reasons including its unbeatable connectivity; top class education; technological brilliance; luxurious brands; and a captivating culture".
However, complacency is dangerous and London’s position is constantly under threat.
During the financial crisis, HNWI volumes in London declined by 4%, which was equivalent to the country average.
"Perhaps in the first years after the crisis there was a little knocking of confidence in London as a hub of international wealth", Barnett commented.
Furthermore, emerging economy cities such as Shanghai and Mumbai are rising up the ranks as cities to watch over the next decade.
Singapore, in particular, has seen the fastest growth in UHNWIs from 2007 and it is likely to overtake London as the multimillionaire capital of the world by 2020, WealthInsight predicts.
On the other h and, Morley says that the increase in global wealth in Singapore and other global financial centres can be an opportunity for London.
London, for example, is the favoured destination of many wealthy international individuals buying a second home. It was the top city for HNWIs buying property in 2010 and research forecasts it is set to remain the number one destination until 2022.
Continuing consolidation
The straightened financial environment is driving the UK wealth management community to polarise: some UK players were focusing on defensive action, costcutting and downsizing their businesses.
The pressure of rising costs on businesses that have failed to transform operating models to improve efficiency has led to an increasing number of consolidation or market exits. One industry commentator,
Ray Soudah, has even predicted that 50% of wealth managers in London will disappear in the next three years.
"A rise in consolidation is something that people have been saying for a long time", Barnett observes. "In the UK it is still fundamentally an attractive market for banks. Private banking produces liquidity
for banks, which is post-crisis the most desirable asset of all for them. It remains a very attractive market space.
But its attractiveness means plenty of people are trying to get in on it, so the competition is probably tighter than ever particularly when you are adding the fact that the demand side is probably flat because the wealth creation is at low level," Barnett adds.
He anticipates continuing consolidation of smaller players. "You are seeing people exiting the business, you see people buying it," Tennant adds. "For some people there could be greater consolidation in the market because the costs of doing business are rising. It is a fragmented industry, you’ll see some consolidation, but there’s also room for
smaller boutiques".
Morley thinks that the industry is still settling in post-RDR. "Depending on their scope, foreign firms entering the market can be either advantaged or disadvantaged. For instance, the increased regulatory environment increases the need for a local operating footprint and creates barriers to entry.
Conversely, as new regulation such as the Independent Commission for Banking takes shape, foreign firms, especially those which are EU-based, may be able to take advantage of this for a short period of
time", he concludes.
The UK industry is going through a significant change, although debate rages as to whether this is the beginning of the end of transformation or the end of the beginning.
What remains clear is that as the UK, and London in particular, continues to attract foreign HNWIs, the attraction to wealth managers will burn bright.
