The Rich Return to Richer Returns

The Rich Return to Richer Returns

The Rich Return to Richer Returns G LO B A L W E A LT H 2 0 0 4

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The Boston Consulting Group publishes other reports and articles that may be of interest to senior financial executives. Recent examples include:

Preparing for the Endgame: Global Payments 2004 A report by The Boston Consulting Group, October 2004 Winners in the Age of the Titans: Creating Value in Banking 2004 A report by The Boston Consulting Group, May 2004 Winning in a Challenging Market: Global Wealth 2003 A Senior Management Perspective by The Boston Consulting Group, July 2003 Navigating the Maze: Global Asset Management 2003 A Senior Management Perspective by The Boston Consulting Group, June 2003 The Payments Puzzle: Putting the Pieces Together, Global Payments 2003 A report by The Boston Consulting Group, February 2003 Prospering in Uncertain Times: Global Wealth 2002 A Senior Management Perspective by The Boston Consulting Group, July 2002

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ANDREW DYER CHRISTIAN DE JUNIAC BRUCE M. HOLLEY VICTOR AERNI

NOVEMBER 2004

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Table of Contents Note to the Reader

4

Acknowledgments

5

Preface

6

Summar y of Key Findings

8

Confidence Returns

10

A Welcome Recovery

10

Regional Differences

12

Growing Markets

16

Emerging Wealthy Investors

16

Mass Affluent Investors

16

Achieving Growth: Offshore Versus Onshore Markets

18

Promising New Markets

19

Greater China

19

India

20

A Management Agenda

22

Methodology

26

Market-Sizing Database

26

BCG Wealth Manager Performance Survey

26

Appendix I: Wealth Management Data

27

Appendix II: Summar y of Previous Years’ Findings

30


3

Note to the Reader In our report this year, we discuss emerging wealthy and mass affluent investors, as well as the broad category of established wealthy investors. We define emerging wealthy investors as those with $1 million to $5 million in assets under management (AuM) and mass affluent investors as those with $100,000 to $1 million in AuM. (In previous Global Wealth reports, we used $250,000 as the minimum threshold for an individual’s AuM.) We define established wealthy investors as those with more than $5 million in AuM. This year’s report is based on three main sources of information. First, we built our own global market-sizing estimates for all the major wealth markets by country and by wealth segment. Second, we conducted an extensive quantitative and qualitative survey of about 100 leading wealth managers worldwide. Third, we drew insights from our own substantial and growing body of work for wealth managers and private bankers. In addition, we have significantly improved the quality and reach of our market-sizing data. For example, we collected data for non-OECD countries and for the offshore market from several sources, including banks that are active in smaller countries. We plan to repeat the benchmarking survey in 2005 and invite interested institutions to contact us at [email protected]. If you would like to discuss your wealth management business with The Boston Consulting Group, please contact one of the following leaders of our global Financial Services practice:

The Americas

Europe

Asia-Pacific

Bruce M. Holley BCG New York +1 212 446 2800 [email protected]

Christian de Juniac BCG London +44 20 7753 5353 [email protected]

Andrew Dyer BCG Sydney +61 2 9323 5600 [email protected]

Jorge Becerra BCG Buenos Aires +54 11 4314 2228 BCG Miami +1 305 728 6042 BCG Santiago +56 2 338 9600 [email protected]

Victor Aerni BCG Zürich +41 1 388 86 66 [email protected]

Giles Brennand BCG Hong Kong +852 2506 2111 [email protected]

Ludger Kübel-Sorger BCG Frankfurt +49 69 9 15 02 0 [email protected]

Steven Chai BCG Seoul +822 399 2500 [email protected]

Huib Kurstjens BCG Amsterdam +31 35 548 6800 [email protected]

Julian Durant BCG Bangkok +66 2 667 3000 [email protected]

Andy Maguire BCG London +44 20 7753 5353 [email protected]

Craig Rice BCG Melbourne +61 3 9656 2100 [email protected]

Philippe Morel BCG Paris +33 1 40 17 10 10 [email protected]

Roman Scott BCG Singapore +65 6429 2500 [email protected]

Rohit Bhagat BCG San Francisco +1 415 732 8000 [email protected] Willie Burnside BCG Los Angeles +1 213 621 2772 [email protected] John Garabedian BCG Chicago +1 312 993 3300 [email protected] Paul Orlander BCG Toronto +1 416 955 4200 [email protected]

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Janmejaya Sinha BCG Mumbai +91 22 2283 7451 [email protected]

