awirbsCORPORATE FAILURES may be increasing globally and the fortunes of dotcom entrepreneurs may be vanishing faster than it takes to utter the words “initial public offering” on Nasdaq, but neither economic recession nor the bursting of the technology bubble is going to halt the rising tide of affluent and newly wealthy individuals in Europe, the US and elsewhere, according to business forecasters. Obituaries of the so-called mass affluent are simply fanciful, along with the reported demise of the wealth management industry that is springing up to serve this expanding segment of the population.

True, the industry has seen some casualties among the specialist financial firms and bank subsidiaries that have struggled to find the right mix of services for this potentially lucrative segment. None are yet delivering a complete wealth management service that caters for all needs — that may still be five years away, says one industry specialist. But there is no shortage of firms gearing up and looking for a piece of the action.

The rise and rise of affluence

The number of people in Europe classified as either in the mass affluent group or of high net worth (even wealthier) is predicted to rise by an average of more than 5000 a day between 2000 and 2004, to reach more than 30.3m (compared with 22.8m at the turn of the millennium). Between them, they will own [euro]8,600bn in liquid assets, according to London-based data and industry analysis firm Datamonitor. Of that, some [euro]2,800bn will be held by the mass affluent, who represent roughly three-quarters of the individuals in the overall total.

For the world, the managed assets of the wealthy will rise from $27,000bn to $40,000bn in the five years to 2005, calculates Merlin Stone, the IBM professor of relationship marketing at Bristol Business School.

Definition of affluent

Precise definitions of mass affluent vary markedly. Datamonitor defines it as individuals with investable assets of between [euro]50,000 and [euro]300,000 or gross annual income of between [euro]50,000 and [euro]150,000. Others use definitions for investable assets that are nearly twice as high. Among the even wealthier group known as high net worth individuals (HNWIs), the number of dollar millionaires in the world has reached 7.2m, according to the latest world Wealth Report, produced by investment bankers Merrill Lynch and management consultants Cap Gemini and Ernst & Young.

In particular, the US, Canada, the UK, Germany and France each have a class of new “money-maires”. And the assets of affluent under-35s are growing more than three times faster than those of the affluent segment overall, according to a separate study by Booz-Allen & Hamilton, a global management and technology consulting firm.

The mass affluent and HNWIs represent a large, rapidly growing and low-risk market for financial and lifestyle services. And that market is highly profitable. In a recently published paper, Wealth Management: A new Phenomenon? (prepared for Morgan Stanley Dean Witter), by Professor Stone and Tamsin Brew, a consultant in IBM’s Wealth Management Financial Services practice, the average return on equity for private banks, which have traditionally catered for the wealthy, is estimated to be around 87%. That compares with 30% for a UK retail bank, 29% for a US commercial bank and 22% for a European universal bank.

Market is highly fragmented

The mass affluent and HNWIs also represent a market that, unlike other sectors of finance, is still highly fragmented and open to capture by the big financial institutions. The top five private banks in the world hold a market share of only 5% between them, according to Prof Stone and Ms Brew.

The market is also very fluid, with private banking increasingly under scrutiny because of concern about tax evasion, fraud and money laundering. Assets that were kept offshore are increasingly coming onshore. On current trends, the proportion of assets held offshore is likely to halve in the next four years, says the Booz-Allen study. Private banking itself also appears to be suffering severe erosion of loyalty among its traditional customers. More than 60% of HNWI are planning to spread their investment portfolios across a broader range of providers.

No firm, whether traditional or new entrant, has yet found a successful formula to service the HNWI and mass affluent markets beyond relatively niche activities. Even so, it is assumed that a big part of what is provided in future will be delivered over the internet to a disproportionately web-savvy audience, helping to keep down costs.

Not least of the difficulties is that the market comprises a diverse group of often highly motivated, busy and independent-minded people with a large variety of needs. It has grown rapidly as the result of several economic and demographic factors: a long-term rise in equity values; the spread of entrepreneurship, particularly in the technology sectors; the sale of family businesses during the recent wave of mergers and acquisitions; an ageing population that is making its own provisions for retirement; and increasing inheritance, as more money and property is passed between generations. The expansion of the mass affluent and the HNWIs represents in short, a permanent and far-reaching new phenomenon that is going to have a major impact on the finance industry, and even on the conduct of economic policy in some countries.

A question of services

How should the banking and finance industry respond to what has been called the “European e-financial services holy grail”? What kind of services do the mass affluent require and what is the best way of providing them?

An attempt to answer such questions lay behind IBM’s assembly, in June, of a panel of specialists in wealth management, consumer consultancy and IT business solutions. IBM is taking a leading role in the wealth management field through its professional consultancy services division, which helps clients to identify and solve business and IT problems. What emerged most clearly from the specialist panel is a general view that a gap exists in the market between what the mass affluent want and what financial firms offer them.

Traditionally, the wealthy have been serviced by independent private banks or the private banking arms of commercial and retail banks. In addition, independent financial advisers catered for mid-level investors, More recent arrivals are the internet discount brokers, such as Charles Schwab, and other e-financial service providers that are seeking more customers for their existing range of products or to sell more products to existing customers. Yet, another recent player on the scene is Close Wealth Management, part of the Close Brothers Group, which aims to provide a high-quality but cost-effective investment service through innovative use of technology.

The list of financial firms establishing expensive new strategies to capture a slice of the wealth management continues to lengthen. Insurance company CGNU is building up norwichunion.com e-wealth management service; HSBC and Merrill Lynch have also launched an e-wealth management service; Lloyds TSB is setting up a similar service, known as Create; both Abbey National and Halifax are developing more conventional (non-internet) wealth management practices; and Lazard Asset Management is putting a new emphasis on private banking with the establishment of Lazard Wealth Management International. In some cases, the new strategies involve investments costing hundreds of millions of pounds.

