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Searching for Profitable Growth

GLOBAL WEALTH 2005

BCG REPORT

Since its founding in 1963, The Boston Consulting Group has focusedon helping clients achieve competitive advantage. Our firm believes thatbest practices or benchmarks are rarely enough to create lasting valueand that positive change requires new insight into economics, markets,and organizational dynamics. We consider every assignment a unique setof opportunities and constraints for which no standard solution will beadequate. BCG has 59 offices in 36 countries and serves companies inall industries and markets. For further information, please visit our Website at www.bcg.com.

Searching for Profitable Growth

GLOBAL WEALTH 2005

VICTOR AERNI

CHRISTIAN DE JUNIAC

ANDREW DYER

BRUCE M. HOLLEY

S E P T E M B E R 2 0 0 5

www.bcg.com

© The Boston Consulting Group, Inc. 2005. All rights reserved.

For information or permission to reprint, please contact BCG at:E-mail: [email protected]: +1 617 973 1339, attention BCG/PermissionsMail: BCG/Permissions

The Boston Consulting Group, Inc.Exchange PlaceBoston, MA 02109USA

2 BCG REPORT2

3Searching for Profitable Growth

Table of Contents

Note to the Reader 4

Acknowledgments 5

Preface 6

Summary of Key Findings 7

Global Market Sizing: Returning to Solid Growth 9

Regional Differences 10

Attractive New Markets 13

Client Discovery: Addressing Clients’ Needs and Enhancing the Client Experience 16

Enhanced Performance and Security 16

Integrated Wealth Solutions 16

Sound Professional Advice 16

Active Participation in Investment Decisions 16

Business Models: Finding the Right Focus 17

Global Players 17

Medium to Large Players 17

Small Players 18

Key Levers: Achieving Wealth Management Excellence 19

Overall Levers 19

Pricing 19

Small-Client Management 20

Retention Management 21

Relationship Manager Performance 21

Perfecting the Client Experience 23

Appendix: Market-Sizing Methodology 24

Note to the Reader

4 BCG REPORT

The focus of this year’s report is twofold: first, to present the development of global wealth markets in 2004;and second, to review key levers for growth in the wealth management business. We distinguish among threedifferent segments of investors: mass affluent investors, or those with assets under management (AuM) of$100,000 to $1 million; emerging wealthy investors, or those with AuM of $1 million to $5 million; and estab-lished wealthy investors, or those with AuM of more than $5 million. For the purposes of this report, investorswith AuM below $100,000 are considered nonwealthy.

We have based the report on three main sources. First, we built our own global market-sizing model to estimatethe extent of major wealth markets by country and by wealth segment. Second, we conducted an extensive quan-titative and qualitative survey of roughly 100 leading wealth managers worldwide. Third, we drew insights fromwealth managers’ best practices and from our in-depth project work for wealth managers and private bankers.

The results of the quantitative benchmarking of leading wealth managers will be published separately. It hasbecome clear throughout our research that a detailed understanding of clients’ needs is a critical issue forgrowth and retention in the industry. We are therefore planning to focus our 2006 survey on the needs and ser-vice experiences of wealth management clients. We invite interested institutions to contact us at [email protected].

If you would like to discuss your wealth-management business with The Boston Consulting Group, pleasecontact one of the following leaders of BCG’s global Financial Services practice:

The Americas

Bruce M. HolleyBCG New York+1 212 446 [email protected]

Jorge BecerraBCG Miami+1 786 497 [email protected]

Willie BurnsideBCG Los Angeles+1 213 621 [email protected]

John GarabedianBCG Chicago+1 312 993 [email protected]

Paul OrlanderBCG Toronto+1 416 955 [email protected]

Craig RiceBCG New York+1 212 446 [email protected]

Europe

Christian de JuniacBCG London+44 20 7753 5353 [email protected]

Victor AerniBCG Zürich+41 44 388 86 [email protected]

Stefan DabBCG Brussels+32 2 289 02 02 [email protected]

Ludger Kübel-SorgerBCG Frankfurt+49 69 9 15 02 [email protected]

Huib KurstjensBCG Amsterdam +31 35 548 6800 [email protected]

Andy MaguireBCG London+44 20 7753 [email protected]

Philippe MorelBCG Paris+33 1 40 17 10 [email protected]

Asia-Pacific

Andrew DyerBCG Sydney+61 2 9323 [email protected]

Giles BrennandBCG Hong Kong +852 2506 2111 [email protected]

Steven ChaiBCG Seoul+822 399 [email protected]

Julian DurantBCG Bangkok+66 2 667 [email protected]

Roman ScottBCG Singapore +65 6429 2500 [email protected]

Janmejaya SinhaBCG Mumbai+91 22 2283 [email protected]

Acknowledgments


We would like to thank all the institutions that participated in this year’s global benchmarking survey andthereby enriched the insights in this report. We also acknowledge the following people for their support dur-ing the preparation of this report: Thomas Buberl, Valeria Bruno, Philip Crawford, Alex Michel, FedericoMuxi, and Andrea Walbaum.

Several Financial Services practice leaders provided analysis, advice, and useful insights—namely JorgeBecerra, Craig Rice, Roman Scott, and Gustavo Wurzel.

Grateful thanks also to members of the editorial and production teams, including Katherine Andrews,Patricia Berrian, Gary Callahan, and Kim Friedman.

Victor AerniVice President and Director

Andrew DyerVice President and Director

Christian de JuniacSenior Vice President and Director

Bruce M. HolleyVice President and Director

Preface

6 BCG REPORT

Global wealth-management markets are in constantflux. Currently, revenues appear to be back on asteady growth track, competition is becoming moreand more global, new growth markets are emerg-ing, and the significance of offshore banking isdecreasing. These trends are changing the compet-itive landscape and thus influencing the ways inwhich wealth managers can best improve their busi-nesses and achieve profitable growth.

