Wealth management

INDUSTRY OUTLINE

Is there a market for wealth management and how is developed? The production of wealth,

aggregate of bank asset starting from single account of 1million upwards; the market developed

very much positively increasing the total amount of wealth that, in 2019, reached 74 trillion dollars.

The distribution that is taking place shows us that North America and Asia-Pacific take the most

part of it followed by Europe, while Africa and Latin America have a small amount but also

contributes.

By looking at who is owning this wealth we can made three categories:

1. Ultra high net working individuals (HNWI): invest up to 30 millions.

2. Mid-Term Millionaires: invest from 5 to 30 millions

3. Millionaires next door: invest from 1 to 5 millions

The main features of the categories is that the individuals are compared to the world population

and we can see how the total wealth is concentrate in few people, the third categories is made by

18 million individuals own 44% of trillion while the second is made by 1.8 million individuals own

22.6% and the first is made only of 183 people that own 33.6%.

The factors which influence the development of the wealth are:

- financial markets

- GDP ( Gross Domestic Product) growth: we can assume that in five years the market of 100

trillion wealth available to be managed will be reached.

The market is progressing with a sustainable growth of 5% across the world and we can translate

it in having every 20 second a new HNWI and every 40 minutes a new ultra NHWI, moreover in the

next 5 years we will be able to add 25 trillion in the wealth to be managed.

If there is a market are wealth managers able to explore the market and read the benefits? In the

last 5 years the growth margin of wealth managers is subnetting; it seams that wealth managers

are not in the position of exploiting this position like in booming market and we need to under why

and what is impeding them to take those benefits.

There is a growing divergence between profitability and market volume, this is reflected in the

sluggish margin development which poses a material challenge for wealth managers.

The challenges that wealth managers need to face are:

1. Regulatory burden: started after the crisis of 2008, the crisis discovered the weaknesses of

sector and regulatory framework. They intervene in capital adequacy, consumer protection

and anti-money laundering; this reshape the context and impose an adoption of standards

that translate into invest in platform and changes in process and also a lot of additional

expenses.

2. Reshaping pricing schedule: the crisis put the relationship between clients and intermediaries

in stress because many clients lost part of they portfolio and realized that what they had in

their portfolio was not really compatible with their risk profile and nobody assess their risk

profile as need; moreover they pay too much for a service that at the end cause the collapse

of the portfolio. At the end the reaction was a request of more professionalized and

personalized service, the willingness of the client to pay for commodities like open bank

account was decreasing and the all structure of the pricing schedule of the wealth manager

were based on transactional activities and safe keeping activities. These resulted in the need

to reshape the clarification of wealth managers.

3. Wealth management offering: in order to be able to assets all the conditions of the client, not

only his portfolio and investments, but need to consider other dimensions that have big

impact on the preference and decisions of the client :

a. activities they do

b. family and the needs related to that

what managers start thinking in terms of holistic offering looking beyond the portfolio itself

and introducing new services and products.

4. Matching client expectations: is a consequence of these extension of offering and more

attention on the client as the holistic approach requires. It means simply that you don’t need

to just look the portfolio of the client but you need to increase and consider that moment as

basic touch moment in order to improve the client experience; only by doing so while

stretchering the approach and the contact with the client will increase the client satisfaction

and your probability to increase the share volume of the client will growth too.

5. Digitalization: century trend, is not one side fits all but it’s customize what a manager can do

according to inside, clientele and approach. It buy a lot of resources and investments.

6. Sustainability: one of the last challenges started in 2016, this is something which is asked and

requested by clients of wealth managers that start to realized that their opportunities in the

transitional economy, the one which nations are willing to put in place another to reach

targets, is also an opportunity to invest more and optimize the risk return profile of current

investments.

CHALLENGE 1

We had three pillars of regulators after the crisis:

- Capital requirements: many banks were almost on bankruptcy and this was alarming because

the capital buffers were too low in order to face the challenge so they impose new requirement.

Actually is the relationship between capital and risk weighted assets. This was the central pillar

that covers also liquidity ratios and capital ratios.

- Transparency standards: new standard were introduced starting from America.

FATCA: is a complex procedure which obliged all intermediaries to reported to American ARS

about assets hold by person around the world and allow the bank to check them.

OECD AEI: automatic exchanging informations this help to prevent anti-money laundering

- Consumer protection: typical legislation like MIFID, FIDLEG as consequence of the fact that

during the crisis many investors were swept away by the tsunami of the crisis because their

portfolio wasn’t matching their risk profile; is a measure in order to reinforce the protection.

Another aspects that became very important was the protection of data privacy and GDPR help

with procedures and resources allocated in this. One of the most sensitive area is the market

access, after the crisis most European countries was leading their strength and set clear

boundaries to assessing market from an out shore location and this impact on the development of

international centers. Market access is one of the most obstacle to exercise the cross business on

of shore centers.

All this measures caused an increase in administrative burden and platform investments, mining

the profitability of managers.

20% of income came from transactional activities, 20% from safe-keeping activities and 40%

from interest rate activities but 20% of the total is coming from trailer fees (During the crisis wealth

managers had a conflict of interest and were driven by trailer fees). Banned trailer fees and

challenged safekeeping and brokerage fee, force new pricing model.

CHALLENGE 2

The wealth managers try to develop a sort of advisory based pricing that allow to know which

client was exposed to high risks, they started to bundle advisory fee or related activities which

could be relevant plus, due to holistic approach, other services related; they also started to

segment based pricing according to the type of client they had. The pricing was build according

to the kind of relevant services and the kind of behavior client like smart approach.

