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Most Wealth Managers Have Been Spared a Direct Hit by the Financial Crisis but Have Still Felt the Effects, Says a Study by The Boston Consulting Group

Concerned About Growth, Some Wealth Managers Are Exploring Opportunities Outside the Most Developed Markets, While Others Grapple with Organizational Issues.

BEIJING, October 28, 2008—Wealth grew at a slower pace in North America, Europe, and Japan last year, but wealth markets in general proved resilient. Global wealth grew by 4.9 percent in 2007, to $109.5 trillion, according to a new report by The Boston Consulting Group (BCG). The report, titled A Wealth of Opportunities in Turbulent Times, is being released today and is BCG's eighth annual study of global wealth.

The report covers data from the whole of 2007, when the effects of the financial crisis were evident but not as severe as they would become in 2008. Still, the crisis's impact on some markets became clear by the end of last year. In North America—the epicenter of the turmoil—wealth grew by 3.8 percent in 2007, down from 8.9 percent in 2006.

"The financial crisis continues to cast a pall over established wealth markets," said Tjun Tang, a BCG's Greater China based partner and coauthor of the report. "It has prompted many investors to move their assets to more conservative products, resulting in lower margins for some wealth managers. As clients have moved their assets elsewhere or have curtailed new investments, some wealth managers have even seen the volume of assets under management (AuM) decline."

"Ultimately, the implications of the crisis will be shaped by a wealth manager's ability to act on important lessons and opportunities," said Bruce Holley, a New York-based senior partner and coauthor of the report. "Many wealth managers have yet to pursue these opportunities, but the crisis has prompted some players to broaden their horizons by expanding into less developed markets."

Accessing the Other Third of Global Wealth

North America and Western Europe accounted for about two—thirds of the world's wealth in 2007. "The remaining third—what we call the other third of global wealth-was spread across emerging or less mature markets around the world, where wealth has been growing at much faster rates," said Tang.

Wealth markets in Asia-Pacific, Latin America, Eastern Europe, and the Middle East had about $33 trillion in AuM in 2007. Most of these markets share a common set of challenges such as high entry costs, a scarcity of relationship managers (RMs), and increasing competition. "To grow, wealth managers will need to overcome these challenges while developing products and services that suit specific markets," Holley said. To this end, the report explores several markets in detail.

• Wealth in Asia-Pacific totaled about $25.5 trillion in 2007. China's wealth market is characterized by high growth, scarce RMs, and a client base dominated by entrepreneurs. India's wealth market is small and underdeveloped, but many clients are investment savvy and have an appetite for risk. Japan's wealth market is massive but growing slowly and difficult to access.
• In Latin America, AuM reached $3.1 trillion in 2007. Brazil and Mexico accounted for 60 percent of this wealth. Brazil's banking sector has exceptionally strong local competition, relative to other emerging markets. Mexico's wealth market has two valuable attributes: growth and stability. The competitive environment is heating up, but it is not yet overcrowded.
• Russia is by far the largest wealth market in Eastern Europe. Its AuM totaled $950 billion in 2007. However, markets in Central and Eastern Europe (CEE) had the strongest growth in AuM. From 2002 through 2007, four of the ten fastest-growing wealth markets worldwide were in CEE: Poland, Slovakia, Hungary, and the Czech Republic.
• The growth opportunity in the Middle East is concentrated in the six markets of the Gulf Cooperation Council (GCC): Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. In 2007 this region had an estimated $1.5 trillion in AuM. All but one of the six GCC markets were among the top 15 markets ranked by percentage of millionaire households. 

In addition to accessing "the other third," wealth managers will need to address organizational challenges to support increased growth. While the financial crisis has underscored the relative stability of the wealth management business, it has also created a new sense of urgency around how to position and structure the front office. "Success in wealth management always seems to boil down to a small set of client-focused capabilities that are critical to driving growth," Tang said. "The front office is the common denominator of these capabilities—it is where clients are acquired and served." The report details a variety of issues that are critical to the success of the front office.