The Boston Consulting Group is committed toenhancing the understanding both of marketdynamics and of the levers available to wealth man-agement institutions in their battle to achieve sus-tainable competitive advantage. In this, the fifthedition of our Global Wealth report, we focus onfour main issues.

Global Market Sizing. We cover the historic and pro-jected level of AuM for 62 countries worldwide,including variations among wealth segments,changes in asset mix, and the resulting implicationsfor wealth managers’ revenues. We emphasizeregional differences among the North American,

European, Asian, and Latin American markets. Wehave also deepened last year’s insights into theIndian and Chinese markets, and highlighted Russiaas another key growth market.

Client Discovery. The product and service needs ofwealth management clients have evolved signifi-cantly—and have done so independently from mar-ket dynamics. We analyze these changes and theireffect on wealth management institutions.

Business Models. Market dynamics and changes inclients’ needs have forced wealth managers torevisit their business models. We discuss possiblechanges to traditional models as they relate to serv-ing different segments of the wealth managementmarket.

Key Levers. Creating wealth management excel-lence requires the optimal use of the key leversavailable to wealth managers. We share insights andbest practices gained from our client work in orderto determine the most important levers for creatingstrategic and sustainable competitive advantage.

Summary of Key Findings


Global wealth is back on a solid growth path. Aftera period of recovery from the losses of previousyears, global AuM should grow by roughly 4 percentannually, in U.S. dollar terms, from 2004 through2009. The specific dynamics of growth, however,will change significantly over the next few years.

• Growth in North America and Europe will comemainly from established wealthy investors, where-as in emerging countries it will come from emerg-ing wealthy investors.

• The share of equity assets globally has stabilizedat around 37 percent. Investors will likely focusmore on alternative investments to enhance per-formance.

• China, India, and Russia are currently the mostattractive growth markets. Although still small,these markets offer the highest potential becausetheir onshore investment climates are improvingsignificantly.

• European offshore wealth will slowly decrease as international transparency and cross-bordertaxation of investment income continue toincrease.

As markets have rebounded, investors havechanged their needs and attitudes. Greater aware-ness of financial matters and a desire for higherreturns will require wealth managers to changetheir traditional approach to client service.

• Clients are searching for a combination ofenhanced investment performance and security.Their asset mixes are changing as conventionalportfolios are combined more frequently withalternative investments.

• Increased regulatory complexity and uncertaintyabout pensions require integrated and long-termwealth solutions.

• Higher fees relative to investment returns havemade clients more aware of getting value for theirmoney. Clients are demanding greater trans-parency on pricing and more value-addedservices.

• Clients across all regions, being more financiallyaware, are demanding a higher degree of partici-pation in investment decisions.

The changes in market dynamics and clients’ needshave challenged traditional wealth-managementbusiness models.

• The trend to move onshore will increase trans-parency.

• Increasing client awareness and a lack of consoli-dation have put significant pressure on prices andmargins.

• Wealth managers in mature European and NorthAmerican markets need to focus on retainingclients. Substantial growth in the emergingwealthy segment will occur only in nascent Asian,Eastern European, and Latin American markets.

• The demand for alternative investment productsand the introduction of tighter regulation haveincreased complexity and the cost of providingwealth management services.

Three core business models have emerged in thewealth management landscape.

• Global players are targeting numerous onshoreand offshore locations and are building a portfo-lio of mature high-margin and emerging high-growth markets.

• Medium to large players are focusing on bothonshore business and offshore business at home,as well as on some other foreign locations. Theywill have to concentrate on selected products andmarkets.

• Small institutions and boutiques are focusing onproduct and customer niches. For most of theseinstitutions, client relationships are their keyasset. Because of their insufficient scale, manywill move to a distributor model with productdevelopment, operations, and IT being out-sourced.

In order to be successful in a world of increasingcompetition—and resulting margin pressure—

8 BCG REPORT

wealth management institutions need to strive forexcellence by optimizing all relevant growth andefficiency levers. Our experience in working withleading wealth managers reveals a need to concen-trate on specific levers.

• Pricing. Standard banking services are under sig-nificant price pressure, and wealth managementinstitutions are moving toward less visible pricing.Offering proactive, tailor-made advice remains ahigh-margin activity, and wealth managers arecapitalizing on this. Internally, a lack of pricingdiscipline and complex discount schemes oftenprevent wealth management institutions fromrealizing optimal prices. Best-practice institutionshave limited discounts.

• Small-Client Management. Most institutions handleclients with AuM below $250,000. These cus-tomers are often unprofitable. In order to makethese accounts profitable, best-practice wealthmanagers have increased minimum fees oroffered standard product and coverage models.

• Retention Management. Most wealth-managementinstitutions experience a high rate of client attri-

tion without understanding the true reasons forit. Best-practice institutions have implementedearly warning measures and systematic clientfeedback to prevent the loss of clients.

• Relationship Manager Performance. A key to growthin the existing client base is enhanced cross-sell-ing and up-selling. Raising the performance ofrelationship managers in the third, fourth, andfifth quintiles has a significant impact on growth.Some wealth-management institutions havealready implemented performance programs thatmeasure client contacts and conversions.

The most important growth levers for wealth man-agement institutions are increasing share of walletand retaining existing clients.

• The quality of a client’s experience at a wealthmanagement institution is the foundation ofthese levers. However, only a few institutions havesucceeded in understanding the needs of theirclients properly.

• Perfecting the client experience will thus be oneof the most important issues for wealth manage-ment institutions over the next few years.

