Aiming for unrealistic targets

The concurrent release of Scorpio Partnership’s Benchmark 2006 and MLEY CapGemini World Wealth Report 2006 (WWR) illustrated yet again the gap between how much is actually in the private banking system and how much is still potentially out there. The total market stated by the WWR is $33,300bn (e26,100bn). The total amount held by 72 of the leading private banks providing financial data on fee-based assets within Scorpio’s Benchmark is $8,500bn, which is 25.5 per cent of the WWR total. Based on the reports, the gap is closing. The reasons for this are manifold. One factor is that more banks are now providing measurable data on their business, therefore improving market clarity. Another is the calculations on the part of WWR are also becoming more accurate as more government data is input into the process. But aside from statistical issues, the fact is that private banks are making a better case for capturing the high net worth (HNW) assets. Nonetheless, there is still plenty to play for. Or is there? Broader market research indicates that a significant proportion of HNWs maintain their assets within the retail banking system or even outside the financial system altogether. Typically the investments will be in direct opportunities such as private equity and real estate. But, to some extent, are these assets that will ever come to the private banks? Indeed, is it really correct to assume that there is nearly $25bn of assets that has just not been marketed to by the world’s private banking professionals and brokers? While the CapGemini numbers are valid indicators of the market potential they remain connected to theory more than reality. The value of the CapGemini report has often been its encouragement to the industry players to aspire for more, perhaps even too much at times. The reality is probably a little more conservative. Indeed, in the WWR’s 10th year, some hindsight on the research can be afforded. In 1996, the WWR posted the total market at $16,600bn. Ten years on and the figure is effectively double – rather than quadruple which some frenzied editions of WWR projected – which reflects a modest compound growth rate of 8 per cent. This growth rate actually mirrors the collective growth rate within the global private banking AUM historical data collated by Scorpio Partnership. Anchor on potential In any event, the Benchmark appears to produce a reasonable quantitative anchor on WWR’s market potential. While it is anybody’s guess how large the market really is – and how relevant the number is – it is probably fair to assume that the private banks could hope to sustain a growth rate of 8 per cent year-on-year and perhaps they can even bet their business on this projection. However, CapGemini in fact projects a compound growth rate of 6 per cent for the next five years. Leaps above this growth rate figure will be due to specific growth strategies that appeal to markets including organic boosts, recruitment or new products, according to the banks. Other leaps may be in the process of asset acquisition – such as through financial planning which is sweeping across the United States and parts of Europe. In terms of regional opportunity, the WWR clearly highlights what is actively taking place in the market – the interest in the East. But while banks may be ploughing investment capital into the Asia-Pacific region, the assets under management concentration has not yet fully registered. The 2006 benchmark illustrated the continued high concentration of assets in Europe and the United States. Even taking into account the potential for a significant portion of Eastern assets being booked offshore in these two regions, the scale of the gap suggests that it will be a few more years before this becomes more balanced. Senior management see the rationale behind the opportunity in the markets there and the value in diversifying the concentration of AUM in their business. Just one point of caution – they are basing a lot of their rationale on the WWR data source. This is not to fault the WWR, but the reality is that a broad market review does not tell the fortune for a specific institution. If we are to take on a predictive stance on the real market based on banked assets, then looking five years out we anticipate that the emerging markets including Asia, the Middle East and Latin America will represent $608bn based on a compound annual growth rate of 8 per cent for the same institutions that provided reporting data today in this context. However, given that we assume that Asia-Pacific markets might demonstrate slightly more positive growth based on the investments of the banks as well as the significant wealth generation from local conditions, we would as an outside bet suggest the region may top $410bn in AUM for these same institutions that have reported breakdowns today. Still a long way from the WWR total market numbers. Strategists should take note. Sebastian Dovey is managing partner at wealth management strategy think-tank Scorpio Partnership