GaWC Research Bulletin 389 |
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INTRODUCTION
Up until the early-1980s, the sleepy world of private banking remained a cosy ‘gentlemanly’ affair serving its traditional clientele, Royalty, the landed gentry, industrialists and entrepreneurs and, latterly from the 1970s, the billionaire and millionaires from the Middle East and other foreign jurisdictions (see Maude and Molyneux, 1996). But, the cosy world of private banking came to a shuddering halt following, what best can be described as, the re-discovery of the private wealth of individuals by the wholesale banking and professional services communities, after the deregulation of financial services on Wall Street and the City in the early to mid 1980s, and the longest running bull market which created astronomical levels of individual private wealth which needed to be ‘managed’ with the obligatory accruing of fee-revenue and profitability. Referring back to Roberts (2008), it is no surprise that many banking, financial and professional services wanted to enter what was to become a new financial services market for the global super-rich, private wealth management (Beaverstock et al, 2012). Over the last twenty years, London, New York, Singapore and Hong Kong have become the most important onshore international financial centres (IFCs) for the investment of private wealth (International Financial Services London [IFSL], 2009). Their prominence as global centres has been produced by both demand- and supply-side factors. On the demand-side, their standing has been shaped by the unprecedented rise in the number of US$, EURO and Sterling million and billionaires, the so-called, ‘global super-rich’ (Beaverstock et al, 2004). The recent growth in the global super-rich has been driven by the emergence of a new cadre of financial elites and entrepreneurs from the 1980s who were central to the development of finance-led capitalism (see Froud and Williams, 2007; Hall, 2009). In contrast, on the supply-side, these financial centres have enhanced their global significance for the investment of private wealth, which has accounted for the rapid development and expansion of the private wealth management industry (Maude, 2006), superseding traditional private banking as a means of providing financial services to the wealthy. However, whilst the role of private banking has been widely documented in London and Europe, the growth and functionality of the relatively new private wealth management industry, encompassing global, foreign and investment banks, and a range of professional services like accounting, insurance and law, in London and other IFCs, has been comparatively neglected. In response, in this chapter we document the rise and changing nature of the private wealth management industry which has been established to service the global super-rich. Reporting on original research conducted into the private wealth management industry in the City of London, we argue that examining this sector makes important contributions to understandings of both the geographies of the super-rich and onshore/offshore IFCs. The rest of the chapter is organised into four parts. First, we outline a significant demand-side factor in the growth of the private wealth management industry: the rise of the High Net Worth Individual market. Second, we account for the City’s leading position in the supply of private wealth management. Third, we report an original empirical study of London’s private wealth provision in accounting, banking (global/universal, private and investment), legal services and insurance. Finally, we report several conclusions. THE RISE OF THE HIGH NET WORTH INDIVIDUAL AND GLOBAL PRIVATE WEALTHThe genesis of the contemporary private wealth management industry is founded on the response of retail financial and professional services to supply expert advice and new products to a rapidly burgeoning pool of private wealthy individuals from around the globe, but particularly from the USA and Europe from the mid-1980s. The specific identification of a new financial market for the super-rich, defined as the High Net Worth Market, has become a financial technology to classify and segment the wealthy by their liquid or investable assets (i.e. those investments than can be readily converted into cash, excluding primary residential property for example). Merrill Lynch Capgemini [MLCG] (2011) identifies the High Net Worth Individual (HNWI) as a person who has investable assets greater than US$1 million and regards Ultra-High Net Worth Individuals (UHNWI) as those with more than US$30 million in investable assets. Many investment banks’ wealth management subsidiaries (e.g. Barclays Wealth) and accounting firms (e.g. PricewaterhouseCoopers) have their own definitions of the HNW market, which essentially mimics the segmentation of the MLCG definition into, ‘wealth pyramids.’ These many definitions and segmentations of the HNW market are neatly summarised by the International Financial Service London [IFSL] (2009) ‘think-tank’ as:
But, after MLCG (and Forbes magazine’s various lists of the most wealthy, see Forbes.com), a second influential indicator of the market segmentation of wealth and assets under management (AuM) is derived from the Boston Consulting Group (BCG) (2011), who define global wealth as:
By drawing on both the MLCG and BCG, it is possible to present a detailed examination of the global rise of the HMWI market and private global wealth, and, therefore, the aggregated demand from this expanding market for the new provision of ‘pure’ private wealth management. MLCG’s High Net Worth Market: Growth and GeographyResearch undertaken by Citibank in 1992 estimated that there were 3.135 million HNWI households worldwide (with 67% in the USA) with investable assets exceeding US$1 million (see Bicker, 1996). In 1996 MLCG estimated that there were 4.5 million HNWIs globally, with an accumulated wealth of US$16.6 trillion (MLCG, 2002). By 2010, the number of HNWIs had increased by +142% (+6.4million) to an all time high of 10.9million, showing significant recovery from the aftermath of the global financial crisis (Table 1). Between 2008-2010, the number of HNWIs increased by +27%, from 8.6m to 10.9m, and their wealth grew by almost a third (+30%), to US$42.7 trillion (MLCG, 2011). These MLCG data show exceptional year-on-year growth in the HNWI population (except in 2000 and 2008), which averaged approximately +7.5% between 1996 and 2010. Table 1: The HNWI worldwide population and the value of their wealth, 1996 – 2010
In terms of geographical share of the HNWI market, up to 2008, North America and Europe had always been the major markets in absolute terms for both the number of HNWIs and their accumulated wealth. However, from 2009, whilst North America heads the pack, the global distribution changed in favour of the Asian-Pacific region, which surpassed Europe in terms of wealth (US$10.8tr compared to US$10.2tr, respectively), and number of HNWIs (3.3m compared to 3.1m respectively) (Table 2). Across the emerging markets, there has been significant relative growth in the number of HNWIs and value of private wealth particularly in China, Brazil and India, and the Middle east (particularly the United Arab Emirates – Dubai and Abu Dhabi) (MLCG, 2007, 2008, 2009, 2010). In 2010, the five top countries by share of HNWI were: USA (3.10m, +8.5% from 2009); Japan (1.74m, +5.4% from 2009), Germany (0.92m, +7.2% from 2009), China (0.54m, +12.0% from 2009) and the UK (0.45m, +1.4% from 2009). Between 2009 and 2010 the number of HNWIs grew by +20.8% in India, from 127,000 to 153,000 (MLCG, 2011). Table 2: The geographical coverage of HNWIs and private wealth, 2000-2010
BCG’s Global Wealth and AuM: Millionaires and BillionairesAccording to BCG, by the end of 2010, AuM reached a total of US$121.8trillion worldwide, with the USA having the highest absolute growth in wealth +US$3.6tr from 2009 (from US$34.6tr to US$38.2tr) and the Asia-Pacific (excluding Japan) experiencing the highest relative growth in wealth (+17.1%, from US$18.5tr to US$21.7tr) (BCG, 2011). Since 2005, North America and Europe have been the two most significant regions for the total share of wealth (averaging 32% and 31.7% between 2005-2010), but again, the highest relative growth in wealth has been experience in the Asian-Pacific, which grew +95.5%, from US$ 11.1tr in 2005 to US$21.7tr in 2010 (Table 3). At the country level, in 2010 the USA had the most millionaire (5.22million) and UHNWI (more than US$100 AuM) households (2.692million), but Singapore had the highest proportion per household of millionaires (15.5%) and Saudi Arabia the highest proportion of UHNWIs (18%) (Tables 4 and 5). Table 3 Assets under Management (AuM), 2005-2010
Source: BCG (2011) Table 4: Millionaire households, 2011 (US$1m AuM)
Table 5: UHNW households (more than US$100million in AuM), 2011
Executive Remuneration and the ‘Bonus’ CultureFrom the early-1980s, a significant driver in the growth of the global HNWI market was the creation of so-called ‘new money’ millionaires and billionaires derived from: ‘liquid events’ (Smith, 2001) for example through flotation’s of private companies, privatisation and the exploitation of natural resources (as in the case of the Former-Soviet Union) (The Economist, 2009) (IPOs); significantly enhanced executive (President, Vice-President, CEO, CFO, COO) remuneration (Frank, 2007; Irvin, 2008; North, 2005); and the ‘bonus’ culture, associated specifically with IFCs and banking, finance and professional services (Beaverstock et al 2012). The rise of financial elite (Folkman et al, 2007; Hall, 2009) provided a ready-made HNWI demand for the private wealth management industry, as many were employees of the wider banking and financial services sector (Beaverstock et al 