Acknowledgments We would like to thank all the institutions that participated in this year’s global benchmarking survey and helped us enrich the insights in this report. We would also like to acknowledge the following people for their support in the preparation of this report: Gilles Ballot, Robert Borsi, Valeria Bruno, Robin Chiang, FlorianDavid Frey, Stephen Hartley-Brewer, Katherine Hayward, Khamphanh Kittikhoun, Jane Loveday, Astrid Malval-Beharry, Revital Padovitz, David Parnell, Mardian Sugandhi, Andrea Walbaum, Katherine Andrews, Gary Callahan, Kim Friedman, and Peter Truell. Several leaders of the Financial Services practice—including Jorge Becerra, Giles Brennand, Andy Maguire, Francesco Morra, Craig Rice, Janmejaya Sinha, and Gustavo Wurzel—provided analysis, advice, and helpful insights. We would also like to give particular thanks to Jeff Whitaker, who recently left BCG’s New York office. Over the past five years, he has done much to help build BCG’s wealth-management business, insights, and surveys. Andrew Dyer Vice President and Director

Christian de Juniac Senior Vice President and Director

Bruce M. Holley Vice President and Director

Victor Aerni Vice President and Director


5

Preface The Boston Consulting Group is committed to enhancing the understanding of the dynamics and economics of wealth management. When run well, wealth management is one of the more profitable and faster-growing financial-services businesses. As financial institutions increasingly move toward recognizing economic profit as a critical measure, wealth management businesses within large integrated institutions will grow in stature. We began this series of reports four years ago, started our surveys of leading competitors three years ago, and continue to deepen our wealth-management practice and expand our coverage of markets. We remain committed to creating shared terminology and understanding of the market and to helping institutions consider and adjust to the substantial demographic shifts occurring as the baby boomers of North America and Europe age and accumulate substantial wealth, and as an emergent wealthy class grows in other parts of the world—notably in Greater China, India, and the Middle East. Our reports seek to provide insights into the best strategies for private bankers and wealth managers. This year, for example, we examine the profound changes now occurring in the offshore market— that traditional destination for wealthy investors. Growing regulatory pressure—especially from the European Union, which contributes more than half of all offshore funds and 70 percent of funds in Switzerland and Luxemburg—is curbing this market. Over the next ten years, offshore players will need to fundamentally change their business models or face increasing difficulties.

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We are looking more closely at emerging wealthy and mass affluent investors, recognizing their growing importance to many large wealth-management franchises and to tomorrow’s markets. This fresh look at the emerging wealthy and the mass affluent markets also dovetails with new BCG research into retail banking. We continue to present overall assets under management (AuM) and revenues in U.S. dollars. In addition, we have a new section on promising new markets, which examines the rapidly growing wealth-management markets of Greater China and India, as well as Latin America and the Middle East. The number of participants in our wealth-management survey has grown to almost 100 institutions, with many repeat participants. (See Exhibit 1.) We continue to expand our coverage. This year, we have particularly strong European participation, including more than 25 Swiss institutions. In our benchmarking analysis, we use client assets and liabilities (CAL) as a broad measure of client fee-earning assets within an institution. This measure is the sum of a client’s deposits, brokerage assets, managed funds, and loans outstanding—but excludes pure custody holdings. Our global wealth-management market sizing has grown, too. It now covers 62 countries—up from 45 countries last year. In addition, we have continued to build our related research in asset management. In December, we will publish our second annual report examining the challenges facing asset managers.

EXHIBIT 1

ALMOST 100 LEADING INSTITUTIONS PARTICIPATED IN THE BENCHMARKING SURVEY

Europe 56 institutions CAL=$2.0 trillion1

North America 29 institutions CAL=$5.4 trillion1

Latin America Asia-Pacific

5 institutions CAL=$51.7 billion1

9 institutions CAL=$89.9 billion1

SOURCE : BCG wealth-manager-performance database. N OTE : Participant data were supplemented with selected public data when comparable and appropriate. 1

Client assets and liabilities of participants in the survey. CAL = wealthy clients’ AuM, brokerage assets, deposits, and outstanding loans.


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Summary of Key Findings The importance of wealth management to banks’ economics should not be underestimated. Wealth management could represent as much as 20 percent of global bank revenues, nearly double the industry’s investment-banking revenues. Meanwhile, we expect growth in wealth management to continue at 4.5 to 5 percent annually in nominal terms because of long-term demographic trends and recovering markets. • Global bank revenues totaled approximately $1.9 trillion to $2.5 trillion in 2003. Wealth management revenues from wealthy investors—those with $1 million or more in AuM—equaled about $252 billion. If revenues from mass affluent investors—those with $100,000 to $1 million in AuM—are added, this pushes the total up another $290 billion to about $542 billion. • Thanks to the recovery in global markets, there were 7 million households that each held more than $1 million in AuM at the end of 2003. Their total wealth had increased by $2.8 trillion at constant exchange rates. This represents an increase of 1.24 million millionaire households around the world, a 23.1 percent increase over 2002. Meanwhile, the world’s mass-affluent households increased by 13.1 percent, or 10 million households, in 2003. • Strong equity markets and currency movements—notably a weakening dollar—were the primary drivers of this growth in AuM. Increased savings played a minor role. • Wealth remains extremely concentrated. Seven percent of wealthy households, or 93 million of the world’s 1.25 billion households, hold 77 percent, or $55.3 trillion, of $71.6 trillion of global AuM. Wealth managers’ profitability improved significantly in 2003, thanks to the recovery in equity markets and better margins. • European onshore wealth managers in our survey showed a marked improvement, increasing their median pretax margin to 24 percent in 2003, compared with a 9 percent median pretax margin in 2002.