Global Market SizingReturning to Solid Growth


Latin America

Asia-Pacific

North America

Europe

1999 2000 2001 2002 2003 2004

AuM ($trillions)

27.1

18.2

15.0

1.864.1

24.8

20.8

16.2

1.81.9

65.5

28.9

26.2

18.8

2.12.2

78.2

31.1

29.4

20.0

2.42.4

2.0

The Middle East and Africa

85.3

CAGR1999–2004

(%)3.6

CAGR2002–2003

(%)19.2

CAGR2003–2004

(%)9.4

1.9

30.0

19.9

17.9

1.8

71.5

28.8

18.9

16.3

1.91.9

67.8

In 2004 the global wealth market grew by 9.4 per-cent in U.S. dollar terms and by 5.5 percent in localcurrency terms. (See Exhibit 1.) This represents areturn to solid growth after the difficulties of 2000through 2002 and the recovery of 2003. LatinAmerica, Europe, and the Middle East experiencedthe highest growth rates in U.S. dollar terms.

Of the total global wealth market of $85.3 trillion inAuM, 7.5 percent is held offshore, primarily in Eur-opean offshore centers. Europe accounts for roughly50 percent of global offshore wealth, although thisproportion is shrinking and should continue to de-crease given rising levels of wealth repatriation andthe current shift into property investments. The

European Union Savings Tax Directive should haveonly a marginal impact on the offshore market sinceclient confidentiality remains unaffected by thedirective and the tax will amount to just 15 percentin 2005 (and can be partly avoided). Yet increasinginternational transparency means the viability of off-shore business models will gradually come into ques-tion. That said, Singapore, for example, is becominginteresting as a regional offshore center because itoffers favorable tax conditions—a development thathas already led to some offshore wealth moving fromEurope and other Asian countries to Singapore.

Between 2003 and 2004, the global asset mixremained fairly stable, with equity assets accounting

SOURCE: BCG wealth market-sizing database.

NOTE: Because of a differing methodology in this year’s report, some AuM amounts calculated for the years 1999 through 2003 may differ from those published in last year’s

report. Column totals and percentage changes in AuM are based on complete, not rounded, numbers.

E X H I B I T 1

IN 2004 THE GLOBAL WEALTH MARKET GREW BY 9.4 PERCENT

10 BCG REPORT

for about 37 percent of total AuM. (See Exhibit 2.)Still, ever since equity markets began to be charac-terized by a higher degree of uncertainty early inthe decade, investors have increasingly been look-ing for capital protection and alternative invest-ment opportunities. As a result, the demand forstructured products and hedge funds has grown sig-nificantly. And whereas demand for structuredproducts should continue to rise, demand forhedge funds is likely to decline because of weaken-ing industry performance. Another trend is thatmanaged funds have edged up to about 34 percentof the market, reflecting a movement toward some-what conservative investment behavior in a morecomplex capital-market environment.

Looking ahead, we estimate that global AuM willgrow on average by roughly 4 percent annually in

U.S. dollar terms, or a total of about 23 percent,from 2004 through 2009. (See Exhibit 3.) A contin-uing recovery in the markets and growing wealth inall investor segments (except the nonwealthy seg-ment) will be the key drivers of growth.

Regional Differences

Because of the strong recovery of equity markets, theNorth American wealth-management market grew by7.9 percent in 2004 and exceeded the AuM level of1999. (See Exhibit 4.) In contrast to the global aver-age, mass affluent clients are the largest NorthAmerican segment, resulting in a lower concentra-tion of overall wealth. The mass affluent segmentalso grew at a faster rate than other North Americansegments in 2004, posting a 12.1 percent increase.(See Exhibit 5.) North American investors hold

Wealthy investors’ asset holdings, 1999–2004 (% of AuM)

Direct equities

Equities

Nonequities

Managed funds, equities

Managed funds, other1

Managed funds, bonds

Direct bonds

Money market funds

Cash and deposits 30.9

7.3

8.6

0.5

27.4

17.9

7.4

31.5

7.7

8.1

9.6

0.5

25.7

16.9

33.0

8.5

8.7

10.3

0.5

23.3

15.7

36.7

9.6

11.3

0.6

19.8

12.7

9.3

35.0

9.1

10.5

0.7

22.2

13.9

8.6

1999 2000 2001 2002 2003 2004

34.6

8.7

9.0

10.3

0.7

22.6

14.1

43.145.8 39.5 33.1 36.8 37.4Equity assets(% of AuM)


NOTE: Column totals and percentage changes in AuM are based on complete, not rounded, numbers. Wealthy is defined as households with AuM greater than $100,000.1Includes hybrid funds and balanced funds.

E X H I B I T 2

THE GLOBAL ASSET MIX REMAINED FAIRLY STABLE IN 2004


30.0 28.827.1

24.8

28.931.1

1999 2000 2001 2002 2003 2004

Total wealth of North American households, AuM ($trillions)

CAGR1999–2004

CAGR2003–2004

(%)0.7

(%)7.9

AuM ($trillions)

Emerging wealthy investors(AuM $1 million–$5 million)

Established wealthy investors(AuM > $5 million)

Mass affluent investors(AuM $100,000–$1 million)

Nonwealthy investors(AuM < $100,000) 11.8 11.5 11.7

49.153.3

60.5

11.712.9

15.512.8

14.1

17.6

2004 2005 2009

85.3

91.8

105.3

10.6

–3.0

10.0

8.7

5.7

–0.3

6.6

4.3

CAGR2004–2005

(%)7.5

CAGR2004–2009

(%)4.3


NOTE: Column totals and percentage changes in AuM are based on complete, not rounded, numbers.

E X H I B I T 3

GLOBAL WEALTH IS PROJECTED TO GROW BY ABOUT 23 PERCENT FROM 2004 THROUGH 2009

E X H I B I T 4

THE NORTH AMERICAN WEALTH-MANAGEMENT MARKET HAS SURPASSED ITS 1999 LEVEL


NOTE: Column totals and percentage changes in AuM are based on complete,

not rounded, numbers.

AuM ($trillions)




Nonwealthy investors(AuM < $100,000)

2003 20042.4 2.2

16.718.8

4.4

5.3

5.5

4.7

31.1

28.94.5

12.1

–11.5

6.4

Change in AuM(%)7.9

E X H I B I T 5

IN NORTH AMERICA , THE MASS AFFLUENT SEGMENTSHOWED THE STRONGEST GROWTH




12 BCG REPORT

about 50 percent of their assets in equities—a muchhigher share than the global average. Most of theseassets are invested in managed funds. We expect theNorth American wealth market to grow by about 4.1percent per year from 2004 through 2009, owingmainly to stabilizing market conditions.

