Wealth of GCC high net worth individuals set to grow to $3.8 trillion by 2012 despite tougher markets

In its report published today, The Future of Private Banking - A Wealth of Opportunity, Oliver Wyman has found that the bull run in stock markets and unprecedented wealth creation has driven a rapid 11% year-on-year growth in HNWI assets globally.

However, due to a tougher market environment, annual growth is expected to slow to 9% over the next five years.

Stefan Jaecklin, Partner and Head of the Wealth and Asset Management Practice at Oliver Wyman said:

'The combination of increased competition and more difficult market conditions has marked the beginning of a more challenging era for the global private banking industry. We expect growth rates to vary significantly by region, with the Middle East and Asia Pacific - except Japan - leading the pack. The strength of these emerging markets combined with the changing global environment will provide new opportunities for well-differentiated and increasingly global players to build a distinctive brand'.

Oliver Wyman's analysis shows that an estimated 16% of HNWI wealth globally
was held offshore in 2007 (for the Middle East, we estimate 52% of HNW+ money to be held offshore).. However, this is countered by a strong trend amongst the GCC's richest to repatriate wealth and invest in regional assets. For a market that was historically served offshore, players are now having to hire teams to service clients onshore, with many foreign wealth management firms also increasing their coverage of the Middle East.

The report also highlighted that international regulatory pressure on tax avoidance will continue to increase, with the share of tax-driven offshore banking set to decline in coming years. A sustained trend towards 'onshoring' of financial assets and tax-transparent offshore banking is likely to lead to a change in strategy both for private banks and for offshore centres themselves.

The scarcity of talent - skilled and experienced client relationship managers - is also a challenge in the Middle East, with dedicated on-the-ground coverage teams needed for billionaire families and top UHNWIs.

'In this region, the critical factor is no longer finding clients - millionaires are increasing quickly - but rather finding the skilled and experienced relationship managers to work in the market. A good client relationship manager is absolutely key for winning and retaining clients, especially in the Middle East which is highly relationship driven,' said Mr Jaecklin.

As the global market environment gets tougher, Oliver Wyman expects that some of the strategic decisions taken by private banks will come under increasing scrutiny.

Decisions relating to geographic footprint, the choice of distribution model and the choice of corporate structure will become much more important.

Within distribution models, Oliver Wyman has found that client relationships in the European onshore private banking model on average create three to four times more value for shareholders than those in the traditional US broker/dealer model.

Mr Jaecklin added: 'Wealth managers must develop a thorough understanding of their main value levers beyond just Assets under Management (AuM) Important areas for management attention include corporate structure, risk management systems, branding and positioning.'

Further report findings

- Focus on entrepreneurs - Oliver Wyman highlights the growing importance of entrepreneurs, as opposed to 'old money', in the client mix. Over half of the growth in the HNWI market has come from entrepreneurs, and this segment requires adjustments in the types of products and services offered. Private bankers will have to increase the cooperation between business units within their organisation, offering a more tailored service and investing in building relationships with the client. This is particularly relevant for the Middle East, where the majority of wealth is of entrepreneurial origin.

- Corporate structure - Many private banks and wealth managers operate under one roof with investment banking units. While synergies do exist in this business model, Oliver Wyman has found that they are often hard to come by in practice. More importantly, this set-up can expose private banks to significant reputational risk, as shown by recent market turmoil and write-downs.

- Risk management systems - As businesses become more complex, private banks need to take a fresh look at risk management. Current risk management strategies in banking are heavily geared towards solvency and liquidity-related issues. However, in private banking, the latter are often less significant than non-financial and reputational risks (e.g. data security, fraud etc.). These risks may not threaten the existence of a private bank, but they do endanger the franchise and might irrevocably destroy shareholder value.

- Brand - Private banks operate as much in the luxury market as in banking. Brand is instrumental in attracting and retaining the 'right' clients. Wealth managers therefore need to create a suitable message that can be conveyed via brand imagery as a key component in maintaining and growing the value of the business. 'Private banks need to manage their brands to differentiate themselves in this increasingly competitive marketplace,' said David Hensley, senior partner at Lippincott, part of the Oliver Wyman Group.