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• North American fee-based players saw their median pretax margins substantially outpace those of commission-based players. • Asia-Pacific institutions in our survey, strongly influenced by healthy investment markets in Australia, saw their median pretax margin leap from 30 percent in 2002 to 46 percent in 2003. Growing confidence has started to have an impact on asset holdings, as investors gradually increase their allocations to equities and equity-related investments, although in most geographies these allocations have yet to reach late-1990s levels. • Equity and equity-related investments are becoming more popular with investors. At the end of 2003, equity-related investments accounted for 36 percent of global investors’ assets, up from 35 percent at the end of 2002. This reflected a shift away from money market and bond funds. • The weakening dollar has inflated views of growing wealth. In local currency terms, global wealth actually decreased 4 percent between 1999 and 2003. Our survey of wealth management institutions showed that all the main business models in private banking can be profitable, but there are very substantial differences in competitors’ performance, which cannot be explained by model, scale, or location. • North American fee-based wealth managers, with 2003 median pretax margins of 26 percent, continued to outpace commission-based players, which had margins of 12 percent. • Wealth managers in the Asia-Pacific region, benefiting from the area’s rapid economic growth, showed a 19 percent increase in median pretax margins; survey participants there enjoyed median pretax margins of 46 percent. Among the world’s wealthy, emerging wealthy investors, with assets of $1 million to $5 million, and mass affluent investors, with assets of $100,000 to $1 million, are the dominant segments, accounting for more than two-thirds of assets and revenues. These investors are the largest groups of wealthy investors across

most geographies, although their significance is greatest in Asia-Pacific, where the number of mass affluent investors has grown rapidly in recent years. • Emerging wealthy investors grew at 24 percent in 2003 and will grow at close to 5 percent annually through 2008. These investors will provide one of the most profitable growth markets for wealth managers provided they tailor their offerings appropriately. • Mass affluent investors won’t offer such rapid growth, but some providers will succeed in realizing the promise of this vast market, whose AuM grew by almost 17 percent in 2003. Overall, onshore competitors are becoming relatively more profitable. Our European onshore survey participants improved their median pretax margins by 6 percent between 2001 and 2003, while European offshore competitors in our survey registered a mere 1 percent increase in margins. • The relative rise in onshore profitability threatens to overturn conventional wisdom about the superior profitability of offshore players. Offshore competitors face more volatile and uncertain markets, and a relentless regulatory squeeze. Nevertheless, best-practice players in offshore markets continue to earn handsome median pretax margins that can be as high as 40 percent per year. • Onshore wealth managers in Europe narrowed the performance gap with offshore providers, our sur vey showed. Median pretax margins for onshore players measured 24.5 percent in 2003 compared with margins of 25.5 percent for offshore players.

Important new markets are opening up to wealth managers with international ambitions. • Greater China (China, Taiwan, and Hong Kong) is increasingly important to the wealth management industry. If Japan is excluded, greater China accounted for $3.29 trillion of Asia’s $6.4 trillion in AuM from wealthy investors and just more than half the $54.3 billion of Asian wealth-management revenues from wealthy investors in 2003. Japan, however, remains Asia’s largest wealth-management market with about $12.4 trillion in AuM. • Although Indian investors with more than $100,000 in AuM held $340 billion at the end of 2003—about one-third of what Chinese investors with more than $100,000 in AuM held at that date—Indian investors’ wealth grew at a 21.4 percent annual clip compared with 8.3 percent growth for Chinese investors. Wealth managers and private bankers have yet to fully tap the asset-management and managedfunds market—particularly in newer wealth-management markets outside of Europe and North America. • Asset management revenues from households with more than $100,000 in AuM accounted for 38 percent, or $207 billion, of global wealth-management revenues in 2003. • Wealth managers have yet to satisfy the markets’ appetite for alternative assets that are not correlated with the stock markets, such as hedge funds, private equity, and real estate.

The offshore market is changing as more countries, notably in Western Europe, consider or embrace tax amnesties to bring offshore funds back to onshore markets. For their part, European investors seemed more willing to keep funds onshore.

Succeeding in wealth management requires a balance of careful revenue management and growth. Tight control of costs is as important as ever, and top performers have a good product and client mix, excellent relationship-manager productivity, a focused and engaged work force, and careful cost management in the back office.

• The changes in the offshore market are increasing the pressure for consolidation in Swiss private banking. However, there were no significant merger transactions in the first ten months of 2004.

• Wealth managers’ improved cost discipline has stood them in good stead. The industry looks prepared to take full advantage of growth opportunities.

• Other offshore centers, notably Singapore and Hong Kong, have benefited from the pressure on Switzerland and other European offshore centers.

• It is critical to align relationship managers with the right clients and achieve the optimal scale in the back office in order to improve profitability.


