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® Wealth Management System Limited Welcome to.. Wealth Campus © Moving to Private Wealth Management Era November 6 , 2007 Topics Why Private Wealth Management Business ? What is the Global Market Size: Now and Future? Who is Who in the PWM Business ? What criteria for Target Selection ? How to tap the Target Market ? Recommended Book Why Private Wealth Management Business ? Y 1993 Private Bank result : Net Revenue US$ 235 MM Growth 40% ROE 38% Return on Economic capital = 52% PBG : TOMORROW’S NEW BACKBONE INDUSTRY Why Private Wealth Management Business ? Citigroup : Private Bank offers the highest ROIC Private Bank (1) 75% Smith Barney 58 46 Transaction Services 29 Cards 24 Capital Markets and Banking Consumer Finance 22 Post-tax return on invested capital, 2004 Retail Banking Asset Management (2) 18 11 (1) Private Bank ROIC excluding Private Bank Japan Discontinuation Charge of $ 244MM after tax. (2) Asset Management ROIC excluding Transfer Agent Settlement of $ 151MM after tax. Note : Does not include Life Insurance & Annuities and Proprietary Investment Activities. Source : Citigroup Why Private Wealth Management Business ? Wealth management profitability Wealth Management Business : Why not… 405%- 409% Percentage Risk adjusted return on capital 100%= 1318m* 360m 958m 10 4.8 Corporate 15.4 Small business 9.3 0.5% 27.6 5.3% 53.6 Mass market 26.0 29.6% 44.9 Affluent 33.2 21.7 Private 405% 21.1 409% 21.7 16.1 2.5 Net profit Cost of capital Value creation *Excluding other businesses Source : UniCredito Italiano investor presentation, 19 June 2001. Mean = 23% Why Private Wealth Management Business ? Wealth management ‘pure plays’ 24.8 Charles Schwab Raymond James AG Edwards 16.0 Retail Brokers 18.8 15.7 Other financial services plays Anglo Irish 16.1 Deutsche Postbank 15.5 EU Retail/ Corporate Banks Monte dei Paschi 15.4 14.1 Banco Popular Northern Trust 19.1 17.9 Julius Baer Vontobel Monte dei Paschi 17.6 16.5 Franklin Resources 21.3 Asset Managers Amvescap 17.4 17.3 Alliance Capital Man Group Wealth management average Source : UBS; IBES; author’s analysis. Investment Bank 14.1 Morgan Stanley 12.3 Goldman Sachs 12.2 Bear Steams 17.9 11.4 10.4 Universal Banks 17.2 11.1 JP Morgan Chase Credit Suisse 12.7 12.3 Merrill Lynch Lehman Brothers 17.4 Federate Investors 10.8 Private/Trust Bank 17.2 Mellon Financial 13.1 11.9 11.0 Citigroup 10.8 Deutsche Bank 10.7 Financial service price-earnings rations, 2005 Why Private Wealth Management Business ? Y 1993 Private Bank result : Net Revenue US$ 235 MM Growth 40% ROE 38% Return on Economic capital = 52% PBG : TOMORROW’S NEW BACKBONE INDUSTRY Beside the Most Profit Business Group,…….. WM : THE FASTEST GROWING SECTOR OF THE FINANCIAL SERVICE INDUSTRY What is the Global Market Size: Now and Future? Wealth Market Measurement Methodologies Mostly follow 2 steps 1) Estimate the Stock of Wealth 2) Estimate how that wealth is distributed across the adult population Estimate the Stock of Wealth : Private Saving Flow data or Private Investment Asset and GDP…adjust the book value with market value of equity / bond / real estate prices Estimate the wealth distribution : Using relevant official statistics….if no then..apply income distribution model as the proxy…Gini coefficient What is the Global Market Size: Now and Future? Niche Market but Big Purchasing Power : ¼ of GFS 136.0 2004, $ Trillion 40.9 30.8 14.3 Non-GB 14.9 Other G8* G8=$26.6 tn US 11.7 HNW Wealth Global Financial stock Global GDP *Japan, Germany, UK, France, Italy, Canada, Russia HWN wealth is larger than Annual G8’s GDP Global Financial Stock = Bank Deposits + Fixed Income + Equities Securities Market Source : Capgemini/Merrill Lynch; IMF; McKinsey Global Institute. What is the Global Market Size: Now and Future? HNW wealth estimation & comparison by Region Japan HNW is estimated at Usd 5.1 Trillion Capgemini/ Merrill Lynch ROW* Asia-Pacific Europe N. America TOTAL Difference BCG 5.4 3.8 1.6 Japan** 7.2 2.2 8.9 5.1 5.1 7.3 - 0.1 3.5 5.4 9.3 10.2 -0.9 6.3 30.8 24.5 *Latin America, Middle East and Africa **Not disclosed; estimate takes BCG’s $4.5 trillion estimate for 2003 (as published in the Economist, 10 June 2004), and assumes growth in line with that of non-Japan Asia Source : Capgemini/Merrill Lynch; Boston Consulting Group; The Economist; author’s calcutions. What is the Global