The European wealth-management market grew by12.4 percent in U.S. dollar terms in 2004 but byonly 4.7 percent in local currency terms because ofthe continuing devaluation of the U.S. dollar overthe course of the year. (See Exhibit 6.) Central andEastern European countries and Switzerland expe-rienced the strongest growth, whereas the UnitedKingdom, Germany, France, and Italy were thelargest markets in absolute terms. Europe’s estab-lished-wealthy investors experienced the strongestgrowth, with AuM rising by 11.5 percent in 2004,whereas nonwealthy investors saw their AuM shrinkby the same percentage. (See Exhibit 7.) After sev-eral years of decline, exposure to equities through-out Europe has stabilized at around 32 percent ofassets, although some countries—such as theUnited Kingdom and Switzerland—have signifi-cantly higher shares. The majority of wealth man-

agement revenue in Europe is generated both fromcash and deposits (43 percent) and from managedfunds (41 percent). We expect the European wealthmarket to grow by about 6 percent per year in localcurrency terms from 2004 through 2009, with fairlyequal growth across all investor segments.

In Asia, wealth markets grew by 11.8 percent in U.S. dollar terms in 2004 and by 7.3 percent in localcurrency terms, mainly as the result of strongexpansion in South Korea, Australia, and HongKong. (See Exhibit 8.) China and Taiwan had thehighest asset holdings in absolute terms, and wealthwas extremely concentrated—with about 2 percentof households holding roughly 70 percent of thewealth. Growth was in the double digits across allinvestor segments except the nonwealthy segment.(See Exhibit 9.)

There was a slight shift toward more equity exposurein Asia (currently at 28 percent), driven mainly byhigher equity shares in mature markets such asAustralia, Hong Kong, and Taiwan. Most Asian assetsare still held in cash and deposits, which are also thesource of most asset-management revenue. Wealth in

AuM (€trillions)





4.6 4.0

11.3 12.3

2.4

2.52.8

2.6

2003 2004

21.720.8

11.5

8.5

–11.5

10.7

Change in AuM(%)4.7

E X H I B I T 7

IN EUROPE, THE ESTABLISHED WEALTHY SEGMENTSHOWED THE STRONGEST GROWTH



not rounded, numbers. At press time, U.S.$1 equaled €0.81493.

Total wealth of European households, AuM (€trillions)

1999 2000 2001 2002 2003 2004

CAGR1999–2004

(%)1.9

CAGR2003–2004

(%)4.7

19.8 20.4 20.6 19.820.8

21.7

E X H I B I T 6

THE EUROPEAN MARKET GREW BY NEARLY 5 PERCENT IN 2004



not rounded, numbers. At press time, U.S.$1 equaled €0.81493.


1999 2000 2001 2002 2003 2004

CAGR1999–2004

CAGR2003–2004

(%)7.4

(%)11.8

16 11.8

5.0

CAGR (%)

5.0 5.1

5.6

6.4

7.2

Total wealth of Asian households, AuM ($trillions)




E X H I B I T 8

THE ASIAN MARKET GREW BY NEARLY 12 PERCENT IN 2004, BUT GROWTH HAS SLOWED SINCE 2003

AuM ($trillions)





2.07 2.17

2.442.86

0.96

0.96

1.10

1.07

2003 2004

7.2

6.4 14.9

16.8

4.8

11.3

Change in AuM(%)11.8




E X H I B I T 9

IN ASIA , THE MASS AFFLUENT AND ESTABLISHEDWEALTHY SEGMENTS SHOWED THE STRONGESTGROWTH

14 percent in 2004—with 40 percent held in cashand deposits. We estimate that Latin America’swealth-management market will grow by roughly 6 percent per year from 2004 through 2009 becauseless new wealth is being generated now than in the 1990s.

Attractive New Markets

China, India, and Russia may still be small markets,but they will represent the most attractive growthcountries in the near future. International wealth-management institutions should focus on thesemarkets in order to provide growth stories for theindustry and to diversify their low-growth, high-margin portfolios.

Greater China is a significantly larger wealth mar-ket than either India or Russia, but the latter twogrew more quickly in 2004. (See Exhibits 10 and 11,page 14.) Looking ahead, the expansion of wealthin Russia is expected to outstrip that in China and

Asia is expected to grow by 6.8 percent from 2004through 2009, with the established wealthy being thefastest-growing segment.

Latin American wealth markets experienced signifi-cant growth in 2004—14.4 percent in U.S. dollarterms and 12 percent in local currency terms—driven mostly by assets in Brazil and Chile. Brazil isby far the largest market, and wealth is as concen-trated there as it is in Asia. The established wealthysegment was the largest and fastest growing inBrazil in 2004.

Moreover, although wealthy Latin Americans havehistorically been active offshore investors, there arenotable differences among countries. WealthyVenezuelans invest roughly 70 percent of theirassets offshore, for example, whereas wealthyChileans invest only 40 percent offshore because ofChile’s more highly developed financial markets.Latin America has the lowest equity exposure—only

14 BCG REPORT




Number ofhouseholds(millions)



Wealthy AuM($trillions)



1.42

0.15

1.590.02

0.38

0.29

0.24

0.91

0.49

0.050.010.55

0.13

0.090.09

0.31

0.33

0.040.010.38

0.090.07

0.16

0.32

IndiaGreater China Russia


NOTE: Column totals and percentage changes in AuM are based on complete, not rounded, numbers. Wealthy is defined as households with AuM greater than $100,000.

