The wealth built in emerging economies is transforming the private banking sector, with the needs and desires of the ultra-rich emerging economies changing as quickly as the markets themselves.
Technology, culture and capital once flowed from industrialized countries to developing countries. That time goes by quickly. Emerging economies are competing with traditional metropolises in terms of advances in everything from 5G communications to electric vehicles – and in the resulting wealth creation. Asia has become the engine of global economic growth, while voters in Europe and North America debate who is responsible for their relative stagnation.
These megatrends are changing the private banking landscape in ways that the industry needs to keep up with. Only 10% of wealthy Asians’ investable assets are held by private banks, estimates Tjun Tang, a Hong Kong-based partner of the Boston Consulting Group. What happens to the other 90% is the question of the era for asset managers and also for asset owners who want to pay out money from companies and build up assets over the long term.
The economies in the Middle East, Eastern Europe and Latin America are less dynamic than Asia. However, there are surges in demand from wealthy individuals looking to diversify risk outside of their home country while watching the tightening global restrictions on offshore deposits. Elsewhere, political changes are widening the scope for onshore wealth management. China is steadily opening its market to global banking competition, while Saudi Arabia is experiencing a kind of big bang under the reform-minded Crown Prince Mohammad bin Salman.
The emerging markets umbrella covers a wide range of financial environments, from Shanghai to Caracas. But the requirements of private banking customers and potential customers are developing in several broad directions across borders.
Complete customer control
The days of a distracted wealthy scion signing his trust fund over to the family banker and glancing at a bank statement once a quarter are going back, likely faster in emerging markets, as more of their wealth comes from ongoing business activities. The new high-net-worth paradigm comes closer to a CEO who proposes his own course and relies on banks for discreet deal-making or investment expertise. “We’re very good at developing our own strategies,” says Karam Hinduja, heir to a South Asian industrial fortune and founder of the Karma Network of Family Offices. “We go to the banks as a service provider.”
Middle Eastern money is also moving towards a more practical approach, says Sudarshan Malpani, managing director of Dubai-based Alpen Asset Advisors, which grew out of Bank Sarasin’s regional operations. “Customers used to split their wealth between six or eight banks without much control,” he says. “You are now moving quickly towards family office structures and sorting out portfolios that are not performing.”
In fact, clients could do better by giving their banks’ investment professionals more control, says BCG’s Tang. “Very few wealthy individuals can manage their own portfolios with maximum efficiency,” he notes. But it’s hard to convince successful people of their own shortcomings.
Leading global asset managers such as UBS, Credit Suisse or Citigroup are adapting to the more demanding requirements of their clients and integrating asset management with investment banking in order to equate super-rich families with rich institutions. But they are abandoning the rich and raising the threshold for private banking services to between $ 5 million and $ 25 million. That opens up regional commercial banks that have helped the emerging wealthy on their way up and, in some cases, are pushing private banking services down. “Local banks are starting to wake up and the $ 100,000 to $ 1 million segment is what they’re really looking for,” says Malpani. Asian regional banks such as DBS and Bank of Singapore or the South Korean KB Kookmin Bank have long recognized these synergies.
Offshore private banking, which continues to determine the public image of the industry, is changing rapidly due to international regulation and the changing requirements of customers from emerging countries. A multitude of transparent pacts and protocols as well as the aggressive enforcement of the Foreign Account Tax Compliance Act in the USA have tightened the noose around assets hidden abroad in order to avoid taxes or public curiosity. The up-and-coming entrepreneurial class in emerging markets has only limited use for these structures anyway, as their income comes from legitimate businesses and tends to be lightly taxed domestically.
Hinduja, Karma Networks: We are very far from developing our own strategies.
But the emerging rich hunger for international diversity in their own way, be it to acquire a subsidiary in a new market or to send their children to Eton or Harvard. The result is insatiable growth in so-called nearshore zones, which serve as global investment brokers in compliance with the latest regulations. Hong Kong is, unsurprisingly, the largest of these. According to the local Securities and Futures Commission, the city-state’s assets under management rose nearly in half to $ 1 trillion in 2017.
The rich emerging countries are facing increasing obstacles to the free development of their wealth. Nation-states from China and Russia to Venezuela tightened capital controls and controls to try to keep the money at home. Investment goals are also growing choppy, with results ranging from the blockade of Chinese technology-related acquisitions in the US and Australia to New Zealand’s recent ban on foreigners buying homes. President Donald Trump’s America-First rhetoric raises greater fears about a rollback in global citizenship. “Whether they are focusing on import-export relationships or sending their children to school in the US or UK, I think Asian entrepreneurs are worried about the climate,” says Jan Bellens, who heads the Asian banking practice of Ernst & Young of Singapore out directs.
But with affluent emerging economies already owning companies and assets around the world, no one can stop the near-shore wave for now. The US is expanding as a near-shore zone, although it is scrutinizing the foreign holdings of its own citizens more closely. “With increasing economic and political instability in Latin America, Miami is increasingly becoming a hotspot for very wealthy private individuals,” says Johannes Schlotmann, wealth management expert in Zurich at Deloitte.
Great expectations (for returns)
Part of the reason that much of emerging market wealth remains outside the coffers of private banks is that their owners have been able to generate generous returns elsewhere with seemingly safe instruments. Chinese financial firms offered interest rates of 4% or more on so-called wealth management products before government crackdown began last year. Banks in the Gulf States offer a similar rate of return on conventional one-year deposits, Malpani says. This is a sharp contrast to the US and Europe, where deposits or government bonds have offered ridiculous returns since the 2008 crash. “These deposits are considered absolutely safe for local investors,” says Malpani. “So if I show them a product that pays 3%, of course they won’t buy it.”
However, several factors disturb this paradise for renters. Beijing authorities have restricted some of these wealth management products for fear of a national multi-trillion dollar Ponzi scheme. Emerging market currencies outside of the oil-rich Persian Gulf have also fainted this year. Savers in India, Brazil, Russia, and other populous markets have seen their domestic coin fall at least 10% against the US dollar, driving returns deeply into negative territory for international-minded investors.
In the meantime, a new generation is growing up with a more global mentality and interests than its parents. Karam Hinduja is a perfect example – trained in Switzerland and living in New York, where he focuses on media projects in addition to the Family Investment Office. “With the younger generation, there was a certain mix between emerging and industrialized countries,” he says. “You can see that everywhere in the international orientation of companies in the growth phase.”
Private bankers are encouraged that Hinduja see another role for them in this brave new millennial world. “When it comes to day-to-day financial management, it makes sense to continue the relationship with a large institution,” he says. “You don’t have to do the overhead.”
But traditional asset managers have a lot to do to keep up with the times. One thing is certain: the emerging market customer will play a greater role in the future of the industry than in the past.