Market Size: Now and Future? Asset allocation of HNWIs 100% 100% 100% 10% 13% 14% Alternative Investments* 17% 13% Real Estate** 10% 12% Cash / Deposits 25% 27% Fixed Income 35% 34% Equities 2003 2004 15% 25% 30% 20% 2002 * Includes structured products, hedge funds, managed fund, foreign currency, commodities (including precious metals), private equity and investments of passion (fine art and collactables). ** Includes direct real estate investments and REITs, which are not common instruments outside the United States. Source : Capgemini/Merrill Lynch, ‘Relationship Manager Surveys’, March 2003, April 2004, April 2005; ‘World Wealth Report’ 2005. What is the Global Market Size: Now and Future? Growth in HNW wealth by region 2003-2004 28.9 Middle East Oil makes More HWN in Middle East 1.5 17.3 Africa 4.9 10.2 N. America 6.7 8.5 Asia-Pacific 8.8 7.9 Latin America 5.8 3.7 Europe 7.7 8.2 TOTAL 7.1 Economic Growth and Asset Price are the key driver Source : Capgemini/Merrill Lynch ‘World Wealth Report’ (various years); author’s analysis. 1997-2004 What is the Global Market Size: Now and Future? N.America and Europe = 59% (5.3 Million People) 100% =$74 trillion-$93 trillion >$100m Africa >$20m-$100m Middle East 5.2 5.2 5.6 17.3 >$5-20m Latin America $30.8 tn 8.3 m 0.7 1.0 3.7 0.1 0.3 0.3 Asia-Pacific 7.2 Europe 8.9 >$1-$5m 66.7 $100m-$1m Avg wealth Per HNWI 3.7 $m Source : Boston Consulting Group : Capgemini/Merrill Lynch; author’s calculations 3.3 12.3 2.3 3.1m 2.6 9.3 2.7 HNW wealth ($ tn) No.of HNWIs (m) N.America AP has 2.3 Million Millionaires with Average USD 3.1 M 7.0 3.4 3.4 What is the Global Market Size: Now and Future? Wealth Held Offshore from Given Region 75 Africa 70 Middle East 65 E.Europe 55 Latin America 30 Asia excl. Japan W.Europe 25 Japan 3 N.America 3 *Weighted by wealth In Western Europe primarily driven by global tax initiatives Global average* = 23% Source : Boston Consulting Group; Julius Baer; author’s client work. What is the Global Market Size: Now and Future? Offshore needs Strong Brand / Onshore emphasis on Local Presence 70 Trustworthy and reliable Brand/ reputation Caring/ attentive Professional Offshore Confidentiality Accessible/ conveniently located branches Forward looking Innovative 35 Helpful Performance Proactive Sincere/honest Keep promise Approachable/ Easy to deal with Flexible Consistent Transparent 0 0 Relationships Easy to use 35 70 Onshore Wealth management attributes Source : McKinsey & Company, ‘Annual Investment and Wealth Management CEO Conference, 2005 What is the Global Market Size: Now and Future? Growth in offshore private banking assets-Singapore’s ascendancy What do you believe will be the most important offshore centers in terms of growth of private banking assets in two years’ time? Offshore centers in 2005 Rank Offshore centers in 2007 E Switzerland 1 Singapore Singapore 2 Switzerland Hong Kong 3 Hong Kong UK 4 UK Luxembourg 5 Luxembourg Cayman Islands 6 Cayman Islands Bahamas 7 Bahamas Offshore centers in 2007 : Singapore rank # 1 ? Source : IBM Consulting Service (2005). What is the Global Market Size: Now and Future? HNWI financial wealth forecast by region, 2004-2009E (US$ trillions) 0.9 1.5 5.0 0.7 1.0 0.6 0.8 0.6 0.8 10.1 3.7 3.4 3.6 7.2 6.6 5.9 7.4 13.9 8.5 9.3 8.4 8.6 8.9 2002 2003 2004 Source : Capgemini/Merrill Lynch World Wealth Report 2005. 10.7 2009E Annual Growth Rate 2004-2009E Global…………...…………. Africa…………………………. Middle East………………….. Latin America……………….. Asia-Pacific………………….. N.America…………..……….. Europe……………………….. 6.5% 5.6% 9.1% 6.4% 6.9% 8.4% 3.8% What is the Global Market Size: Now and Future? Overtaking the G6: when BRICs’ GDP would exceed G6 UK Germany US Japan China Italy France Germany Japan India Italy France Germany Russia Italy France Germany Brazil G6 BRICs’ *Cars indicate when BRICs’ US$GDP exceeds US$GDP in the G6 2000 2005 2010 2015 2020 Source : Goldman Sachs (2003). 2025 2030 2035 2040 2045 2050 2055 BRIC’s : The next big 4 in WM Market What is the Global Market Size: Now and Future? The largest economies in 2050 China US India Japan Brazil Russia UK Gremany France Italy GDP (2300, US$ trillions) 0 Source : Goldman Sachs (2003). 