2012). High base remuneration and the year-end bonus are a major facet of all major IFCs. Taking London as an example, 354,000 City workers in 2007 received bonuses worth £11.565 billion (Table 6). Post-financial crisis, London bankers, like elsewhere were back on the bonus trail. The Centre for Economics and Business Research [CEBR] (2010, 2011) estimates that in 2011, 327,000 City-workers will receive a bonus pot of £7.154 billion, an increase of 34%, + £1.8billion from 2008. Wall Street bankers are also on their way back in the bonus stakes. An estimated US$20.8 billion was paid out to Wall Street’s financial community in 2010, +18.2% or +US$3.2billion more than in 2009 (http://www.economist.com/node/18231330, accessed 110511). Thus, over the last thirty years or so, the size, composition and geography of global wealth have changed dramatically from its ‘old’ money roots (see Lundberg, 1988; Thorndike, 1980). The super-rich are now a self-styled and financialized market in themselves, which provide the demand, and often bespoke stimulus, for retail financial products and services to manage and protect their wealth in the form of the private wealth management industry (Beaverstock 2011). In essence, the shaping of the contemporary private wealth management industry has run parallel to the rise in the volume of HNWIs and their tailored demand for innovative financial services and expert advice. THE CITY OF LONDON AND THE SUPPLY OF PRIVATE WEALTH MANAGEMENTThe City of London is one of the leading IFCs for the investment of private wealth from both domicile and non-domicile (offshore) residents, and the provision of a purely private wealth management industry. In 2010, BCG (2011) estimated that US$1.9 trillion of private offshore wealth was managed in the UK (primarily in the City), Jersey, Guernsey, Isle of Man and Dublin, second after Switzerland (US$2.1 trillion) (Figure 1). Of the US$1.9trillion of offshore private wealth held in the UK, 39% of this wealth originated from mainland Europe (US$0.74tr) and 27% from the Middle East (US$0.52tr). Indeed, the BCG (2011, p.16) noted that, “UK offshore banks, especially those in London … are well positioned to attract wealth from China, India, Latin America and the Middle east owing to historical ties.” The latest available data on UK fund management, derived by TheCityUK (2011a, p.9) estimates that private clients are an important segment of the UK market, with assets accounting for £475bn at the year end of 2010. Figure 1: Private wealth in offshore centres, 2010 (US$ trillions)
The establishment of London’s global private wealth management industry has been driven by several factors. First, the City’s world class reputation in traditional private banking has laid the foundations for the new wealth management industry (see Bicker, 1996; Cassis and Cottrell, 2009). London’s private banks have been in existence since the end of the Seventeen century (e.g. Coutts & Co, established 1692), and today the City hosts the headquarters or regional offices of the top global private banks, who still remain significant players in the private wealth management industry (see Beaverstock, 2011) (Table 6). This private banking sector has not only engrained a tradition of credibility, trust and safety in the deposit of wealth, but it has also created a milieu of expertise, knowledge and financial instruments which spill-over into similar financial sectors. Second, London’s position as a fully functional IFC has meant that these firms have been able to take advantage of their location and global service platform to re-engage with private clients or diversify into wealth management functions. In particular, global universal banks like Citicorp, UBS and Credit Swiss, investment banks like Goldman Sachs, J P Morgan and Barclays Wealth, and professional services (e.g. ‘magic circle law firms’ and the Big Four accounting groups e.g. KPMG) have begun to offer new products and bespoke advice to a high volume HNWI market in competition with traditional private banks and brokerage firms (Beaverstock et al, 2012). Third, London’s position as a global financial centre means that it has a global talent pool to draw upon, with a range of specialist financial, professional and expert knowledge (including trust and taxation), in many jurisdictions and markets, which are second to none (see Beaverstock, 2010; Wainwright, 2011; Z/Yen, 2011). London is a specialist global centre where its talent pool can access and manage: conventional funds (e.g. cash, bonds and equities); alternative funds (e.g. private equity, hedge funds, equity derivatives, and the trade in fine arts and collectables) (IFSL, 2009). Fourth, London is a global centre for specialist banking and investments, like for example Islamic finance which is vitally important for the Middle-East and SE Asian HNWI clientele (IFSL, 2009). For example, London has 22 banks which supply Islamic