9

Confidence Returns The global wealth market recovered in 2003, growing by 18 percent in U.S. dollar terms and by 8.5 percent in local currency terms. The rich are getting richer, gradually returning to the frequently higher, but more volatile, returns of equities, hedge funds, and private equity. There were about 7 million households around the world that had more than $1 million in assets under management (AuM) at the beginning of 2004.

grow 24 percent by 2008 to $89 trillion. (See Exhibit 2.) This increase will result from demographic changes and higher savings rates in Europe and North America, where aging populations are accumulating assets rapidly, as well as from growing wealth in Asian markets, notably Greater China and India. For wealth managers, the critical question is how best to take advantage of such opportunities in order to achieve stronger growth.

The improvement in global stock markets over the past 18 months has helped the wealth management business restore its returns after some lean years and has reduced some of the overcapacity in the market. Nevertheless, investors remain cautious and have yet to make a substantial shift from cash investments to equities. Investors are gradually returning to equities and equity-related products, signifying growing confidence in the economy.

Our 2004 benchmarking showed that almost all private-banking models can be quite profitable. But huge differences in profitability continue to exist— differences that cannot be explained by model, scale, or region. Leading players show that focusing on revenues and costs determines success. Product and client mix, relationship-manager productivity, and back-office cost management are especially critical to success. Regulatory and government pressure, particularly on offshore investors, will continue to increase, but it can sometimes offer opportunities.

But equity holdings still remain below the levels of the late 1990s, when the market peaked. In 2003, for the first time in four years, investor holdings of equity and equity-related investments actually rose to 36.2 percent of their assets, up from 34.6 percent in 2002. This is still far below the 47.1 percent of these investors’ holdings invested in equity and equityrelated products at the end of 1999. Wealth management is a highly attractive business for those competitors that understand and choose their markets carefully. In 2003, for example, the narrowly defined wealth-management industr y, excluding mass affluent investors, generated revenues of more than $250 billion, accounting for more than 15 percent of financial-services-industry revenues. If financial services for wealthy retail customers are included in the definition, those revenue estimates rise substantially. The global revenue pool for wealth managers has increased across the world, growing by more than 20 percent in 2003 from $232.3 billion in 2002 to $281.1 billion. The United States, the largest single market, accounted for one-third of revenues and 60 percent of worldwide profits. The long-term prospects for this critical banking business are good, too. Global wealth is projected to

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A Welcome Recovery Global wealth rebounded substantially in 2003 after the lean years of 1999 through 2002. (See Exhibit 3.) In U.S. dollar terms, the increase in asset values was particularly dramatic in Europe (25.4 percent) and other markets outside the United States because of the depreciation of the U.S. dollar. If this increase is expressed in local currency terms, that average drops to 8.5 percent. In local currency terms, wealth has yet to regain the heights of the late 1990s. Thanks mainly to the recovery of the equity markets, there were more than 11 million wealthy households at the end of 2003, and their wealth grew by $8.7 trillion. (See Exhibit 4.) But, as markets have improved, so have client demands. Investors are more concerned about capital protection—and capital destruction—after the downturn of recent years. The interest in capital protection has driven investment in fixed income and real estate. And tougher markets have also made investors more price sensitive and more willing to switch to lower-

EXHIBIT 2

GLOBAL WEALTH IS PROJECTED TO GROW 24 PERCENT BY 2008

AuM ($trillions)

89.0

CAGR 2003–2004

CAGR 2003–2008

(%)

(%)

6.4

4.5

Growth Drivers

• Improving market conditions 76.2 71.6

21.7

7.1

5.4

13.5

9.2

4.9

17.9

Established wealthy investors (AuM >$5 million)

16.7

Emerging wealthy investors (AuM $1 milllion–$5 million)

10.7

Mass affluent investors (AuM $100,000–$1 million)

27.9

29.7

Nonwealthy investors (AuM $100,000)

60.6

1,250 93

46.6 Nonwealthy households (AuM $100,000. 1

Includes hybrid funds and balanced funds.


15

Growing Markets As wealth managers search for growth, they are turning to the largest groups of wealthy investors across the globe—emerging wealthy and mass affluent investors—those with $1 million to $5 million in AuM and $100,000 to $1 million in AuM, respectively. The emerging wealthy and the mass affluent are the dominant segments. (See Exhibit 10.) This dominance holds true across most regions. (See Exhibit 11.) These investors, especially the emerging wealthy, are perhaps the least-tapped target markets for wealth management services. In Europe, for instance, such investors accounted for 33 million households that collectively had €10 trillion in AuM, creating €104 billion in revenue for wealth managers. Even in today’s recovering markets, there are surprisingly few very wealthy investors—those with more than $100 million in assets. In North America, for example, we estimate that there are just 1,800 households with more than $100 million in AuM, accounting for just 6 percent of all the region’s AuM.

