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Big Changes Coming in HNWI Marketplace

Capgemini reflects on their world wealth predictions

Client reporting, the complexity of globalization, and inter-generational wealth transfer are the three most important issues facing financial services companies who cater to HNWIs, according to Capgemini Vice President Donie Lochan, who co-wrote the firm’s 2006 World Wealth Report (WWR).

Capgemini, the Paris-based IT services and consulting company that operates in more than 30 countries, collaborates with Merrill Lynch to publish this annual report each June.

“Wealth management firms are not as ready as they should be in these areas,” says Lochan. “Quite a lot of firms are not ready for inter-generational wealth transfer. There will be an outflow of assets and there will also be a churn of clients.

“Some firms have initiatives, and others don't. We haven't seen the initiatives that we would have expected. We'll have to see what happens in 2007.”

ONE SIZE DOES NOT FIT ALL

Forward-thinking companies are looking at new market segments and scrambling to prepare for what promises to be a very different marketplace in the next several years.

“In the future, no firm is going to be everything to everyone,” says Capgemini Principal Ileana van der Linde, who will co-write the 2007 WWR.

“Firms will look at their core competencies and figure out what markets they want to focus on. Clients will also look at which firms will best serve them and their changing needs. There’s a mass affluent community that’s retiring, and a younger generation coming up.

“Right now we're still seeing firms in the evaluation stage. I don't think there will be a lot of firms saying they will want to be everything to everyone. Firms are trying to better understand segments and better serve them. They are lessening service to some (more online, less personal) while focusing on other targets.

“Firms will want to minimize churn; the cost of losing and acquiring clients is considerable. Some firms are proactive in engaging the new generation by offering seminars and having younger people on their teams to deal with a younger generation. They’re not just Daddy's banker or Mom's advisor. Other firms are being reactive and are not addressing this right now.

“It depends on the player. There are boutique players, regional firms, and global firms. We can't predict who will be a winner. Their clients are also changing; some like boutique firms and some like global service. There’s a lot of impending change. It won't happen next year, but over the next few years you will see a lot of shifting.”

SHIFTING PRIORITIES

“Many of our clients are looking at the client base they have and wondering if they should be looking at different segments of the market,” says Lochan. “They are looking at different attributes, such as cities, gender and age. They are asking for a lot more data across different market segments. They are looking at acquisition strategies. They are starting to look at new initiatives and service models.

“Our clients are asking us how to prepare for the impending wealth transfer coming over the next few years. Firms are requesting more information on the best-practice, service/delivery models in place in the industry.

“Our clients are also focused more on growth opportunities, particularly in mergers and acquisitions.”

For the past 10 years, the WWR has closely monitored and reported on the investment behavior of HNWIs, pinpointing trends and forecasting developments that subsequently have had an impact on the wealth management industry.

The 2006 WWR spotlighted these trends:

HNWI BEHAVIORS AND PORTFOLIOS GLOBALIZE AS WEALTH-TRANSFER WAVE ACCELERATES

• The interrelationship and convergence of economies and cultures continue to mold the face of wealth management around the globe.
• HNWIs’ investment and lifestyles are taking a growing international flavor.
• Intergenerational wealth transfer is likely to accelerate these trends and to prompt new service-delivery strategies from relationship managers and wealth management providers.
• HNWIs’ inheritors are likely to take a more active role in their investments, focusing on higher returns, emphasizing wealth accumulation over wealth preservation, and accepting more risk to achieve goals.

GLOBALIZATION COMPOUNDS HNWIS’ UNFULFILLED NEEDS

• Opportunities from globalization are widening the gap between HNWI clients' needs and the current state of wealth management services.
• While investment allocation is becoming more complex, HNWIs' desires for reporting simplicity are intensifying.
• Wealthy clients want tailored portfolio strategies and advice to support their overall wealth management goals.

CREATING A GLOBAL, FULL-SERVICE WEALTH MANAGEMENT PROVIDER

• Establishing specialist wealth strategy teams around the globe will help relationship managers meet clients' desires for more information on international markets and other financial concerns.
• Streamlining back-end processes such as client reporting and account opening around the globe will improve banking efficiency while fulfilling client needs.

MAINSTREAM ISSUES

HNWIs sit at the center of a global cycle of growth, the WWR said. As a result of their investment strategies and their hunt for high returns, HNWIs play a key role in fueling regional wealth creation. HNWIs are scouring the global investment marketplace for opportunities, seeking better performance, risk mitigation and increased global perspective.

“In all of the years we've done WWR, we don't predict the future; what we write about comes from previous years working with clients and where we see them expending their efforts,” Lochan says. “We find our predictions are pretty much spot on; we are working with very innovative clients at the forefront of issues that are happening, and will become more mainstream.

“Some of the trends we report and predictions we make are actually happening now a lot faster than they have in previous years. Typically, it takes six to nine months for our predictions to become mainstream. Client reporting, an issue in last year's report, is already mainstreaming. There isn't a major firm that isn't looking at client reporting.

“Most clients now are much more complex. Their demands are more complex, and they are investing more globally. They are bringing in the next generation of wealth strategies. That was a theme of the 2006 WWR. Wealth based from a client-needs perspective and a provider’s perspective has become more complex. Firms are struggling with this. This is prevalent in the marketplace.”  

MANY QUESTIONS

“We don't do research based just on what firms are doing, because there might be a time lag between what clients want and what firms implement,” says van der Linde. “It takes time and funding to make changes to platforms and visions and how firms decide to change whom they target.

“Firms are making adjustments. They are looking at what's coming down the pike and looking at target markets. They are also seeing a shift in the marketplace and re-evaluating the direction they are taking.

“Should we change our offerings? How are we going to be ready for what's coming? These are just some of the questions they’ll have to answer.”

SOURCES:

• January 2007 interview with Donie Lochan, Capgemini Vice President and Ileana van der Linde, Capgemini Principal.
• The 2006 World Wealth report (WWR), by Capgemini and Merrill Lynch.