E X H I B I T 1 0

GREATER CHINA IS A SIGNIFICANTLY LARGER WEALTH MARKET THAN INDIA OR RUSSIA




IndiaGreater China Russia

2003 2004 2003 2004 2003 2004

0.34 0.38

0.280.29

0.220.24

0.11 0.13

0.08 0.090.07

0.09

0.91

0.310.26

0.84

0.07 0.090.06 0.07

0.140.16

0.320.27

AuM ($trillions)

CAGR (%)

8

19 19

Growth in AuM of wealthy households


NOTE: Column totals and percentage changes in AuM are based on complete, not rounded, numbers. Wealthy is defined as households with AuM greater than $100,000.

E X H I B I T 1 1

THE INDIAN AND RUSSIAN WEALTH MARKETS GREW FASTER THAN THE CHINESE WEALTH MARKET IN 2004


India. (See Exhibit 12.) In contrast to global trends,the nonwealthy segment in Russia is growing signif-icantly. Many wealth managers are currently focus-ing on India and Russia, and keeping China as anoption for the medium-term future. Indeed,China’s huge export industry, along with many suc-cessful IPOs of Chinese companies in Hong Kongand New York, have resulted in a large number ofChinese entrepreneurs becoming wealthy. For for-eign wealth managers, China will offer primarilyonshore opportunities.

India may possibly offer greater potential than Chinabecause wealthy nonresident Indians, who oftentransfer money back into their home country, are anattractive target group. In addition, the Indian bank-ing market will be fully liberalized by 2009. Severalforeign players—such as Citigroup, Goldman Sachs,BNP Paribas, and SG Private Banking—have already

established a presence in the country. They arefocusing on discretionary portfolio-managementservices, which local players are still struggling to provide. However, competition will increase aslocal players broaden their wealth-managementcapacities.

It is worth noting that a large proportion of Russianwealth is currently held offshore. Political instabil-ity, the state of the banking system, a lack of servicesaimed at long-term wealth preservation, and wealthtransfer have compelled many wealthy Russianinvestors to manage their assets away from home.We believe, however, that the Russian onshore mar-ket will grow in the long term as the result of twofactors: first, risk-adjusted returns are currentlymuch higher in Russia than they are in Europe as awhole; and second, cash storage will decrease as trustin the domestic banking system gradually improves.

Global wealth managers need a separate strategy foreach of these three markets. The Western approachof seeking a balanced asset framework is not appli-cable in these countries because the typical portfo-lio structure is different—with a high cash base pro-viding security, and property playing a larger rolebecause it offers more stable returns. For morespeculative investing, expected returns are difficultto achieve with the standardized wealth-manage-ment products typically offered by global institu-tions today.

In order to determine an optimal strategy, wealthmanagers need to address the following key ques-tions about mature markets:

• Which mature markets are the most attractive?

• Where will the highest number of wealthy house-holds emerge in the future?

• Where will margin erosion be the highest?

They also need to address the following questionsabout new markets:

• How close should new markets be to our corebusiness?

• What is required for competitive advantage inthese markets?

• Which types of products and services would bemost suitable?

15.6

11.0

13.7

AuM ($trillions)

Russia

India

Greater China 0.91

0.31

0.32

2004

1.54

2.92

1.73

0.52

0.67

2009

Projected AuM of wealthy households

CAGR (%)



not rounded, numbers. Wealthy is defined as households with AuM greater than

$100,000.

E X H I B I T 1 2

THE RUSSIAN WEALTH MARKET SHOULD GROW FASTER THAN THE INDIAN AND CHINESE WEALTH MARKETS

Client DiscoveryAddressing Clients’ Needs and Enhancing the Client Experience

16 BCG REPORT

Historically, private-banking clients have soughtsecrecy, anonymity, and tax relief. Products have beentraditional, with discretionary mandates focusing oninternational bonds, equities, and money marketfunds. But the painful experience of the market down-turn early in the decade, along with ongoing genera-tional changes, have shifted clients’ needs moretoward enhanced performance and security, inte-grated wealth solutions, sound professional advice,and active participation in investment decisions.

Enhanced Performance and Security

Following the equity market struggles that began in2000, wealthy clients are now seeking both higherreturns and a higher degree of capital protection. Inparticular, demand is growing for innovative struc-tured products that offer both of these benefits.Wealth managers are eager to meet this new demandbecause structured products yield comparatively highmargins. Demand for higher returns will increaseeven further if capital markets are relatively flat.

Integrated Wealth Solutions

Given the significant transfer of wealth between gen-erations, increasing uncertainty about pensions, andregulatory complexity, wealthy investors now requireintegrated and life-cycle-oriented solutions. Proactiveinvestment consulting, tailored advice based on indi-vidual clients’ needs, and expertise in legal and taxmatters are becoming essential. Wealth managershave begun to address these needs not only for the es-tablished wealthy but also for the mass affluent andemerging wealthy segments. Financial institutions haveimplemented standard processes and are using spe-cialist know-how to ensure consistency of advice andconsideration of all relevant client needs. But wealthmanagers must go further and focus more on clients’risk profiles and on the integration of investors’ long-term financial goals into portfolio structures.

Sound Professional Advice

Current low-to-medium-level returns have madeclients more aware of the quality of the counsel they

receive from their wealth managers. Investors are alsodemanding greater transparency of products andprices, higher service levels, and direct accountabilityregarding investment advice—especially when returnsare subpar. Wealth managers are expected to offer anopen-architecture environment that includes prod-ucts from external providers and to present qualifiedrecommendations on the full spectrum of availableproducts. Although a comprehensive in-house prod-uct range is no longer required, scrutiny of the prod-ucts and investment strategies offered by wealth man-agers has become more meticulous than ever before.

Active Participation in Investment Decisions

Generally speaking, today’s investors are far moreknowledgeable and financially aware than those ofprevious generations. They tend to have a greaterdesire to participate more actively in the investmentdecisions made by their wealth managers. They alsotend to be more price sensitive, particularly to exter-nally visible fees such as those for account adminis-tration. As a result of this trend, the overall numberof managed mandates will likely decrease. Price sen-sitivity is at its highest in the mass affluent and estab-lished wealthy segments (especially in portfolios val-ued at more than $8 million).

