The Challenges Of The UHNW Market After The Crisis

Emma Rees Features Editor 8 December 2009

The Challenges Of The UHNW Market After The Crisis

Despite the kudos attached to providing services to the ultra wealthy, this is not necessarily the easiest or most lucrative segment to service.

Despite the kudos attached to providing services to the ultra wealthy, this is not necessarily the easiest or most lucrative segment to service. “For catch-all players, ultra high net worth and very high net worth individuals might add to a firm’s prestige but not necessarily to profitability,” said PricewaterhouseCoopers in its 2009 private banking survey, adding that wealth managers seeking to operate in these segments must have the scale, systems and product mix to do so profitably.

Dwindling numbers

Already, fierce competition at this level is being compounded by dwindling numbers of super-rich individuals being increasingly multi-banked for security reasons after the credit crisis. PwC found that the highest wealth segment is a very concentrated pool, representing 13 per cent of firms’ assets under management, with just 5 per cent of clients holding these assets. By contrast, the lowest two segments ($100,000 to $1 million) represent 60 per cent of the global client base and account for 39 per cent of AuM.

Always a relatively small group, the ranks of ultra-wealthy have fallen significantly during the global recession. Merrill Lynch and Capgemini’s World Wealth Report found that the numbers of those with wealth of more than $30m fell 25 per cent and their wealth by 24 per cent during 2008, pushing many into “mid-tier millionaire” category.

Scorpio Partnership, the consultancy, sees limited benefit in firms focusing solely on the ultra high net worth market as there were always few of these individuals even in the good times and they have become fewer still. Graham Harvey from Scorpio says that those whose wealth is in eight figures have always been multi-banked, retaining on average at least five relationships with different wealth management firms. “They are examining their current relationships even more carefully,” says Mr Harvey, although he does not see these individuals spreading their assets more thinly.

“There are less potential buyers in this space and more competitors. The ultra-wealthy are better at negotiating, which means that margins are thinner,” concluded Mr Harvey.

High net worth research firm Ledbury comments that UHNW individuals have always been hard to service, not least due to their high expectations and additional scrutiny. “This environment makes the situation ever harder,” said James Lawson. “Our Client Satisfaction Benchmark is showing declines in client satisfaction and advocacy across the major providers. The results also show that clients dramatically increased their service providers in 2009.”

Institutions with arms and legs

Whilst for many firms an UHNW offering is a prestige proposition, for other boutique operators like Fleming Family & Partners, Sandaire and Lord North Street it is their bread and butter. Fleming Family & Partners, for example, has a minimum assets threshold of £10 million and Goldman Sachs a £5 million threshold.

According to JPMorgan, which says that individuals with at least $10 million in investable assets can generally make the best use of its services, its ultra-wealthy clients have two things in common. First, they have more wealth than they will spend in a lifetime and their fortunes will outlive them, so they are concerned about ensuring that their wealth will meet the goals they set today several generations from now. Second, they are financially sophisticated individuals with complex needs, often tied to a family or to a business enterprise, and very often to both.

“They are 'institutions with arms and legs' – they have institution-size needs, but very personal issues,” said Pablo Garnica, head of JPMorgan’s private bank in the EMEA region. “Many are borrowing to finance their next idea, diversifying to preserve the wealth they created, and investing selectively in products to derive as much return as possible given their risk tolerance. They need to think very carefully about tax, and more often than not need access to investment-banking services.”

UHNW clients tend to have more complex needs and therefore they tend to need a much broader array of services. “These clients almost always lead international lives, and so their requirements are for investments, tax planning and trusts that take their multi-jurisdictional needs into account,” said Mr Cutts, head of advisory, British Isles, RBC Wealth Management. The firm’s clients are given a bespoke service with a dedicated team of specialists, but ultra-wealthy clients, because of their size, have access to other areas of the bank such as the capital markets. “UHNW clients also often deal through family offices, so it is crucial to have an offering and a team of relationship managers which can respond to the needs of these institutions."

Coutts believes that when dealing with the ultra-wealthy it is vital to acknowledge a client's uniqueness and sharply tailor any approach, advice, and the nature of the relationship to find where the client might feel most comfortable. “Time, patience, understanding, expertise and commitment are a necessity,” said Pauline Brown, head of business development, Coutts. “Trust, versatility, an advisor who can deliver one-stop solutions as well as aid short, medium and long term planning, are all important. Advisors who catch onto a client's own unique style quickly will often be more successful in developing that relationship.”

High costs of providing superlative service

UHNW clients demand a superior offering, so there is a focus for firms targeting this client segment to provide the very best service in order to be competitive. The cost of providing such an unparalleled level of service and advice is high. It requires highly experienced advisors with huge amounts of expertise, who need to be remunerated well.

“This, of course, may be a disadvantage at this time in the market when firms are trying to reduce costs. But to address this and leverage the high costs involved, firms are actually trying to target the end clients directly with client facing applications, even for the UHNW market,” says Isabel Fonseca, senior analyst, Celent. She says that whilst the advisor will not disappear, this additional service will provide extra “stickiness” for clients. “They will be able to monitor their holdings and activity on their own through the internet, and some firms are even allowing some basic transactions to be conducted by them directly.”

This is a trend that financial research firm Tulip has also observed, saying that wealth management should be more aware of the threat to their business from DIY investors. “Ultras are becoming more and more self-directed when it comes to investment decision making, and increasingly making use of the web,” said John Clemens. He points out that as it takes time to acquire wealth for most people, a high proportion of the wealthy are 60 plus, but even they are looking to the internet for financial data and for financial services, from buying shares to advice.

However, whilst harnessing an increasing desire by the ultra-wealthy to be self-directed may be one thing, splitting fewer CRMs between a greater number of clients does not appear to be a solution for profitability at this level. PwC found that those firms servicing the uber-wealthy with $50 million or more allocate one relationship manager per 18 clients on average. However, the most profitable firms, as measured in terms of lowest cost income ratio, have a client CRM client ratio of 2 to 1. 

“The most profitable wealth managers have significantly lower ratios of clients per CRM in the different client segments which shows that taking care of the client really does provide its own rewards,” said PwC.

Actively marketing to the super-rich rather than relying on gaining clients by referrals is one way that firms may gain critical mass in this space. Tulip’s Mr Clemens notes that whilst increasing numbers are multi-banked, this is frequently with retail banks that offer more flexible cash returns than their wealth counterparts. He believes more active encouragement and incentives for the ultra-wealthy to switch banks might be the key.

“For those firms with total wealth management offerings, now is the time to promote themselves. The ultras are wondering how to reinvest and looking for new opportunities and are in many cases open to new thinking and to change,” Mr Clemens concluded. “The ultra-wealthy need to be wooed and firms cannot just wait for them to come knocking.”

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