The financial crisis is taking its toll on the world economy. While the International Monetary Fund (IMF) has projected world growth will fall to 0.5 per cent in 2009, its lowest rate since the second world war, a study commissioned by the Asian Development Bank (ADB) has estimated the global financial crisis has slashed the value of financial assets worldwide by $50,000bn (€40,000bn).
According to private equity company Blackstone Group’s CEO Stephen Schwarzman, up to 45 per cent of the world's wealth has been destroyed by the global credit crisis. Not surprisingly, the wealth management industry is feeling the crunch.
Flight to safety
“Assets under management in the wealth management and private banking space have gone down.
This means lower fees for service providers. The world of structured products is dead at this point in time and there is a flight of capital into safer domains,” remarks Tobias Straessle, head of strategic business initiatives at Danish online investment bank, Saxo Bank.
He says there is a huge opportunity for smaller independent wealth managers.
“Assets are flowing in from the big banks to smaller banks. Clients want more control of their finances and will go to smaller firms to get more personalised, transparent service,” he explains.
“Structured products and hedge funds are less fashionable. It is back to basics in terms of products. Private wealth managers need to re-build the trust of their clients,” says Didier Pitton, product marketing director at wealth management technology vendor, Odyssey Financial Technologies.
A key wealth management firm that has been a victim of the sub-prime crisis is UBS. It posted the biggest loss in Swiss corporate history of $7bn in the fourth quarter of 2008. The Swiss financial institution saw its clients withdraw an estimated SFr58bn (€40bn) from its wealth management and private banking businesses in the last three months of 2008 alone.
The problem has been further compounded by the fact that the Swiss giant was forced to hand over confidential client data to the US in February this year. According to local media reports, in an internal memo to UBS employees, the management said that it would take two years to restore client confidence at the bank.
For European investors, the present crisis has meant a shift away from risky assets and towards wealth management service providers that instil trust in their clients and can provide a more personal advisory experience, states Isabella Fonseca, senior analyst at research firm, Celent, who has authored several reports on the wealth management business and technology trends in the sector.
Additionally, she says that investors are looking for new types of services, such as improved risk management, tax planning, and help with socially responsible investing. “Over the coming years, the wealth management industry in Europe is expected to go through three stages of consolidation, stabilisation, and, finally, growth, as consumer confidence returns,” states Ms Fonseca.
“In general, the more mature western European economies have seen more negative effects from the crisis. Smaller western economies are expected to follow their larger counterparts and experience slow growth in coming months.”
Facing the challenges
In these times of uncertainty, wealth management firms are taking several steps to deal with the downturn, says Ms Fonseca. They are lowering the customer segment net worth level to include a broader range of products and services.
For instance, Intesa Sanpaolo in Italy has lowered the assets required for investment for a private banking client from €1m to €500,000. Firms are also expanding the product ranges for their clientele. They are creating new levels of client investments and turning execution-only business to investment advisory business to generate AUM revenues. Many firms are also focusing on Central European countries.
Interestingly, despite the obvious impact of the financial crisis on the wealth industry, Ms Fonseca states that so far there has been no slowdown in market demand for wealth management technologies. This is mostly due to increasing wealth, she says.
“There is a need for robust wealth management systems,” she explains. “We have seen postponement of projects in certain instances, but no cancellation. With the consolidation activity, as one might expect, solutions that are able to scale to large volumes will be a better fit to be the solution of choice. Also, there has been an increase in demand for integrated front to back office activity, with a focus on firms’ infrastructure.”
Opening up the market
There is no doubt that technology is a key enabler of wealth management initiatives. Automation allows services that firms once only offered to the extremely rich to be offered to the mass affluent segment of the market.