In order to address clients’ needs in a more efficientway, wealth management institutions should considermoving away from segmenting clients solely accord-ing to their level of AuM and focus more on segmen-tation that reflects geography, lifestyle, product-mixusage, and risk tolerance. In our view, in order tobecome more client focused, wealth managers needto address the following key questions:

• How can clients’ needs be systematically identified?

• How can clients’ needs be better integrated intothe advice process?

• How can increasingly complex demands be metwith third-party solutions?

• How can wealth managers react to the continuingconvergence of onshore and offshore needs?

Business Models Finding the Right Focus


Trends in the global wealth-management marketand changes in clients’ needs have challenged tra-ditional wealth-management business models. Forexample, the decline in offshore volumes willincrease onshore competition and transparencywith regard to fees. Yet offshore accounts tend tohave higher returns. Wealth management institu-tions will therefore need to find ways to improveoverall investment performance in order to com-pensate clients for generally lower onshore returns.

Many institutions have recently reviewed their pric-ing practices. This has largely been a reaction toincreased pricing pressure—particularly on stan-dard banking fees—as clients have demanded agreater degree of price transparency. Wealth man-agers have thus shifted loads from highly visibleareas, such as administration fees, to less visibleareas, such as structured-product margins or in-house funds. Given that a large number of financialinstitutions are eager to grow in wealth managementmarkets, pricing pressure is certain to intensify.

Wealth managers will also likely struggle with theincreasing complexity of the business and, hence,the cost of providing services. The demand foralternative products will raise product developmentcosts, and new regulations such as the EuropeanUnion Savings Tax Directive will significantlyincrease the burden on operations.

In our view, wealth managers in mature marketsshould focus on client retention because the rich arebecoming richer in these regions. By contrast, in suchemerging markets as Asia, Eastern Europe, and LatinAmerica, wealth managers need to pay attention pri-marily to emerging wealthy investors.

These competitive trends have given rise to threebasic types of players within the internationalwealth market: global players, medium to largeplayers, and small players.

Global Players

UBS, Citigroup, HSBC, and Credit Suisse are lead-ing the race for global presence in wealth manage-

ment. All of these institutions target multipleonshore and offshore markets, mostly through acombination of high-margin mature home territo-ries and selected high-growth regions such asEurope (onshore) and Asia. In high-growth mar-kets, these banks are concentrating on cherry-pick-ing attractive private and corporate clients that cur-rently are not adequately served by domesticinstitutions.

Generally speaking, global players are pursuing twostrategic thrusts: excellence in their home marketsand leading positions in attractive overseas markets.At home, they are leaders in fulfilling clients’ needsbased on a standardized advisory process. Typically,this approach leads to high client retention. In for-eign growth markets, they focus on achieving lead-ing positions either through acquisitions orthrough fast organic growth. UBS, for example, isthe largest player for servicing ultrarich families inGermany and has built a leading Asian offshorepresence. However, many global players enteringforeign markets are currently struggling to adapttheir advisory processes to varying cultural needs.

Medium to Large Players

Medium to large players focus on both onshorebusiness and offshore business in their home mar-kets and have a selected geographic presence else-where. Examples include BNP Paribas, SociétéGénérale, and Deutsche Bank. These institutionsoffer onshore wealth-management services in coun-tries where they have a retail-banking presence.

Such institutions benefit from actively managingreferrals within the institution and from leveragingtheir integrated business models. Indeed, most uni-versal banks have retail-, corporate-, and invest-ment-banking divisions in addition to their wealth-management division. Identifying potential clientsin their retail base and leveraging untapped poten-tial from corporate- or investment-banking transac-tions are key growth levers for these banks.

It is worth noting that medium-size wealth-man-agement institutions are in a difficult position.

18 BCG REPORT

They do not have the resources to compete withglobal players such as UBS or HSBC, yet they aretoo large to focus solely on certain product or customer niches. Consequently, they face severecompetition from such new entrants as familyoffices, hedge funds, and other specialist pro-viders. Finding the right business-model focus,therefore, remains a key challenge for medium-sizeinstitutions.

Small Players

Small wealth-management institutions tend to focuson product and customer niches, sometimes com-bined with a selected international presence. Oneexample is Wegelin & Co., a Swiss boutique special-izing in structured products. Increased scale islikely to put pressure on such small players becausethey will face higher costs, especially for compli-ance. For example, implementation of the

European Union Savings Tax Directive has createdan average cost burden of two to three basis pointsfor each individual institution. Our work withwealth managers indicates that in the future smallerinstitutions are likely to move to a distributormodel, concentrating on improving the quality ofinteractions with customers and creating a detailedunderstanding of clients’ needs.

In order to focus their business models on the rightlevers and markets, wealth management institutionsneed to ask themselves the following questions:

• Should we concentrate on onshore and/or off-shore business?

• Which products should we offer?

• Which segments should be our primary targets?

• Which are the most attractive markets, given ourparticular resources and expertise?

Key LeversAchieving Wealth Management Excellence


In the current low-growth, highly competitive envi-ronment, wealth management institutions need toconcentrate on operational excellence. Key overalllevers include significantly improving revenue gener-ation from both existing and new clients, and tight-ening cost management. Each of these broad initia-tives has several individual sublevers. (See Exhibit 13.)

Overall Levers

With regard to enhancing revenue from existingclients, wealth managers need to resolve the conflictbetween performance and revenue. In other words,although pushing in-house products can maximizerevenue, such products often do not generate thehighest performance compared with the wide rangeof products available in the marketplace. In thefuture, institutions will be forced to focus primarilyon performance in order to satisfy this ever-increas-ing client need. They can generally improve revenueby offering both products that are customized for cer-tain client segments and innovative pricing.

