2010 will be a year of opportunity but with plenty of risks as dramatic changes occur within the wealth management industry and global economy. The wealth agenda will be driven by migration of wealth Eastwards, a changing environment for offshore financial centres, regulatory tightening, and continued mergers and acquisitions in the wake of the financial crisis.

2010 will be a year of opportunity but with plenty of risks and uncertainty, as dramatic changes occur within the wealth management industry and global economy.

The migration of wealth Eastwards, a changing environment for offshore financial centres, regulatory tightening, and continued mergers and acquisitions in the wake of the financial crisis will drive the wealth agenda for 2010.

Macro Environment

While wealth management can appear to be a sector able to shrug off economic gyrations compared with other financial businesses, it has not been immune to the financial turmoil of the past two years. Data from Merrill Lynch and Capgemini showed that the wealth of the world’s rich fell by 19.5 per cent in 2008 from the year before, while the population of this group fell by 14.9 per cent. Stock markets have rallied sharply since March 2009, so on the face of it, the assets of high net worth individuals should have recovered by roughly the same amount.

One issue of particular concern for wealth managers this year will be whether the huge amounts of fresh money pumped into the economy last year will translate into higher inflation, and hence higher interest rates. Investors are uncertain what to expect. Different interest rates and inflation scenarios require different portfolios, and markets will be sensitive to changes in confidence caused by governments’ and central banks’ actions.

The consensus among strategists and economists at private banks is for the US, UK and eurozone to continue stimulating monetary growth in the first quarter of the year.  But after that, expectations diverge.

Investec, for example, expects the Bank of England and the Federal Reserve to start tightening in the second quarter, while AXA Investment Managers expects this to be delayed until the fourth quarter for the BoE and as far out as 2011 for the Fed.

The outcome of this situation may be increased volatility and uncertainty around macro indicators, but the consensus view is firm: growth will come from emerging markets. The International Monetary Fund predicts the UK will grow by 0.9 per cent, US by 1.5 per cent, India by 6.4 per cent, China by 9.0 per cent, Russia by 1.5 per cent, and Brazil by 3.5 per cent.

Asia/Emerging Markets

Asian markets vary economically and politically, but “infinite” growth potential exists for locations with a large population such as China, India and even Vietnam, says Justin Ong, leader of the wealth management practice at PricewaterhouseCoopers, the global accountancy and consulting firm. Going into 2010, a portion of global wealth equal to that of Europe and the US will reside in Asia. It is therefore not surprising that wealth managers see the Asian region as a vital driver of future new business. Already, this publication has reported on a number of firms, such as Julius Baer and Standard Chartered, expanding their business reach in Asia.

“Wealth in Asian private banks is expected to grow by at least 29 per cent year-on-year in 2009 and 2010...We see a growing trend in high net worth individuals and UHNW individuals moving their base to Asia, especially those from Europe…due to tax developments in their home countries, whereas Asia, especially Singapore, now provides attractive benefits,” said Mr Ong.

India, Latin America and even Japan are likely to enter the frame as significant wealth players over 2010, says Graham Harvey, a director at Scorpio, the wealth management consultants. In India, for example, a flurry of Western private banks have set up shop, while in Brazil, firms such as Morgan Stanley and Goldman Sachs have deepened their footprint. Japan has traditionally been a tough market for non-domestic wealth managers to enter, but maybe the picture is changing: for example, Credit Suisse opened an office in Tokyo last May.

Offshore

The offshore world has had in some ways a difficult past 12 months, as debt-laden members of the Group of 20 major industrialized nations have targeted international financial centres such as Switzerland, Liechtenstein and the Cayman Islands in their increasingly desperate hunt for tax revenue.

“Offshore centers are in a very difficult war with the G20...However, the effect will be that offshore jurisdictions will no longer be able to build their business on tax avoidance, to compete they need to become very good at offering an excellent service to the wealthy,” said Bruce Weatherill, of Bruce Weatherill Executive Consulting, a firm specializing in the wealth management sector.