5 10 15 20 25 30 35 40 45 50 What is the Global Market Size: Now and Future? Who is Who in the PWM Business ? High (advice, Banking, etc) Wealth management competitor landscape • EFG International • Bordier Private Banks • Julius Baer • Pictet • MLP • Banca Fideuram • Coutts • C Hoare & Co Trust Institutions/Custodians • Northern Trust • Atlantic Trust • Wilmington Trust • Fiduciary Trust • Global Wealth Management • Fleming Family & Partners • Rockefeller • Bessemer Trust • Stanhope Capital • BNP • ABN Amro • HSBC • Citigroup • Bank of America • Deutsche • Bank of New York • Mellon Financial Family Offices Retail/ Universal Banks • UBS • Credit Suisse • Vontobel • Sarasin Advisers & Access Providers • UK IFAs • 21i.net Investment Banks Stockbroders • Cortal • E*TRADE • Consors • Charles Schwab • JP Morgan • Goldman Sachs • Lehman Brothers/ Neuberger Berman • Lazard • Rothschild • Morgan Stanley • Merrill Lynch Direct Banks • ING Direct • Egg • DAB • Fidelity • Old mutual • BGI • Schroders • Sanford Bernstein • AMVESCAP Product Specialists Low (Products/ Transaction) • Man Investments • GAM • Permal • Blackstone • Apax partners • 3i Affluent Source : Author’s analysis. Asset Managers HNW Client segment UHNW Who is Who in the PWM Business ? Top Ten got 14% even Top 20 got only less 20% Global market share of top 10 players, end 2004 Percent 80 UBS 2.9 AUM 878 Billions Merrill Lynch 68 Citigroup 36 33 14 M&A Fixed Income 2.4 Credit Suisse 58 Credit Cards* 2.6 Global Banks** * US market only ** Top 15, based on market capitalisation † Includes US Trust Asset Mgmt. 1.6 Charles Schwab† 1.0 Wachovia 1.0 Bank of America Private Bank 0.7 Fidelity 0.7 JP Morgan Private Bank 0.6 HSBC 0.6 Wealth Mgmt. Wealth management industry fragmentation Source : Mercer Oliver Wyman; Bloomberg; Global Investor; Deutsche Bank; Datastream; Barron’s; Wealth Partnership Review; Datamonitor; Scorpio Partnership; company data; author’s analysis. What Criteria for Target Market Selection ? Client Integrated client-facing team Capital Markets Specialist Private Banker 6% Revenue Trust and Estate Planner Brokerage Credit Capital Markets Investments Banking Foreign Exchange Investment Counselor Invest. Finance Specialist Trust and Estate Planner Risk Management Original Model : Team-Based Total # Bankers : 532 Private Bankers Revenue per Banker : $3.8 million p.a. Banker Support Ratio : 7:1 Compensation Model : Base + Bonus Banker Compensation : 6% Revenue Net Income Margin : 28% # of Clients : ~ 25,000 # of Clients per Banker : 47 Avg. Relationship Size : ~$7.1 million Avg. Rev. per HNW Client : ~$70,600 p.a. Insurance Real Estate Family Advisory Art Advisory Citigroup Private Bank service model and key metrics Source : Citigroup (2004) What Criteria for Target Market Selection ? Sources of prospective clients Existing clients Marketing & Promotion Advertising Cold calling PR Event sponsorship Worksite marketing Seminars Referring friends Referring family Referring work colleagues Poaching staff from the competition Offering services to the group’s own wealthy staff Prospective customers External growth Acquisitions Alliances Staff Intermediaries Financial Advisors External asset managers Lawyers Accountants “Ambassadors” Source : Datamonitor(2002), ‘Clients Acquisition in Wealth Management Survey’, September 2002. Internal referrals Other wealth mgt units Retail banking Investment banking Corporate banking Stockbroking What Criteria for Target Market Selection ? EXAMPLES OF DIFFERENT ENTRY CRITERIA APPLIED BY PROVATE BANKS Example 1 • Minimum account size USD 1 m Example 2 • USD 5 m + of bankable assets Source : Presentation by Peter Wuffli, CEO, UBS, at Morgan Stanley European Banks conference, 22 March 2006, page 8. Estimate excludes real estate, private business interests, insurance and other illiquid assets. What Criteria for Target Market Selection ? Client bands Ultra high Net worth >$50 Million Percentage of respondents expecting increase in 3 years Percentage of asset under management 19% 47% Very HNW $5m - $50m 30% 69% High net worth $500,000 - $5m 32% Affluent $100,000 - $500,000 The Wealth management pyramid Source : Pricewaterhouse Coopers (2005), ‘Global Wealth Management Survery’. 