Emerging Wealthy Investors It is in this segment that tomorrow’s rich are building their fortunes and where providers can often find it easier to establish lasting and valuable relationships. We firmly believe that particularly good opportunities for wealth managers exist among the numerous emerging-wealthy investors with unmet needs who are looking for guidance, advice, and better products and services. If wealth managers can correctly define and address the needs of the emerging wealthy in a cost-effective and disciplined way, they should be able to build large and rapidly growing businesses in this segment. The emerging wealthy are invariably pressed for time and eager to find good advice. We believe this segment is often the biggest missed opportunity for wealth managers. We have encountered private-banking and trust models that work well with such investors.

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It is critical, of course, to offer such services in a cost-effective way. That means being disciplined in product focus and delivery. The product offering can be broad, but there should not be unnecessary and costly product variations. In addition, it is often hard to deliver many sophisticated products in a cost-effective way. There should, for example, be sufficiently high qualifying AuM hurdles for investors who want to access hedge funds and structured products.

Mass Affluent Investors To serve the mass affluent successfully, wealth managers need solid products and good service at competitive prices. The challenge for banks is to achieve this in a cost-effective way. That means streamlining products in order to tailor them for the mass market. For the larger wealth managers, building a broad base by reaching into the mass affluent market can be helpful—even critical—to building scale and profitability. The opportunities in this segment are especially attractive for sizable and growing wealthmanagement franchises that control costs well and are flexible in accessing, customizing, and offering carefully chosen products from across the marketplace in order to keep costs down. Wealth managers may be attracted by the higher fees that usually come with smaller accounts. But good cost management is essential if mass affluent and emerging wealthy investors are to be profitable for the provider. Many competitors in these businesses don’t manage costs well. Often, they operate too many different business models and don’t think through the costs to serve investors. Too much product variation quickly adds to complexity and piles up costs for the provider. That is why central management, such as that afforded by separate accounts, is often the solution to ensuring good profitability.

EXHIBIT 10

THE EMERGING WEALTHY AND THE MASS AFFLUENT WERE THE DOMINANT SEGMENTS IN 2003 93.2 1.3 5.3

0.01 0.01

55.3

544.4

3.2 0.8

23.8 6.6

12.7

AuM >$100 million AuM $20 million– $100 million Established wealthy investors

115.5

AuM $5 million– $20 million

107.5


Emerging wealthy investors

AuM $250,000– $1 million

Mass affluent investors

41.5 10.7

214.6

20.7 45.1

Number of households (millions)

AuM $100,000– $250,000

76.4

7.2 AuM ($trillions)

Revenue ($billions)

SOURCE : BCG wealth market-sizing database. N OTE : Wealthy is defined as households with AuM >$100,000.

EXHIBIT 11

THE EMERGING WEALTHY AND THE MASS AFFLUENT WERE THE LARGEST SEGMENTS ACROSS MOST REGIONS % of AuM AuM>$100 million AuM $20 million– $100 million Established wealthy investors Emerging wealthy investors



5.0 1.2

4.5 1.1 13.3

13.0

14.3

17.7

3.1 0.7

27.4

13.1

24.3

6.7 1.6 13.6 15.5

Mass affluent investors

AuM $100,000– $250,000 Nonwealthy investors

AuM $5 million)

0.19

Emerging wealthy investors (AuM $1 million– $5 million)

0.14

0.15

Increase of 21.4%

Mass affluent investors (AuM $100,000– $1 million)

0.59

0.64

$0.34 trillion

$0.27 trillion

0.22

0.18

2002

2003

0.01 0.08

0.01 0.11

2002

2003

SOURCE : BCG wealth market-sizing database. N OTE : Wealthy is defined as households with AuM >$100,000.


19

EXHIBIT 14

MASS AFFLUENT INVESTORS DOMINATED THE WEALTH MARKET IN GREATER CHINA % of AuM AuM >$20 million Established wealthy investors Emerging wealthy investors

0.8


15.5


11.6

4.5

0.8 11.2

25.3

13.8

15.1 12.5 17.2

39.3 Mass affluent investors

AuM $250,000– $1 million

6.6

41.6

38.8

29.2 AuM $100,000) (AuM>$100,000)

(%)

North America United States Canada

142 133 8

161 150 11

13.5 12.4 31.2

Europe United Kingdom Germany Italy France Netherlands Spain Switzerland Belgium Sweden Austria Denmark Russia Greece Ireland Portugal Norway Finland Poland Czech Republic Hungary Slovakia

136 36 21 15 17 8 7 9 6 3 3 2 3 1 1 1 1 1 0 0 0 0

172 43 27 20 22 10 9 11 8 4 3 2 4 2 2 1 1 1 0 1 0 0

26.9 20.7 29.6 32.3 32.1 24.9 31.1 18.7 30.2 40.0 24.7 31.5 18.6 30.4 31.6 38.2 25.7 27.7 19.0 63.3 25.4 31.3

Asia-Pacific Japan Taiwan China Australia South Korea Hong Kong India Singapore Indonesia Thailand Malaysia New Zealand Philippines Pakistan