Increasing net new assets must also be a priority.Sustainable net-new-asset growth requires both highretention levels among existing clients and selective

growth in new clients. To enhance retention, leadingwealth managers are increasingly monitoring clientsatisfaction and building stronger relationships byselling clients a broader range of products. For new-client acquisition, wealth managers are focusing heav-ily on referrals. In Europe, for example, approxi-mately 75 percent of wealth management clients areobtained through referrals from existing clients. Oursurvey indicates that retention management and rela-tionship manager productivity are currently regardedas two of the most important levers for achieving sta-ble growth.

In order to improve cost efficiency, institutions havefocused mainly on general cost management. However,there is significant additional potential for cost reduc-tion in operations, IT, and product outsourcing. Smallinstitutions, in particular, need to consider outsourcingsolutions because they lack the scale to comply withincreasing investment requirements and complexity.

Over the past few years, wealth managers have focusedmainly on improving only selected efficiency andgrowth levers. Yet our survey shows that over the nextfew years, financial institutions will have to go much fur-ther—particularly in terms of optimizing the followingspecific sublevers for wealth management excellence—if they are to achieve growth and margin stability.

Pricing

Our survey of leading wealth managers reveals that pricing is widely considered to be one of themost important levers for further revenue op-timization—and one whose potential has gonelargely untapped. Indeed, a 1 percent improvementin price realization typically leads to a 7.7 percentimprovement in return on equity. Yet our surveyindicates that price realization varies greatly amongrelationship managers—even within the samewealth-management institution. (See Exhibit 14,page 20.)

The principal reasons for price leakage are an over-all lack of discipline and costly discount schemesbecause relationship managers tend to sell onprice, rather than on value, and discounts are not

Relationship manager

performance

Client service model

Retentionmanagement

Outsourcing

General cost management

Pricing

Existing revenues

Costs

Net new businessSegmentation

Clientpenetration

Referralmanagement

Small-clientmanagement

Asset and product mix

Wealthmanagementexcellence

SOURCE: BCG analysis.

E X H I B I T 1 3

THERE ARE MANY FACETS OF WEALTH MANAGEMENTEXCELLENCE

20 BCG REPORT

0

10

20

30

40

Price realization among relationship managers working at one institution

0.5x 1.0x 1.5x

Assets managed($millions)

Fees (indexed)

E X H I B I T 1 4

A LACK OF PRICING DISCIPLINE HURTS WEALTH MANAGERS

SOURCE: Wealth manager example.

always tied to compensation. What is more, dis-counts often appear illogical because smalleraccounts are typically granted the highest dis-counts. A clear value proposition is therefore crit-ical for avoiding discount pressure. Moreover, most discount schemes are extremely complicatedand difficult to manage. Limited discount classeswould ease the management of such schemesconsiderably. Our survey of wealth managers showsthat fees for standard banking services—especiallythe most visible charges—will likely decrease,whereas individualized, proactive advisory serviceswith custom-made solutions will maintain their highmargins.

Best-practice institutions have optimized pricing atboth a strategic and a tactical level. At a strategiclevel, these institutions have repositioned their pric-ing models according to changes in the competitivelandscape. At a tactical level, they have managed toincrease price realization throughout all wealth lev-els. They have also aligned compensation with pric-ing strategies, set clear expectations for pricingnorms, and limited discounts to 5 percent.

When considering pricing optimization, wealthmanagement institutions need to address the fol-lowing key questions:

• Are all discounts monitored and reported?

• What is the value of our products to different cus-tomer segments?

• Are both visible and less visible prices competitivein the marketplace?

• Does our institution have a good understandingof the fixed and variable costs involved in thesales and delivery of services?

Small-Client Management

The majority of wealth managers have a large num-ber of small mass-affluent accounts that are chargedless than the stated minimum fees. Consequently,many small-client accounts tend to lose money forthe institution. (See Exhibit 15.)

But some best-practice wealth managers have ener-gized small-client accounts and made them prof-itable. Some institutions have accomplished this byasking small clients to bring more assets to the tableor face being transferred to the retail division. Othershave streamlined their business models with call cen-ter support, standardized asset-allocation products,and higher minimum account fees—or by having

junior relationship managers service approximately800 to 1,000 small clients. Moving small clients tostandardized solutions has proved to be the most effi-cient way of raising profitability. (See Exhibit 16.)

In order to improve small-client profitability, wealthmanagers should address the following questions:

• How can our cost base be reduced without losingthe client segment?

• What are the key drivers for smooth client transfer?

Retention Management

In times such as these, when growth is slow andcompetition is intensifying, retention is crucial forprotecting the existing client base. Many wealth-management institutions have implemented the sys-tematic registration and analysis of complaints,although this step is often taken too late to retaindissatisfied clients. In addition, win-back programsare usually extremely expensive.

Clients generally leave, logically enough, becausethey feel their overall needs are not being ade-quately considered and believe that the institution’sinvestment performance is unsatisfactory. (SeeExhibit 17, page 22.) However, looming client dis-satisfaction can be foreseen early if investment per-formance is weak—particularly with discretionarymandates—or if the account shows low transactionvolumes and increasing asset outflows. Proactive

relationship management and early warning pro-grams are key instruments for retaining clients thatmay be at risk. Such programs—in which the per-formance of client accounts is regularly monitoredaccording to risk profiles—have proved to be veryeffective.

In order to increase retention, wealth managersshould address three basic questions:

• What are the true reasons for client attrition?

• What are the most effective measures for increas-ing client retention?

• How can relationship managers get to know theirclients better?