However, moves by the UK government, for example, to increase taxes on higher earners and tax bank bonuses are seen as helping drive some footloose cash to offshore centres.

While smaller island-jurisdictions struggle to survive, bigger offshore economies will seek to diversify their financial services-based proposition, consultants say. 

“Although legitimate tax structuring opportunities will still exist, many of the current jurisdictions will disappear because they just do not have the scale or resources to meet the increasingly stringent international operating expectations,” said Stephen Wall, another director at Scorpio.

“There will definitely be a need among smaller offshore centers for specialization to serve their immediate big centers of excellence, hubs like London, New York and Singapore…There will be only two, maybe three of these bigger centers per region,” he added.

The position of offshore centres, and the related issue of bank secrecy, came under a particularly fierce spotlight when UBS, under a US-Swiss government pact, agreed to hand over details of some client accounts to the US, signalling a historic breach of Swiss bank secrecy. We may see more attempts to erode this secrecy during 2010.

Merger and acquisition merry-go-round

According to Scorpio, the majority of assets will stay with big players; with cheaper technology being the main driver for new business starts.

The view as to what kind of business model will prove a winner this year is mixed, however. The case for boutiques may be stronger, says Jeremy Jensen, EMEA leader private banking and wealth management, at PwC. New, smaller firms can arguably offer closer client-relationships and can build their risk management and data management systems from scratch. 

“Client expectations have increased, the bar has been raised, and strong, transparent, risk management will be a differentiator in the marketplace, for example around due diligence on investment products,” said Mr Jensen.

On the other hand, small firms may struggle.

“Smaller firms will join together because their businesses won't survive the changing capital, regulatory and compliance requirements alone. Bigger firms will be more likely to take equity or hire large teams rather than undertake full acquisitions unless the deals are transformational or part of wider transactions,” said Mr Weatherill.

Many banks will continue to shed assets as a condition of having been bailed-out last year. In 2009, a number of M&A deals were struck, such as the disposal of Commerzbank’s non-German private bank businesses, as in the case of Kleinwort Benson, and the sale by Royal Bank of Scotland of some Asian assets.

“2010 will continue to be dominated by ‘legal’ moves, namely the government imposed  obligation of financial groups which received government aid to restructure and as a result are forced to make disposals of non-core activities like private banking and wealth management,” said Ray Soudah, of MillenniumAssociates.

Risk

Compliance will continue to weigh heavily on wealth mangers as they prepare for a stricter and more expensive regulatory environment in a post-crisis, post-Bernard Madoff world. 

“Madoff has upset a lot of people, and it laid bare a lot of old issues. There will now be more nervousness about open-architecture. There has been reputation damage to IFAs or Private Banks who endorsed these products and I think there will be a movement away from totally open architecture to a more 'guided architecture',” said Mr Weatherill.

Yet the overall cost of enhanced scrutiny and risk analysis is hard to measure. While many clients would not expect extra product due-diligence to inflate their management fee, there will be increased internal management.

“CEOs will be focusing on mis-selling risks, but a strong overall focus will be on internal processes, and HNWs asking about these. Everything within the private bank's processes should be client-centric and run in the interest of clients,” said PwC’s Mr Jensen.

Mr Jensen said transparency about how wealth managers do their job and deliver results will remain a crucial factor in how firms stand out from the competition.

Also, investors have turned wary towards complex products following the financial-crisis and subsequent mis-selling scandals and there will more pressure on financial advisors to deliver results.  

“The key words in product [development] for 2008/2009 were 'simplicity and transparency'. The key word for 2010 will be 'liquidity'…Some clients are still in need of liquidity so will not deploy assets into tied-in products. Others have cash and are willing to invest it in long-term projects for higher returns,” said Mr Harvey.

Wealth managers may be wary of making bullish forecasts for 2010 after all the turmoil over the past two years. But one thing is for sure, this sector will now have to prove all over again that it can grow clients’ wealth as well as protect it from whatever forces emerge over the next 12 months.