products, of which five are fully shaira compliant, and 34 Islamic funds managed from the UK (The CityUK, 2011b). Fifth, over time, London has developed as an important location for managing the UHNWI market primarily through family offices, who offer: specialist advice and planning; investment management; and administration (see Maude, 2006). There are over 300 family offices in London with assets of over £100 million each (ISFL, 2009), and London hosts Bloomberg’s top family office, ranked by assets, HSBC Private Wealth Solutions, which manages US$102 billion for families in 18 offices around the globe (http://www.bloomberg.com/news/2011-08-08/hsbc-tops-family-office-list-as-money-firms-manage-rises-17-.html, accessed 18.10.11). Sixth, and importantly, London is a residential magnet for the global HNWI and UHNWI population. Table 6: City bonus payouts and employment (April), 2001-2011
Table 7: The Top 20 Global Private Banks, 2011
A SURVEY OF PRIVATE WEALTH MANAGEMENT IN THE CITY OF LONDON AND UNITED KINGDOMThe authors undertook a desk-based survey of 400 leading firms to identify the specialist financial products and services offered to the HNWI market1. These firms were categorised into six major providers of wealth management: (i) accountancy; (ii) asset management; (iii) banking, including group/foreign, retail/commercial, private and investment; (iv) insurance; (v) legal; and (vi) retail internet-based specialists and ‘high-street’ providers. For each firm, their website was scrutinised in a systematic way to capture data on: the products and services that they offered to clients; their ‘target’ market (e.g. HNWI up to U-HNWI); and organizational characteristics (e.g. location of HQ, number of international offices and employment size). The information for each firm was analysed, and compared and contrasted to reveal new trends and evidence for sub-groups within the HNWI categories. In the following section, we will analyse in detail the composition and characteristics of the five leading providers of private wealth management (accounting, asset management, banking, insurance and law) and outline their unique input into the HNWI market2. AccountancyForty-eight accountancy firms were investigated including the major transnational corporations – the Big Six (e.g. Baker Tilly; Deloitte; Ernst & Young; KPMG; Grant Thornton; PwC) and an array of medium-sized UK providers (e.g. Moore Stephens and Shipleys). An analysis of the products and services on offer from these accounting firms indicated that 92% of their private wealth management business was predominantly to clients in the HNWI to U-HNWI market (the remaining 8% were targeted at clients in the Mass Affluent market)3. Furthermore, the ‘private’ products and services most regularly supplied to the HNWI to U-HNWI market, accounting for 53% of the total, were advice on personal taxation (including filing returns), financial planning, setting –up and managing trusts (for inheritance) and the management of estates (private property portfolios). The major global accounting firms offered a full portfolio of specialist products and services to clients within and between different jurisdictions through devoted private wealth partnership teams including a more specialised focus on expatriates and ‘non-domiciled’ residents in the UK and beyond. In contrast, many of the regionally-based firms targeted local HNWIs and large family run businesses/entrepreneurs primarily focused on personal taxation, trusts and financial planning. Asset ManagementThe private wealth management provision of 131 asset management (AM) companies were analysed in the survey. These firms represent one of the new burgeoning segments of the ‘private wealth management’ industry that mushroomed from the late 1980s. Our database of AM firms included: a variety of transnational firms, with domestic and foreign ownership, with offices in other IFCs (e.g. J. P. Morgan Asset Management in New York; USB Global Asset Management in Zurich); those which are subsidiaries of global (e.g. HSBC Investment Funds) and investment banks (e.g. Credit Swiss Asset Management; Goldman Sachs Asset Management); and specialist SMEs, often one office firms located in the City (e.g. Troy Asset Management Ltd), Edinburgh (e.g. Baillie Gifford & Co. Ltd) or other regional cities (e.g. Liverpool Victoria Asset Management in Liverpool). In AM the majority of firms offered their products and services across the entire range of the wealthy, to the MA+, HNWI and U-HNWI markets (representing over 71% of the products and services on offer). The MA-UHNWI range provides little insight into the particular niche markets. The reasoning behind this is that many financial products, mutual funds and Open-ended investment company’s (OEICs) may be recommended for purchase by an MA+ client’s accountant, or by the private bank of a HNWI-UHNWI, leading the two to overlap. For example, Credit