The continued expansion into developing markets by wealth management firms seems to defy the global recession. However, challenges such as dwindling numbers of wealthy individuals across the world and the prospect of lower revenues may provide some strong headwinds.

The continued expansion into developing markets by wealth management firms seems to defy the global recession. However, challenges such as dwindling numbers of wealthy individuals across the world and the prospect of lower revenues may provide some strong headwinds.

“For the first time, wealth has been lost in every region, in both mature and developed markets,” Ileana van der Linde, a principal at Capgemini Financial Services, a global consultancy told WealthBriefing.
CapGemini and
Merrill Lynch were due to issue their annual report on the global wealth management industry this week.

Firms are also facing lower margins as clients opt for more conservative assets, existing asset values are depleted and new investments are not forthcoming, industry figures said.

Sebastian Dovey, managing partner at wealth management consultancy
Scorpio Partnership says that “the inefficiency jaw is widening" as clients have been de-leveraging their portfolios for the last 12 – 18 months. “As these low volatility assets are cheaper to purchase, revenues have fallen while the cost base at many firms remains the same and some firm’s cost-income ratios have fallen outside efficiency levels,” he said.

Another regular commentator on the wealth industry, Ray Soudah, founder of wealth management mergers and acquisition advisory firm,
Millenium Associates, shared Mr Dovey’s assessment. “Revenues in many instances are falling by more than the 35 per cent margin firms tend to make in good times,” he said.

Capgemini’s research indicates that while no region has remained unscathed, developing markets such as Latin America have lost less in percentage terms than Asia, North America and Europe. These markets are seen by some companies as offering the potential for growth as much of the developed world faces economic recession.

Expansion

In the last 18 months, RBC Wealth Management, the wealth management arm of Canada’s largest bank, has opened offices in Beijing, Mumbai, Chile and Panama and has also just launched an onshore business in Brazil. Other firms on the expansion trail include Barclays Wealth and Standard Chartered.

"We are looking to grow our international presence,” said Michael Lagopoulos, president and chief executive, RBC Wealth Management, Europe, Asia & Latin America. “When we open an office in Moscow later this year, we will have operations in all BRIC countries,” he said.

While markets with higher numbers of potential high net worth and ultra high net worth individuals are obviously attractive, firms are becoming increasingly selective about where they expand or waiting until there is more certainty before executing their plans. For example, while RBC’s focus is on high growth markets for the next few years, a connection with target countries is also key, Mr Lagopoulos said.

“There are a substantial number of high net worth individuals in the BRIC countries, so it makes sense for us to grow our platform in these regions," he said. “We are also concentrating on those markets which have an immediate affiliation with RBC, like Russia as both Canada and Russia are rich in natural resources,” he said.

Barclays Wealth has substantial ambitions to expand in India, China and Japan. As well as the expected growth in numbers of wealthy individuals, the firm also focuses on current market dynamics like whether a market is over or under banked.

“When there are too many competitors servicing a constant pool of HNW individuals, it can make a market less attractive,” said Gerard Aquilina, vice chairman, Barclays Wealth. Barclays says that its strong global brand and significant presence in global markets through its retail bank and investment banking arm, Barclays Capital, provides it with leverage that enables it to enter newer markets more quickly and effectively.  

Other notable expansion plans include Coutts’ parent, Royal Bank of Scotland, and the Netherlands-based financial services group, ING, which has been active in India. There are also the examples of Standard Chartered’s Indian operation expanding from five cities to eight and JP Morgan’s plans to launch there next year. Credit Suisse has plans to boost its private banking team in Asia by as much as 80 per cent in three years. Julius Baer and BBVA, meanwhile, are expanding in Latin America and HSBC and Union Bancaire Privée have both set up private banking operations in Russia in the last year.

Stock bounce

Ledbury Research, a firm specialising in the high net worth sector, attributes the renewed interest in emerging markets to strong stock market performance in developing markets. In the first quarter of 2009, India’s benchmark Sensex index of equities has doubled in Mumbai ,and Sao Paulo's Bovespa index of Brazilian shares is up by 50 per cent. In China, sheer numbers of people make the country an obvious place to expand for many firms, despite challenging regulatory restrictions.

The shedding of assets by some firms has created potential buying opportunities for others to buy up talent and infrastructure in new markets. Mr Soudah observes that where some major firms have been obliged to cut back, growth options are slowly being considered now that markets have stabilised.

“But only by those who are not government influenced,” Mr Soudah said, adding: “Acquisition-led growth strategies are back on the agenda under the premise that integration synergies coupled with low acquisition prices are attractive.”

Mr Soudah sees the greatest success among those firms that are experienced asset gathering networks, namely HSBC and the medium sized independent Swiss private banks, such as Julius Bear, Sarasin, Vontobel and Union Bancaire Privée.

According to Ledbury’s James Lawson, who leads the firm’s wealth management practice, there are a number of attractive acquisition targets for banks with strong balance sheets.

Scorpio distinguishes between entering more mature developing markets, where acquisition opportunities may be available, and entering new developing markets, where it may not be an option. Singapore, Hong Kong, Brazil and India are mature developing markets from a wealth management perspective, where there may be opportunities for deals, it says.

“Brazil and India are now showing signs of being very interesting as onshore plays, with some global banks spending significant sums to buy into the market,” said Mr Dovey. “However, Russia and China remain more restricted to foreign players.”

Balance sheet

A strong balance sheet is fundamental to successful expansion plans and Capgemini’s Ms van der Linde has witnessed some firms pulling back and considering whether they can afford to go now.

“They are talking the opportunity to see where they should focus growth and are continuing to build out their strategy, waiting for the right time to put it into effect,” she said. She predicts those firms that have already invested will not withdraw completely. “However, if balance sheets are out of order financially, then core business must come first,” Ms van der Linde said.

Scorpio’s 2009 annual report on the wealth management industry, due out in the next few days, is likely to show a decline in absolute market size. “However, while growth rates are lower, wealth creation will continue,” said Mr Dovey. “There is not necessarily a strict dividing line between the G7 counties or the BRICs and other emerging markets with strong wealth communities. Strategically, banks are still looking to build businesses and while the total global prize may be less attractive, there is still plenty of room for the 400 plus firms operating at a local and multi-jurisdictional level to grow.”

Scorpio’s data analysis clearly shows that over 25 per cent of assets that could potentially be managed by wealth management firms are currently outside the industry.

However, the signs are that despite setbacks, in the long run growth will continue to come out of developing markets as they continue to offer new avenues of business for wealth management firms looking to grow at pace. In the future, today’s developing markets may grow more slowly, so firms will always be on the lookout for the next “boom” market that promises accelerated growth.

“In five years when all of this is behind us, there will continue to be more rapid growth in developing markets than mature ones,” added Ms van der Linde.