So far, though, it has looked like another financial fashion, with the same old products plus a few bells and whistles. It falls well short of the kind of holistic service, based not on products but on needs, that was described at the IBM June panel session by Rohitha Perera, head of the computer firm’s Wealth Management Financial Services practice. People accumulate wealth for a lot of different reasons, perhaps to follow more interesting pursuits, to retire early, to give security to their family or to educate their children. It may give power and celebrity or it may allow great acts of charity. But catering to this group’s needs means more than just financial investment and asset accumulation. It will frequently span the life cycle and include a high lifestyle component, says Mr Perera.

Strategies look weak

On those grounds, many of the latest generation of wealth management firms look likely to fail. In the words of a recent Datamonitor study, written by senior analyst Adam Hill: “As yet, few compelling new propositions have come to market and there has been more than a hint of ‘me too’ syndrome about strategies of many latecomers.” Mr Hill concludes: “A shakeout later this year in the e-wealth management space, similar to the one seen in late 2000 and early 2001 among the standalone e-banks would, therefore, seem inevitable.”

One of the most recently launched projects in this area is the joint venture between Merrill Lynch and HSBC, which are planning to invest $1 bn in the new investment management offshoot, The venture, expected to become profitable by 2004, is aimed at a particularly internet-savvy segment of the mass affluent. Alan Southall, head of business management at the new venture, Merrill Lynch HSBC, describes this segment as “self-directed”. The potential customers targeted by this venture are in the band that is one step down from the types of wealthy people that have traditionally obtained investment advice and transaction execution from a private bank, Mr Southall said at the IBM panel discussion.

He reckons there are 4m households in the UK alone with investable assets of [pound]350,000. By 2005, the number will have grown to 5m. Although only 300,000 are internet users, he expects to see internet penetration expand substantially. “More people are getting more self-confident’ about investing online, he says. The aim is to provide them with the kind of service that might have been provided, traditionally, by the private banks, only more cheaply.

Joint venture offers privileges

The key point for clients using the Merrill Lynch HSBC service is timely access to the high quality research produced by the two partner firms. These clients will get the same privileged access as the firms offer their other customers, says Mr Southall.

By integrating banking and investment products, the joint venture allows a customer to transact a share purchase without transferring money from an external account. And a client in the UK without a dollar account who wishes to buy shares in the US quickly, can do so. The foreign exchange aspect will be handled automatically.

Collateralised loans are provided against a client’s securities. Merrill Lynch HSBC, which started operating in the UK in April 2000 and now has similar operations in Australia and Canada, also provides a telephone service through a call centre and a face-to-face service through investment centres in London and Birmingham.

Even this set of options and functions looks more like the combining of services that already exist, particularly in the US, rather than a customised approach to wealth management. Mr Southall says Merrill Lynch HSBC will be expanding its menu. “You do not eat an elephant in one meal,” he says.

Mr Perera says: “Organisations getting into [the wealth management business] can not do everything at once. They have to prioritise. He is working with five or six financial firms — insurance companies, and investment, retail and private banks — including Merrill Lynch HSBC, to help establish their wealth management strategies, design the IT architecture and assist with the technical implementation of programmes. For example, IBM hosts the websites (looking after all the heavy equipment) for Merrill Lynch HSBC and configured the software for the call centre.

One apparent weakness in the Merrill Lynch HSBC model is that, logically, the faster the turnover of clients’ portfolios, the higher is the joint venture’s revenue. Yet, as Professor Stone said during the panel discussion, the more investors trade, the more likely they are to destroy wealth. “If you believe in ‘efficient markets’ theory, the best thing you can do is to make some good long-term choices and then leave these investments alone,” he says.

Serious contradiction

Although Mr Southall insisted that his firm was offering a comprehensive and evolving range of products, such criticisms do highlight a serious potential contradiction in the approach of most firms to wealth management.

Today, however, no companies are “really doing wealth management in the clinical sense of well being”, says Professor Stone. What kind of services would be included in a more needs-based approach to wealth management? The only existing example of a business concept that brings together advice, oversight and aggregation over a full range of financial assets and liabilities is what is known as the family office. Such offices were initially set up by very wealthy families ($100m upwards) but in some cases have been extended to provide other wealthy families with legal, tax and financial advice. In a few other cases, such offices have been replicated by banks to provide exclusive and very expensive support for the super-rich. Deutsche Bank provides such services, separate from its private banking activities (because the aim is to provide advice, not sell products). A few private boutiques do something similar. The sorts of services provided through the family office range from wealth and estate transfer planning, asset allocation and trusteeship to tax planning and charitable foundation administration; and from cashflow management and insurance coverage to property management and travel planning.

Such services may only be available to a relatively small number of people today, but Mr Perera, Prof Stone and others argue that it could be replicated for a wider group.

UBS package shows the way

One big financial firm has demonstrated the value of lifestyle management to banks, as users rather than as providers. In July, UBS, the big Swiss bank, announced that it intended to offer its 6,500 staff in Britain a bespoke package of services designed by Enviego, the fastest growing lifestyle management company in Europe. Enviego will help UBS staff to deal with the stresses of everyday life, from finding a childminder at short notice to securing an emergency plumber. The bank hopes this service will help employees to cut down on the amount of time they take away from work dealing with lifestyle management issues.

So-called concierge services are said to be one of the most attractive benefits offered by top US companies in attracting professional staff. Linking such services with financial advice would seem to be the logical next step.

Many banks may have identified the mass affluent as a potentially profitable market segment. Some have realised there is a big gap in the market between what these people want and what is on offer. Which firm will be most successful in filling that gap is going to take a little longer to emerge.

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