Distribution of Wealth and Millionaire Households

Globally, wealth grew faster among richer households. Wealthy households—those with at least $100,000 in AuM—represented about 18 percent of all households but owned 88 percent of global wealth in 2007. Millionaire households represented just 0.8 percent of all households but owned 35 percent of global wealth.

In 2007 the number of millionaire households grew by 11.2 percent to reach 10.7 million. The United States again had the greatest number of millionaire households, followed by Japan, the United Kingdom, Germany, and China. (This year's study of wealth covers 62 markets representing more than 98 percent of global GDP.)

"Small markets, however, had the greatest concentrations of millionaire households," Tang noted. "In Singapore, an astounding one in ten households had at least $1 million in AuM. Three of the five densest millionaire populations were in the Middle East—in Qatar, the United Arab Emirates, and Kuwait—while Switzerland had the highest concentration in Europe, at 7.3 percent."

In 2007 the amount of wealth held offshore grew to $7.3 trillion but declined as a proportion of total AuM. Traditional offshore centers such as Switzerland face a number of pressures, including more stringent tax regulations in other countries and the rise of new offshore centers in Singapore and Dubai. Although traditional offshore centers are not on the verge of surrendering their leadership positions, the report details steps they can take to maintain their competitiveness. These include focusing on the strengths of a private bank—in particular, the ability to deliver strategic advice and a wide range of products.

Wealth Markets in China

Looking specifically at China, an October 2008 BCG report Wealth Markets in China:  The Beginning of the Race for China's Rich finds that China continued to have the highest percentage increase in AuM, at 27.8 percent when measured in local currency terms and 36.8 percent in USD terms, boosted by very strong economic growth, stellar stock market performance and the appreciation of the Renminbi in 2007. While the full impact of the global financial crisis on growth rates of Chinese wealth in 2008 is yet to be seen, China clearly is the most important opportunity for wealth managers in Asia ex Japan.

"Three aspects make China's wealth market stand out:  it's a large yet very fast growing market, it has a very high savings rate of 56% and it also boasts exceptionally high cash holdings of 63% in terms of assets under management," said Tjun Tang, coauthor of the report and a BCG partner in the firm's Greater China practice. 

2007 has been a game changing year for the banks operating in private banking in China. The government allowed foreign banks to be locally incorporated and to provide local currency retail business and wealth management services to local Chinese individuals. Many foreign banks have entered the private banking businesses in China, establishing serious competition to Chinese incumbents for this highly profitable customer segment. As a consequence, many Chinese banks accelerated their plans to build a private banking offering of their own.

"2007 was a milestone year for the start of private banking in China. Going forward, we observe major difficulties that the foreign and Chinese banks face in order to win in this segment", said Frankie Leung, another of the China report's authors and a BCG partner in the firm's Hong Kong office, "migrating away from a product-driven servicing model towards the role of a trusted financial advisor, expanding the product offerings, and tackling the organization and human resource issues" are the three most challenging tasks for Chinese wealth managers in the near future.

The report goes on to detail the seven key building blocks that the authors have found to be critical to successfully differentiate against competitors, and to win and better serve clients in the China market.

1. Design a value-creating operating model and wealth advisory process
2. Set up well-structured customer prospecting and acquisition
3. Provide a compelling product offering
4. Create programs to recruit and develop talented relationship managers
5. Establish a clear brand promise for Private Banking operations
6. Build out the necessary IT platform
7. Ensure active management of the business-model economics

"It is possible to make money with different business models, value propositions, and targeted customer segments. The key is to ensure that one is clear about which segments to pursue, what the unique competitive advantages might be, and how to align all aspects of the business with the bank's strategic goals. ," said Holger Michaelis, another of the report's authors and a BCG partner in the firm's Beijing office.

To receive a copy of the report or arrange an interview with one of the authors, please contact Ms. Gu Li at +86 21 23064000 or gu.li@bcg.com.

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