Value perception: clients are less and less willing to pay for commoditized services for

safekeeping and brokerage and want more transparency.

Advisory based pricing: those clients which are interested in professional advice and customized

services are inclined to reward the provider with an advisory fee.

Product bundling: most ultra HNWI and core HNWI are increasingly interested and positively

responding to a holistic goal based approach beyond investments.

Segment based pricing: those clients defined as self-directed are interested execution services

and research, investment opportunities and portfolio risk-return analysis tools.

CHALLENGE 3

how the appreciation of clients as far as the holistic offering, ultra HNWI individuals are

appreciating the service and also willing to pay for them; the segment from 60 years old is

increasing for the generation transfers and the same thing is happened to the second class of

individuals. The future is clear and the service will increase according to the needs of replace

older individuals.

CHALLENGE 4

In terms of advise the quest was related to more professional and customized advice but also the

sustainability is coming over and to match these expectations the managers need to be able to

address correctly this quest by focused the client experience of their clients.

Digitalization can be multichannel access to the bank and automation of process.

CHALLENGE 5

The main challenges is scaling the innovation and introduce novelties, while many banks are

experiencing automation of existing processes they have trouble in sailing innovation in the

organization; very much relevant is to been able to reform and redesign the whole project

according to the digital means. If we don’t change a project at the base we will have a file of the

whole process of innovation, above all when doing digitalization we need to involve all the

stakeholders in the company and if we fail in this there will be a general fail.

Business process management via machine learning helps schilling single automation initiatives, if

under proper and effective governance.

CHALLENGE 6

There are different actions to do in order to reach the sustainability goal:

- full transparency on portfolio sustainability, that include standardized process performance and

report them.

- train investment professionals in sustainability and turn professionals in ambassadors of

sustainability principles.

- identify client preferences and try to figure out where to put the client with an implement of

approach to reflect client sustainability preferences.

- reduce Corbin portfolio in order to reach climate goals and establish a clear road map

- adopt active ownership strategies and exercise voting right and engage in constructive dialog

with company that supports sustainability.

Strategic activities and core markets:

1. Strategic vs Non-strategic: the choice of markets in which to play is inevitable, investments in

core markets are drawn from existing marginal ones.

2. Client segment: cluster clients according to segments and markets to streamline resources

and leverage capabilities.

3. Build or buy: identify what is strategic in terms of processes, products and services and

outsource what is not.

Business model:

1. Integrate offering: develop a wealth management model towards a holistic approach, including

relevant services on wealth governance for HNWI

2. Value proposition: redefine the own USPS within a changing regulatory and market

preferences context. Accordingly adapt the business model developing sustainable and value

creating approaches, like cross border client servicing model.

3. New pricing model: develop a pricing model which is in line with clients value perception, like

advisory based fees.

SWISS WEALTH MANAGEMENT INDUSTRY OUTLINE

Swiss banks has some challenges on wealth management:

- exchange rate:

- quantitative easing:

- interest rate: negative interest rate is due to franc appreciation in the last years

But also the traditional challenges:

- decreasing margins

- client behavior

- digitalization agenda

- sustainability

Most of the time this challenges play against the wealth managers even if some times is the

opposite.

The number of banks decrease and also the number of employees were loss because of

contraction of employer in wealth management; a larger asset base but a larger credit based,

second pillar of productivity, and when we take the total income we can see how this moved

naturally but not showing what we could expect looking at asset development and worldwide

production. The conclusion is that industry is not able to take advantage of this situation in fact

there is a decreasing of net profit; also in Switzerland it seams that wealth manager have some

trouble for benefit of market

If we want to have higher income we need higher asset, if we are able to attract clients we will

have success. The biggest contribute to positive or negative result is the performance, in 2018 it

contributed to the most part, as it can be positive or negative is not under our control because the

valuation of the market don’t shows our ability; what helps to give how well we could do is the

NNM and M&A.

In all different sectors we will have some differences and the four main class are:

1. Weak performers: Swiss owned banks in sub scale given their BM or without clear and

focused value proposition; banks either subsidiaries of large international groups charged with

to high allocated costs, most of them have been so far supported by buoyant markets

2. Strong performers: largest Swiss headquartered banks leveraging their infrastructure and work

wide presence to achieve economies of scale; niche players, Swiss and foreign led very

focussed on markets or offering.

3. Lower mid performers

4. Upper mid performers

in each class by looking to ROE, uno of the most used ratio, we can made an idea of how that

class is going.

Another activity is the M&A, there is one main trend of a consolidation process on two Swiss

banks that is like the domestic acquisition by Swiss private bank that are the major consolidations

that we can see by analyzing this activity. Also acquisition abroad by Swiss private bank is

growing especially in the last 5 years, along side with the exit of abroad by Swiss private banks

that instead is going until zero. Finally the acquisition of Swiss private bank by new entrant is not

still spread enough because it start in 2018 and then stopped due to Covid-19 situation that

affects also the bank world.

Switzerland has another features because is one of the financial pole and fiscal paradise in the

world where banks offer services all around the world and is been define as offshore center.

Looking at the size of wealth management in this centers it’s very small, 8.6 million on a total of

175.1, but is very significant when it comes to managers of that banks; usually this portion is

impacted by different factors:

- political instability and socio-economic inequality of client countries

- repatriation programs

- markets re-focus of wealth managers

- Global financial markets

- Growing global wealth

- Move to non financial wealth

What makes a WM centre