Suisse and JP Morgan Asset Management offer unit trusts, fund of funds, ISAs and OEIC products to its clients. A closer comparison of the MA+ client products and the HNWIs, reveals products that are deemed to require larger initial investments. While the MA + consumers products tend to focus on ‘traditional ‘ products such as exposures to equity, corporate bond funds and government bonds (accounted for 72% of advertised products), the HNWI-UHNWIs products included ‘non-traditional’ products including hedge funds, bespoke portfolios and structured funds (which accounted for 22% of HNWI products). BankingSixteen UK banking groups and foreign banks (e.g. Arab National Bank, Bank of India, BNP Paribas, FIBI Bank, N M Rothschild & Sons Ltd) were included in the survey, whose targeted market were their resident national populations and clients who wanted their wealth managed ‘offshore’ in London. The majority of products and services were offered to HNWI-UHNWI (56%) and MA+ clients (21%). The most common services and products for HNWI-UHNWIs included, financial planning, investment management, current accounts, secured lending and trust services, but also included more diverse services such as tax advice (expatriate), lifestyle advice and art & jewellery advice (e.g. storage and insurance). We also analysed 23 of London’s leading private banks, and for some, their interests have been in the City for over 100 years (e.g. Arbuthnot Latham & Co, Brown Shipley & Co, Coutts & Co), with one being headquartered in Bermuda and two in Zurich. The HNWI-UHNWI client sector accounted for 83% of the services offered by private banks. The most frequently offered services included: current accounts and investment management (13% each); financial planning (10%); trust services (9%); and offshore services (8%) for expatriate and non-domiciled clients with interests in the UK. These private banks also offered a range of specialist lending facilities and products to their clients to address their complex financial requirements (e.g. brokerage, yacht finance, secured lending, pensions). We included 16 of banks, including Barclays Wealth Management, Mellon Bank, Morgan Stanley Private Wealth Management, Schroder & Co Ltd, UBS AG. Eighty-eight per cent of all products and services were targeted at the HNWI to U-HNWI market. These banks supplied a diverse range of products and services to their HNWI-UHNWI clients, in a similar way to private banks. The most commonly offered products were: investment management (16%); financial planning and current accounts (15% each); and tax advice, trusts and ‘lifestyle’ advice. These firms also offered the management of alternative investments like hedge funds and private equity. InsuranceThe distribution of products offered by 135 insurers, including transnational firms (e.g. AIG, Aviva, AXA) and specialists (e.g. British & Foreign Marine Insurance), to the wealthy only accounted for 22% of all products targeted at the HNWI+ market, including MA+-HNWI-U-HNWI (15%) and the HNWI-UHNWIs (7%). The most frequently advertised products were: home and marine insurance (14% each), followed by an array of highly-specialised insurance products (e.g. aircraft, kidnap, jewellery, fine art, classic cars, equine). For example, as part of their HNWI-UHNWI product portfolios, Chubb Custom Insurance Ltd provided specialist products to protect assets such as jewellery and fine art, and AIG UK Ltd offered yacht, aircraft and kidnap products. Legal ServicesTwenty-five law firms, including City-based ‘magic’ and leading US practices (e.g. Allen & Overy LLP, Baker Mckenzie LLP, Herbert Smith LLP) and specialist providers (e.g. Dawson Cornwell, Manches LLP) were analysed to investigate their service provision. All of these firms offered services to the HNWI-UHNWI markets, with a preponderance of the market share accounted for by the global law firms. The three most important services offered to the HNWI market were: the establishment and administration of trusts and estates (36%), to protect the inter-generational transfer of wealth; taxation advice, especially for those with complicated, cross-jurisdictional financial affairs and earnings; and family law, to minimise the loss of wealth outside of the family following death or divorce. CONCLUSIONSOur unique survey of private wealth providers has showed quite clearly that the industry is now very much focused on the management of wealth, providing four related generic functions. First, the preservation of wealth through products and services which focus on being as efficient as possible in limiting the burden of the state, through for example personal income and inheritance taxes (e.g. products and services which provide tax advice, expatriate services, financial planning, the establishment and administration of trusts and estates etc). Second, the protection of wealth and investable assets, like for example