151 104 10 14 5 5 3 4 2 1 1 1 0 0 0

177 123 12 15 6 5 4 4 3 1 1 1 0 0 0

17.5 18.5 14.1 8.4 38.8 6.1 17.7 22.2 12.3 20.5 30.4 20.2 30.6 15.3 12.8

Latin America Mexico Brazil Venezuela Argentina Chile Peru Uruguay

14 6 4 2 1 1 0 0

16 6 5 2 1 1 0 0

14.6 4.4 27.3 11.1 20.1 27.2 15.3 10.2

The Middle East and Africa Saudi Arabia Israel United Arab Emirates Turkey South Africa Kuwait Iran Egypt Oman Qatar Algeria Morocco Lebanon Bahrain Tunisia Syria Yemen Jordan

16 5 2 2 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0

18 6 2 3 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0

15.8 12.0 22.7 12.9 16.0 39.5 16.7 12.5 4.6 15.0 14.0 19.7 22.9 10.5 12.0 20.3 18.1 14.5 13.5

458

544

18.9

Global

SOURCE : BCG wealth market-sizing database.


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Appendix II: Summary of Previous Years’ Findings Richer Prospects in Wealth Management: Global Wealth 2001 Who wants to be a millionaire? Mere millionaires are often not well served by financial institutions, which tend to focus on their very wealthiest clients. They need broad product offerings and tailored, concise advice. This attractive slice of the wealth market is still waiting to be served properly. • Traditional providers have served clients with more than $5 million in wealth, but private-banking services are attractive to many investors with far less in investment assets. • Today some financial institutions are focusing profitably on investors with up to $5 million in financial assets. There is a popular belief that wealth management is a very attractive business with high returns. • It is a large market comprising more than $40 trillion in wealth and more than $500 billion in annual revenues for financial institutions. • With strong growth forecast for all the major regions, rich investors will have more than $65 trillion in wealth by 2005 and generate more than $700 billion in revenues for wealth managers. But our experience with clients and our research suggest that many competitors are not nearly as profitable as they should be. • Many competitors let their costs grow rapidly during the ten-year bull market and don’t have a clear picture of their own economics and particularly of their costs to serve customers. • Many wealth managers miss their marketing sweet spot by targeting the wrong customers, focusing on those with either too much or too little wealth to match their business models. Wealth managers need a certain minimum size to be profitable. • For most integrated institutions, $10 billion in assets under management defines minimum effi-

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cient scale. For some providers, that number is far higher. • Most institutions can’t break even in a new location without at least $7 billion in assets under management. Smart institutions are using the current uncertainty in investment markets to move boldly to build competitive advantage. • They are controlling costs—and especially rising IT costs—and adapting to the changing investment markets. They are selecting the customers they wish to serve and deciding where and how they can create the most advantage. • Large institutions are pursuing acquisitions and alliances to build strong positions as powerful forces consolidate the highly fragmented wealthmanagement market. It’s about wealth management, not just asset management. • Investment products account for just a part of financial services revenues from wealthy households. Wealth managers should provide tailored insurance and credit products to improve their revenues and to help their clients achieve higher after-tax returns. • Investors often have much of their wealth tied up in private businesses. To offer a satisfactory service, wealth managers should address the needs of these businesses. Watch out! Here come the baby boomers. • The wealthiest investors are graying rapidly: the fastest-growing age groups are people aged 50 to 59, which will increase by 47 percent over the next ten years, and those aged 75 and over, which will increase by 37 percent during the same period. • As they age, investors shift from borrowing to saving and investing, followed by a period of consuming wealth in the latter part of their lives.

Driven by the aging boomer population and the privatization of pensions, offshore banking will decline in relative importance as onshore banking and investing increase in importance. • But offshore banking will continue to be critical for many of the world’s wealthy as they seek out high returns and try to manage currency and political risks in their home countries. • Institutions are finding that it is cheaper to build an offshore banking business that serves customers from many parts of the world than to create individual national franchises. U.S. institutions manage wealth more cheaply than their competitors from other countries. • There is an approximately 30 percent price differential between the cost of U.S. wealth management services and comparable ones offered by European providers. • European competitors will find it difficult to break into the U.S. market with its lower prices for wealth management services. At the same time, the European market will be very attractive to U.S. players. Open architecture is becoming more and more important. • Investors will increasingly focus on performance, seeking the best returns, selecting among the offerings of many providers. • They want tailored offerings that fit their needs and will pick and choose to find such offerings. Prospering in Uncertain Times: Global Wealth 2002 There was worldwide destruction of private wealth in 2001 as investors saw the value of their equity holdings tumble. • The declining markets cost all investors an estimated $2.9 trillion, or 4.4 percent of the total value of global investment assets. More than 2 million households slipped below our wealth threshold of $250,000 in net investment assets. • Global wealth is forecast to grow more slowly than previously foreseen—at an average 6.9 percent