19% 49% 23% How to Tap Target Market ? Polarisation of the asset management industry Projected Market Growth : 2004-2006e Index funds 3.2 Above average Structured Products 0.5 ETF 0.2 Real estate 1.1 Market Tracking A B Hedge Fund 0.8 Quantitative products 0.4 Traditional products C Private Equity 0.6 Innovative products Money Market 4.3 Below average Active equities 11.6 Active bonds 12.3 10 20 30 Source : National statistics; BCG analysis 40 50 2003 Size ($x trillion) 100 200 Revenue margin (bp) How to tap the Target Market ? Clients’ reasons for choosing their wealth manager Quality of client service Confidentiality and security Quality of investment advice Image and reputation Referrals from existing clients Investment performance Pricing of Product and service Breadth of product range Access to other specialist service Extent of geographical Family history Referrals from business introducers 83% 75% 67% 64% 56% 50% 47% 44% 28% 28% 19% 19% Ranking of preferences according to level of importance Source : IBM Consulting Services, European Wealth and Private Banking Industry Survey 2005. How to tap the Target Market ? Client acquisition at UBS 2% Follow new client advisor 3% External communications initiative 3% Other channels 6% Relationship with UBS employee 7% Through non-client referral 8% Through rep office or other unit/ division 37% Recommendation from existing client 12% Client’s own initiative 22% Through external asset manager Source : Mercer Oliver Wyman (2005) How to tap the Target Market ? 79% of European Private Wealth Clients use less than 2 Private Banks… ..only 3% use more than 4 Private Banks 40% 39% Number of Private Bank Used by 1 Client 18% 3% 1 2 3 >4 Number of providers used Source : IBM Consulting Services, European Wealth and Private Banking Industry Survey 2005. How to tap the Target Market ? Trust is more and more challenged Investors indicating issue a “big problem”* 2004 Percent 69 Industry motivated by greed 1999 42 64 Firms putting their own interests ahead of Investors’ 37 Industry’s reluctance to punish wrongdoers 64 34 59 Lack of internal controls to prevent Wrongful actions 28 53 Insider trading 31 46 Insufficient disclosures of risks to investors 27 40 Account churning 16 Insufficient disclosure of fees to investors 39 n/a 37 Transaction fees/commissions too high 27 *Aided basis Source : US Securities Industry Association annual investor survey, November 2004 Clients’ ‘big problems’ How to tap the Target Market ? Clients’ reasons for leaving their wealth manager 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Dissatisfaction with service Poor investment advice Poor investment performance Pricing of products and services Lack of good investment offer Decline of the bank's image Poor product and services offering Poor quality reporting Mergers Following key staff Changes in legislation Generational transfer Death * Sum of percentage of respondents with ‘strongly agree’ and agree responses. Source : Clients’ reasons for leaving their wealth manager* How to tap the Target Market ? Open architecture waves – where we’re at and where we’re going To Higher Value Added Services once the OA ready Spread Emerging Waves 1 : Multi-Managers Focus on distribution and packaging and offering best-ofbreed products through multi-manager solutions E.g. Manager-pickers like Frank Russell Emerging Waves 2 : True partnerships Open, full scope architecture with just 1-2 partners Embedded and partner AM treated equally or as defined product suite E.g. Vanguard/Wellington: Unicredito/Pioneer Wave 2 : Niche gap-fillers Very limited OA where embedded AM does not have product offering Largely failed due to narrowness of scope E.g. Invesco, Deutsche Emerging Waves 3 : True partnerships Streamlined Internal capabilities, with lowcost sub-advised product in-fill White label arrangements retain house brand E.g. Clariden’s sector funds, Friends Nory & Slme Wave 1 : Fund supermarkets Largely failed due to bewildering choice and reliance on direct distribution E.g. Ample/I II, Skandia Time Today Source : Mercer Oliver Wyman (2005). How to tap the Target Market ? Transformation of wealth management To From Products sale force Trusted wealth advisor Secrecy and asset preservation Value added solutions Proprietary products Open architecture Investments focus Full client balance sheet Stocks and bonds Alternatives, derivatives, etc Transactional pricing Annuity pricing Off-shore dominant On-shore dominant Fragmented Consolidated Research as generic service Research driving investment insights Research paid explicitly Research paid through trading execution Source : Presentation by Todd S. Thomson, Chairman and Chief Executive Officer, Citigroup Global Wealth management, UBS Asset Gathering Conference, 31 March 2005.