specialist insurance policies which covers art and jewellery, classic cars, property, private aeroplanes and yachts, and bespoke advice on family law, trusts and land management. Third, the accumulation of wealth through services such as: financial planning, investment strategies, brokerage, FOREX, alternative investments (e.g. hedge funds, private equity) and family offices services. Finally, what can be best described as, the ‘everyday life’ retail provision of wealth, including privileged current accounts, pensions, credit cards and secured/unsecured loans, savings, mortgage finance, and lifestyle advice, car insurance. But, what is of stark significance, it that this identifiable HNWI market is serviced by a specialist cadre of firms, individuals, technologies and products, primarily located in the pre-eminent IFC, London, which are not only ring-fenced from the rest of the UK and world population, but are also in a self-perpetuating, financialized political economy which is explicitly exclusive to the rich and wealthy, where the barrier to entry is a high level of liquid assets (>US$1m). Looking beyond the conclusions of our empirical survey, two significant implications can be tabled from this brief analysis of the private wealth management industry and the market for HNWIs. First, post-financial crisis, the global super-rich have, to coin a phrase, never had it so good. Their number and stock of global wealth have reached record levels (whether you use MLCG, BCG, Forbes data etc) in mature markets (USA in particular), and unprecedented growth is expected in the Asia-Pacific, notably China and India over the coming decades (BCG, 2011; MLCG, 2011). For the private wealth industry, this forecasting data are fantastic news as the industry expects to be sustained by a high number of UHNWI’s who wish to drawn on the bespoke products and services of places like the City of London, Wall Street and Hong Kong/Singapore to preserve and manage wealth. Second, the U.K.‘s wealth management industry is an extremely dynamic and competitive retail financial market. London remains the pre-eminent financial centre for the management of such wealth through a constellation of global players in private banking, asset management, brokerage, insurance and investment and global banking capacity, and expert labour. But policy-makers and stakeholders must be diligent in their regulatory frameworks as the ‘City’ remains in fierce competition with ‘offshore’ jurisdictions and established centres like New York, Hong Kong and Singapore. The future potential growth in the City of London for the management of HNWIs is at global scale, essentially to manage ‘offshore’ wealth. London will continue to attract a HNWI population from around the world, particularly from Russia and the Middle East, and the industry manages significant global portfolios with its critical mass of experts and professionals. Despite various global social movements rising-up against the super-rich, they are very much here to stay. ACKNOWLEDGMENTSWe would like to thank the Financial Services Research Forum for funding this research within the project: Scoping the Private Wealth Management of the High Net Worth and Mass Affluent Markets in the United Kingdom’s Financial Services Industry (http://www.nottingham.ac.uk/business/forum/index.aspx) REFERENCESBeaverstock, J.V., Hall, S. and Wainwright, T. (2012) Servicing the super-rich: new financial elites and the rise of the private wealth management retail ecology. Regional Studies (in press) Beaverstock J V (2012) The privileged world city: Private banking, wealth management and the bespoke servicing of the global super-rich. In International Handbook of Globalization and World Cities, Derudder, B., Hoyler, M., Taylor, P.J. and Witlox, F. (eds), Edward Elgar, Cheltenham (in press) Beaverstock, J.V. (2010) Immigration and the UK labour market in financial services: A Commentary In Ruhs, M. and Andersen, B. (eds) Who Needs Migrant Labour? 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NOTES* Jonathan V. Beaverstock, School of Geography, University of Nottingham, UK, email: jonathan.beaverstock@nottingham.ac.uk ** Sarah J. E. Hall, School of Geography, University of Nottingham, UK *** Thomas Wainwright, Small Business Research Centre, Kingston University, UK 1. For a detailed analysis of the methodology for this survey see: Beaverstock et al (2010). 2. We have excluded retail/commercial banking, and retail internet-based specialists and ‘high-street’ providers in this analysis because our survey indicated that these sectors were hardly visible in the provision of private wealth management to the HNWI+ market. 3. The acceptable definition of the Mass Affluent are those individuals with liquid, investable assets greater than US$100,000, but less than US$1,000,000 (see ISFL, 2009; PricewaterhouseCoopers, 2009).
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