Relationship Manager Performance

To date, many initiatives to improve overall perfor-mance in wealth management have been back-officeoriented—in other words, focused on operations andIT. However, numerous players are turning theirattention increasingly to the front office. According toour survey of leading wealth managers, the perfor-mance of relationship managers has become a princi-


Gross margins (%)

2638

5661

13

–94

Wealthband

<$250,000 $250,000–$1 million

$1 million–$5 million



>$100million

E X H I B I T 1 5

SMALL-CLIENT ACCOUNTS TEND TO DELIVER NEGATIVE MARGINS


$250,000–$1 million





<$250,000

Move small

clientsto

stan-dardized solutions

Share of AuMby type of service (%)

100

75

50

25

0

Standardized Managed Execution only

Wealthband

E X H I B I T 1 6

MOVING SMALL CLIENTS TO STANDARDIZED SOLUTIONS IMPROVES MARGINS


22 BCG REPORT

pal organic growth lever, and competition for high-quality relationship managers has risen dramatically.

The main differentiators among relationship man-agers are the product mix they offer clients andtheir level of price realization and asset loading.Asset loading, in particular, is a primary driver ofsales force performance. Relationship managers inthe top quintile manage ten times the AuM andgenerate ten times more revenue than those in thelowest quintile. It is therefore critical to raise theaverage asset loading of relationship managers wholanguish in the bottom three quintiles up to thelevel of those in the second quintile.

Best-practice wealth managers focus on achievingsales and creating action plans for clients. But inorder to guide relationship managers more effec-tively, institutions need to monitor a broader rangeof key performance indicators (KPIs) than just netnew assets and revenues. Successful institutions tendto focus on additional indicators, such as the num-ber of new contacts, client conversions, and productsper client—thereby exposing performance differ-ences among relationship managers. In particular,

wealth managers need to analyze net-new-asset per-formance in a different way, because the highest netproducers are not always the best at retaining clients.For client planning, relationship managers need tofocus on increasing their penetration of averageclients and on systematically selecting and prioritiz-ing target clients so they can then develop and mon-itor specific action plans. Our survey shows that assetgathering and performance can also be boosted bysharing best practices and by splitting sales forcesinto “hunters” and “farmers.”

Improvement in the performance of relationshipmanagers leads to a significant increase in the pen-etration of the existing client base. In order toachieve this, wealth management institutions needto address the following questions:

• What are the right KPIs for sales force effectiveness?

• How should teams and relationship managerportfolios be structured to achieve higher per-formance?

• Which relationship managers should be targetedfor performance improvement?

2. Poor overall service conditions

3. Need funds for real estate purchase

4. Need funds for own business

5. Need funds for private reasons

6. Need funds for taxes

7. Departure of relationship manager

8. Insufficient investment return

9. Desired products unavailable

10. Other reasons

1. Unwanted transfer of accounts within bank

Total 1 42 8 93 5 6 107

Service and performance

(42%)

Need forliquidity(25%)

Other(33%)

Principal reasons for client attrition

E X H I B I T 1 7

CLIENTS LEAVE IF THEY FEEL NEGLECTED OR IF INVESTMENT PERFORMANCE IS UNSATISFACTORY


Perfecting the Client Experience


As we have discussed, success in increasing revenuesfrom existing clients and achieving net-new-revenuegrowth from new clients relies on a detailed under-standing of clients’ expectations and needs.Addressing these needs more efficiently increasesboth the retention of existing clients and the gain-ing of new business.

Although our survey has indicated that some lead-ing wealth managers have focused on addressingclients’ needs through a standardized advisoryprocess—thereby ensuring that those needs aredealt with in a systematic way—we have alsoobserved that standardized processes are notenough for institutions to fully understand therange of products and services that wealthyinvestors want in today’s market environment. Thisis one reason why financial intermediaries are pro-liferating. Clients that desire integrated and cus-tomized solutions use these individuals and institu-tions as ambassadors vis-à-vis the banks.

In the future, wealth managers will be forced todeepen their understanding of clients’ expectationsand needs even further. As a result, entire business

models may have to be redesigned. Client-focusedbehavior, which starts with the relationship man-ager, must be integrated into products and servicesthroughout the whole institution. In order toaccomplish this, a systematic approach to assessingand tracking client feedback and satisfaction isrequired.

Client satisfaction data are currently gatheredmainly through relationship managers—and veryoften only after the client has left. Wealth managersshould now make it a high priority to examine thewhys and wherefores of client behavior moreaggressively. Our benchmarking shows that someinstitutions have already started to survey clientsextensively—a meaningful step that more institu-tions should take.

As we look ahead to the second half of the decade,it is our view that understanding and optimizing thetotal client experience will be at a greater premiumthan ever before in the wealth management market-place. Those institutions that execute these initia-tives the best will be the most advantageously posi-tioned to gain and maintain competitive advantage.

Appendix: Market-Sizing Methodology

24 BCG REPORT

We define wealth as assets under management(AuM), which includes the net of listed securities,held either directly or indirectly through managedfunds, and cash deposits, including life and pensionassets. This is the measure of the assets that a typi-cal wealth-management provider can most directlymonetize.

We calculated 2004 AuM for larger countriesthrough a review of national accounts and otherpublic records. For smaller countries, we calculatedAuM as a proportion of GDP, adjusted for country-specific economic factors.1

We then distributed total wealth within each coun-try on the basis of Lorenz curves. These curves werebased on a combination of wealth distribution sta-tistics for countries that had available data. For

countries without such data, we made estimates onthe basis of the wealth distribution patterns ofcountries with similar income distributions (Ginicoefficients) compiled by the World Bank. We fur-ther refined wealth distribution using other publicsources and BCG proprietary information.

We then used available national statistics to identifydifferent holding patterns for different countriesand wealth segments. When such data could not beobtained, we assumed that countries with similarcultures and regulatory environments would havesimilar asset-holding patterns.

We calculated market movements as the weighted-average capital performance of asset classes held byhouseholds in each country, factoring in bothdomestic and overseas equity and bond holdings.

1. Whenever possible, we used national accounts for past years as well. This approach contrasts with the methodology used in The Rich Return to RicherReturns: Global Wealth 2004, where we projected into the past based on market performance estimates. For this reason, some AuM amounts calculated for1999 through 2003 may differ from those published in last year’s report.

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