Penetration of private banking and wealth management into the high net worth sector remains stubbornly at less than 30 per cent, according to the latest review of the UK high net worth (£250,000 or $500,000 in free investable assets) and affluent (£100,000 or more) markets which has just been released by MDRC consultancy. It offers an extraordinarily detailed and penetrating analysis of the key issues driving the changes in market characteristics, changes in market dynamics, behavioural segmentation and key issues for the broader wealth management community. This year there is also an assessment of the HNW sectors in the other countries of the EU, to give context to the size and growth of the UK HNW sector. The 2007 scenarios suggest that the UK’s HNW sector is set for three or four years of growth at well above the growth rate in the UK economy as a whole. However, this will not automatically translate into greater take up of the current set of products and services offered to the HNW sector. The products and services on offer from private banks and private client wealth managers still fail to attract most of the target market. The majority of the UK’s HNW individuals seek financial advice from professional advisors, particularly IFAs. The survey found that the UK HNW market increased by 11.7 per cent in 2006 and growth in 2007 will be in the range of 8.5 per cent to 10.5 per cent. And in the twelve months to January 2007 there were some 137,000 new HNW individuals, but 69,000 of the existing HNW group dropped out of the segment. The balance of clients’ needs is likely to change from wealth protection to lifestyle protection. Firms that are able to offer flexible products will gain a competitive edge. Pension products are likely to gain in importance, says MDRC. At the start of 2007 there were over 2.2 million affluent individuals in the UK and 660,000 HNW individuals; 124,000 individuals had more than £1 million in free assets. More HNW individuals are seeking improved investment performance and are questioning the value derived at many wealth managers. Ad valorem charges are increasingly unpopular. In the £1 million plus segment, the headline net growth in the market was around a third, but this was achieved by a doubling in new millionaires and a fifteen per cent fall in the existing millionaire population. In 2006, nearly 6 per cent of millionaires and 3.5 per cent of HNW individuals consumed enough of their free assets to push them out of their wealth category. There is evidence of growing consumption of financial assets in HNW sectors in France and Italy, but not in Germany. One of the structural changes identified in the UK is the increase in the number of high earners who are accumulating sufficient investable wealth to be HNW. In 2006 over 37 per cent of new millionaires were high earners, displacing entrepreneurs as the largest source of new £1 million plus portfolios. They typically dislike paying ad valorem commissions, preferring to pay fees for financial advice. The price structure of many wealth management services is a significant barrier to high earners who naturally compare the services on offer to the advice-driven model of IFAs. Although the concept of “private banking” has an undoubted appeal, current private banking and wealth management offers fail to interest most HNW individuals. MDRC research suggests that all UK wealth management businesses face increasing operating costs with staff costs, IT costs and the costs of regulation all rising well above inflation. The potential reduction in margins and profitability will force many firms, particularly the smaller, to reappraise their competitive strategy. Fortunately, for many firms the degree of change required to become a strong competitor will be evolutionary, not radical. A challenge for all wealth managers and private banks is to project a distinct brand when the “brand values” they wish to articulate are virtually interchangeable with those of other firms. A study in 2005 showed that professional advisors were frequently unable to distinguish one wealth management firm from another. At a fundamental level a brand is an implicit promise or contract with those who engage with the business. The full report is available price £175 from Market-Dynamics Research & Consulting Ltd, Abbey House, Wellington Way, Weybridge, Surrey KT13 0TT, UK. Tel: +44 (0)1932 268475, email: research@mdrc-uk.com, website: www.mdrc-uk.com.