annual rate through 2006 compared with the five year annual average growth rate of 9 percent predicted just a year ago. The decline in equity markets has had a severe impact on the profitability of wealth managers—especially on brokerages that rely on commissions. The BCG Wealth Manager Performance Survey revealed very different declines in profitability from region to region. • In the United States, profitability fell 69 percent, with commission-based brokerage firms reporting significant losses while fee-based wealth managers in the survey recorded a more modest 6 percent decline in profitability. • In Europe, profitability declined by an average of 34 percent as private banks in our survey saw their revenues tumble by 14 percent. • In Asia-Pacific, profitability at the institutions we examined—which included several top performers—grew by 15 percent. Most wealth managers have so far done surprisingly little to address costs, given their reduced revenues in 2001. • Our survey indicated that, on average, costs have risen. Moreover, cost reductions have usually not matched revenue declines. • Some institutions that participated in our survey were unable to provide the cost breakdowns requested. The costs section was invariably the least complete portion of a participant’s survey. Nervous investors—particularly those with more moderate holdings—are becoming more conservative. • They are shifting to cash and money market funds and increasing their holding times for investments, while cutting their margin debt substantially. • U.S. equity-fund holdings dropped $550 billion in 2001 while money market holdings increased $440 billion. • Despite this increase in investor conservatism, alternative investments are growing and have a longterm role in the wealth management industry. In the United States and to a lesser degree in Europe, increasing regulation has precipitated a


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shift to onshore investing. Nevertheless, the offshore market continues to grow. • The onshore market is growing faster than the offshore market. Still, the offshore market remains very large, totaling at least $5 trillion. • The offshore market offers better margins than the onshore market, but it is highly fragmented among many different managers. Regulatory and legislative investigations have focused attention on the importance of truly independent research and advice. • A series of corporate scandals in recent months has undermined investor confidence in earnings reports and in the markets in general. This strengthens the case for separating investment advice from transactions. • Clients, meanwhile, are demanding higher-quality, broader, and more personalized investment advice from wealth managers. The new wealth management agenda demands that wealth managers address their costs. That alone, however, is not sufficient for success. Leading competitors also need to attract and retain the most valuable customers and ensure the effectiveness of their sales forces. Innovative, competitive products— including alternative investments—are critical to maintaining and improving the yield on client assets. • Many competitors are still assuming unrealistic levels of growth. To create sustainable, successful franchises, institutions must actively manage their costs instead of focusing too narrowly on revenue and asset growth. They need to understand their cross-subsidies and transfer pricing to manage their costs better. • To gain competitive advantage, wealth managers must deal with unprofitable customer groups within their businesses by ensuring that investors really do meet their standard account minimums. • In particular, they must align their business models to focus on their target markets, investing in their sweet spots—where their brands, skills, and costs to serve best fit their chosen customers—

and ensuring that their offerings are sufficiently segmented and appropriately matched to their core customers. • Institutions should review the effectiveness of their sales forces, ensuring that they match their service models, compensation, and management structures with their priorities. • Most players will want to consider how innovative investments—including funds of funds—fit into their product and service offerings. There are substantial rewards for those institutions that get the new wealth-management agenda right. • Today’s uncertain markets provide wealth managers with a rare opportunity to push through tough decisions and changes. • Wealth managers that exploit that opportunity will build competitive advantage—improving their price-to-earnings ratios and increasing their market capitalization. Winning in a Challenging Market: Global Wealth 2003 The wealth management industry—its markets and business models—finds itself at a crossroads.2 One must look back more than 70 years to see a similar confluence of events globally. • AuM have declined by more than 14 percent since 1999, and wealth industry revenues have fallen by around 25 percent. The revenues that wealth managers derive from equities have been hardest hit, falling by half during this period. • In most major economies, markets have shifted decidedly to low growth, and regulatory frameworks that helped fuel the industry are being fundamentally altered. • The service models forged over more than a decade of strong market growth have been under siege for three years and continue to struggle to adjust to new, sobering realities. In 2002, the world’s millionaires and billionaires lost $1.9 trillion in wealth. Since January 2000,

2. We have defined a set of distinct business models that allow us to group institutions into meaningful peer groups. Institutions are classified by business model on the basis of a combination of factors, including similar target customers, revenue sources, and cost structures.

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declining markets have destroyed almost $5.3 trillion of these investors’ holdings in local currency terms.3 • In 2002, European and North American investors with more than $250,000 in liquid assets saw their wealth drop by 7 percent and more than 10 percent, respectively, in local currency terms. • Most major markets appear to be in a period of low or no growth that may persist for several years. This has profound implications for wealth managers, whose prior strategies relied on annual increases in market value of more than 10 percent. In the established wealth markets of Europe and North America, customers’ preferences have shifted, requiring wealth managers to revise strategies. • Investors now focus more on absolute returns than on relative returns, and investors are much more interested in risk and asset allocation. There is also distrust of the advice of sell-side analysts, with investors now favoring advisers that are as free as possible from conflicts of interest. • Investors are leaving large amounts of money in cash or other liquid holdings, making it far easier for them to switch wealth managers. Yet there has been surprisingly little product innovation to meet investors’ changed needs. Wealth managers should seize this opportunity to craft solutions that deepen relationships with customers. European and North American wealth managers face very different but equally profound threats on the regulatory front. • In Europe, national authorities are using a combination of tax amnesties, intergovernmental agreements that impose withholding tax on investment income of uncertain origin, and increased transparency to target offshore accounts. This three-pronged attack threatens offshore-banking margins in Europe, requiring wealth managers to find funds elsewhere and leading to additional competition in other geographies. We estimate that more than 50 percent of offshore funds in Switzerland, or some $1 trillion, are of European origin, underscoring the scope of the threat to offshore players.

