The financial crisis has provided domestic firms in developing markets with a competitive advantage as prospective clients increasingly turn to them to manage their wealth.

The financial crisis has provided domestic firms in developing markets with a competitive advantage as prospective clients increasingly turn to them to manage their wealth.

However, those global firms that take time to understand new markets and invest sufficiently in the right areas will find their patience rewarded, say industry experts.

“Local firms and those with global regional franchises have traction. These firms are succeeding in emerging markets vis-à-vis those that only ‘suitcase’ visit the market or have a limited local presence,” said Sebastian Dovey, managing partner at wealth management consultancy Scorpio Partnership. He said the ‘back to basics’ product set of cash and treasuries offered by regional and local firms is also suited to the current environment with cash and credit still the focus for most clients.

“Strictly speaking, clients are looking for plain vanilla products. While there is an inevitable drive back to value and equity investments in both emerging and developed markets, clients are still looking for low volatility and asset protection,” Mr Dovey said.

Global consultancy Capgemini has also observed a retrenchment to the familiar with clients increasingly using local and regional firms and favouring those with very strong reputations. “With the financial industry buckling at the knees, clients are thinking 'Whom do you trust?,' said Ileana van der Linde, a principal at Capgemini Financial Services, speaking to WealthBriefing recently. Capgemini’s 2009 World Wealth report with Merrill Lynch was published last week.

There is speculation that the feeling among clients that some international banks may not be delivering value relative to their charges may encourage domestic banks to upgrade their wealth solutions.

“It’s now a more equal competition,” said Mr Dovey. “Domestic banks in Asia and Latin America are now increasingly able to punch at the same weight class as global banks in their local, domestic market. This is particularly the case in the upper retail sector and entry level private banking.”

The financial crisis has also had an unprecedented impact on regulation; a recent warning by the Brazilian Central Bank that foreign banks should dispose of their representative offices in the country has created further uncertainty in that part of the world. Many global firms are waiting for further clarity before commencing their expansion plans. The crisis has also spawned a flurry of lawsuits as disgruntled clients seek recompense for losses.

Gerard Aquilina, vice chairman, Barclays Wealth, says barriers to entry in new markets, including banking laws, regulatory issues and red tape, are “serious hindrances” which can make an otherwise attractive market become much less so.

“The ease of operating an international banking model is also an important factor to consider,” he recently told WealthBriefing.

“A major hurdle to expansion is regulatory,” said James Lawson, from Ledbury Research, a firm specialising in the high net worth sector. “Despite this, some developing markets, such as India, are more hospitable than developed areas, notably Japan.”

A shortage of talent in developing markets has been a significant inhibiting factor preventing some firms from expanding as quickly as they would like. However, the global recession has had the effect of loosening the recruitment market in some key regions.

PricewaterhouseCoopers’ biennial Global Private Banking and Wealth Management survey published earlier this week found that demand for CRMs is expected to fall by 24 per cent over the next two years, in stark contrast to 2007 when demand for CRM’s was expected to grow by 32 per cent. In EMEA and Asia Pacific falls of 45 per cent and 17 per cent respectively are anticipated.

“When it comes to entering a new market, attaining critical mass is a key determinant to being able to provide outstanding service to clients and achieving it profitably,” said Barclays Wealth’s Mr Aquilina. “In this 'talent war' and in the current environment, it is definitively an advantage to be part of a strong, well capitalised, independent and fast-growing universal bank,” he said.

There are still huge opportunities for international firms to enter new markets as long as they do so in the right way. PwC said while acquisitions are high up the growth agenda of two-thirds of CEOs, these are focused domestically. Very few envisage acquisitions across borders, preferring to probe new markets by sending CRMs on visits.

“In the new era of tightened regulations, the fly in/fly out model increasingly appears questionable,” said Natasha McMillan, director, PwC at the launch of its survey.

On the ground
International banks that have invested in being on the ground and building an onshore presence are reaping the rewards post the financial crisis.

“Those that can also reach into the SME market are more successful in retaining clients and to some degree attracting new ones in current market conditions,” according to Scorpio’s Mr Dovey, citing HSBC, Standard Chartered, Citi and BNP Paribas as particular examples in Asia. “Santander is an operator to watch in Latin America with a similar agenda.”

“Global firms are still seeing some growth as clients move away from independent firms that do not always have the same risk management and due diligence capabilities of their larger counterparts,” said Capgemini’s Ms van der Linde, who also notes that wealthy individuals are increasing the number of firms with which they do business.

Scorpio has noted a change in attitude by global firms towards the costs, the tools required and expectations around time to profitability when entering new markets. Where there was once an expectation by some firms that they could just turn up and in two years enter the black, now more firms realise that in mature developing markets, a five-seven year time horizon from entry to profitability is more realistic.

"The immaturity of the go-go years is now behind us. It is a time for prudent and rational market entry based on strong market insight and forecasting,” said Scorpio’s Mr Dovey. He adds that the time a firm takes to make a profit can be accelerated with better brand marketing and slowed by “a total reliance on buying a salesforce who have their own books as there is ultimately no ownership for the institution”.

“Firms are starting to understand the importance of the clients’ contribution to the vision of the corporate. What better way than to have the clients directly tell you what they would like and then you can decide if it is worth offering it,” he said. Historically, the industry has built the product first and then found a market, but now this approach is being reversed.

Fluent with brands
In regions such as India and China, younger generations are more fluent with international brands than their parents. “As a result, these brands frequently have a greater cachet with this upcoming generation,” said  Ledbury’s Mr Lawson. “However, the majority of wealth is still held by their parents, who are a tougher audience to communicate to,” he said.

Scorpio still sees a strong demand for onshore and international banking capabilities and regards truly international offerings as big business. A client based in Hong Kong with a business in New York, will need a firm like Standard Chartered, SocGen, BNP or Citi with a footprint on the ground in more than one continent and the ability to link up.

However, a local wealthy client without international interests may find their needs met by a local firm. “Critically, the commercial glue across multiple centres is increasingly likely to include banking, credit and possibly corporate banking access," said Mr Dovey.

“It’s not over for global firms and those firms that have been less in the press and not associated with the credit crisis have even gained assets. Investors are savvier than you give them credit for and know whom they can trust,” said Capgemini’s Ms van der Linde.

According to Capgemini, clients still need the products that global firms offer, but are reaching out to local firms to look after their cash because of the comfort and safety they provide. However, as the comfort level shifts, the question is whether local and regional firms will have access to products HNW individuals need in the long term.