• In North America, wealth managers continue to cope with the aftermath of the market bubble of the late 1990s and the ensuing increase in regulation. What is far more damaging to wealth managers, however, is investors’ lingering distrust of the markets and of the investment industry that has resulted from the sustained fall in the markets. Investors’ concerns continue to keep large amounts of money on the sidelines. Wealth managers’ economics continued to deteriorate in 2002, raising the prospect of more lean years before the market improves. Wealth managers need to be decisive, ensuring that they understand their competitive position, business model, and what more still needs to be done. • In the United States, many wealth managers reduced costs, but their cuts did not keep pace with revenue declines. In Europe, costs rose while revenues fell among the institutions in our survey. New ways to manage costs are required to reduce business risk. • Meanwhile, institutions in Asia and Australia continued to grow, buoyed by relatively strong financial markets and a growing but underserved class of wealthy investors. In Latin America, offshore institutions serving the wealthy continued to benefit from economic and political uncertainty, which has driven substantial flows offshore. In challenging times, strategic management and competitive advantage are more important than ever. We see wealth managers across geographies and business models thriving or failing on the basis of their ability to respond to the needs of their best customers. Wealth managers fall into three groups, each with a distinct competitive position and set of strategic imperatives. • The first tier consists of the winners: institutions that have delivered margins in excess of 30 percent in this challenging market. They are present in all geographies. They have carefully managed their fortunes, acting decisively to improve their economics and business models while maintaining a select portfolio of businesses. These institutions have a rare opportunity to extend their advantages over weaker rivals in today’s market.

3. This total increases to $5.6 trillion if investors with holdings of $250,000 to $1million are included.


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• A middle tier of wealth managers also exists: institutions that have recovered from the havoc of the past two years by realigning their strategies and cutting costs, thus starting down the path to improved profitability. We believe that these institutions will sur vive, but they must further improve their operating models if they are to become truly competitive.

They can pursue new business growth, at the expense of less nimble rivals, with distinct customer value propositions, innovative offerings, and aggressive new-business development. Nevertheless, they must be careful to maintain and refine sustainable cost structures that create value and answer customers’ needs at prices customers can afford.

• A bottom tier of underperformers—some 27 percent of the institutions in our sample—deliver pretax margins of 10 percent or less. Saddled with a business model that depends on growing asset prices, high costs, low productivity, and an indistinct client value proposition, these organizations require radical change if they are to remain independent.

• A particular business model is no guarantee of profitability. Stronger performers have three key factors in common: a management team able to exploit relative competitive advantage, a clear customer value proposition, and an effective sales and customer-service organization.

Wealth management remains an attractive, highmargin, high-growth business and a critical part of a broad financial-services franchise. Now is the time to act to ensure that the business is positioned to weather difficult markets and prepared for the eventual upturn. • Leaders in today’s market have a rare opportunity to extend their advantage and to identify and pursue acquisitions that complement their strategies.

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• Wealth management leaders interested in expanding by acquisition should carefully screen the markets for potential candidates that complement their strategies and prepare themselves for the difficulties—and potential rewards—of such a growth strategy. • Underperforming businesses must move aggressively to control their own fates—either by withdrawing from all or parts of the business or by acting decisively to reinvent and reinvigorate their franchises.


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The Boston Consulting Group is a general management consulting firm that is a global leader in business strategy. BCG has helped companies in every major industry and market achieve a competitive advantage by developing and implementing winning strategies. Founded in 1963, the firm now operates 60 offices in 37 countries. For further information, please visit our Web site at www.bcg.com.

The Boston Consulting Group publishes other reports and articles that may be of interest to senior financial executives. Recent examples include:

Preparing for the Endgame: Global Payments 2004 A report by The Boston Consulting Group, October 2004 Winners in the Age of the Titans: Creating Value in Banking 2004 A report by The Boston Consulting Group, May 2004 Winning in a Challenging Market: Global Wealth 2003 A Senior Management Perspective by The Boston Consulting Group, July 2003 Navigating the Maze: Global Asset Management 2003 A Senior Management Perspective by The Boston Consulting Group, June 2003 The Payments Puzzle: Putting the Pieces Together, Global Payments 2003 A report by The Boston Consulting Group, February 2003 Prospering in Uncertain Times: Global Wealth 2002 A Senior Management Perspective by The Boston Consulting Group, July 2002

For a complete list of BCG publications and information about how to obtain copies, please visit our Web site at www.bcg.com. To receive future publications in electronic form about this topic or others, please visit our subscription Web site at www.bcg.com/subscribe.



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