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Wealth Firms Consider Lower Client Asset Minimums

Emma Rees, Features Editor , 24 November 2009

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As falling markets have wiped heavy sums from asset values, wealth management firms may reduce the minimum sums of money that a client must have. WealthBriefing talked to the industry to find out what is happening.

The global recession has eroded the value of assets owned by many private banking clients, leaving firms with a dilemma. Should they retain their existing assets thresholds for or drop them to reflect recent falls in wealth?

According to Ledbury Research, many firms are being forced to change their assets criteria by the simple fact that many clients have lost money, taking them below the usual threshold. 

“The target market has shrunk: for example, we estimate the population worth over $10m in the UK will drop by 36 per cent by the end of 2009, or 52 per cent from 2007,” said James Lawson from Ledbury.

Merrill Lynch and Cap Gemini’s latest World Wealth Report also calculates that the number of individuals with $1 million or more in investable assets crashed back to 2005 levels, falling by 15 per cent and their wealth by 20 per cent by the end of 2008. However, other experts believe that impact on has been minimal, particularly on the ultra-wealthy.

“Those with liquid assets of £5 million ($8.3 million) or more haven't got that much poorer, they just haven't got a lot richer recently,” said John Clemens from Tulip Financial Research. He said wealthy individuals have bigger stocks of cash than in pre-crunch days and are wondering what to do with it. “Arguably, it’s a good time for private banks, if they are proactive, but most are not.”

Describing assets entry levels in wealth management as “a game of smoke and mirrors”, Scorpio Partnership, the consultancy, has witnessed a polarisation of the industry and a refocusing by firms on their perceived core client bases. Having been notoriously reticent about stating entry levels, firms are starting to become less coy and more explicit about their thresholds. “The drivers are profitability and an outcome of engagement with and better understanding of the client base,” said Scorpio’s Graham Harvey.

HSBC Private Bank, for example, clearly states on its web site that its services are available to those wanting to invest or borrow more than $2 million and those with requirements below this amount are directed to HSBC Premier or HSBC’s retail bank. HSBC’s threshold in the UK of £2 million can comprise a mixture of investable assets, insurance, lending and so on. The firm says that this is not necessarily a focus on the ‘ultra-wealthy’, but does mark a pure private banking proposition in the UK distinct from its Premier product, which it says distinguishes it from some competitors in the UK.

JP Morgan says that whilst it has no set minimum, families and individuals with at least $10 million in investable assets – or $25 million in net worth –can generally make the best use of the service it offers due to the level of complexity in their financial affairs. “But there is no hard and fast line; our objective is to grow relationships with clients who have complex wealth issues across generations,” said Pablo Garnica, head of JPMorgan’s private bank in the EMEA region.

“Of course investable assets are hugely important,” according to Pauline Brown, Coutts, head of business development. “However, our entrance criteria is versatile, in the sense that we will apply the most relevant criteria, based on the individual applying.” Coutts will take on a new client if they satisfy the firm’s income criteria which might be much more relevant when assessing potential new professional clients or city executives. Total net assets might be more appropriate as a starting point for potential new entrepreneurial clients and the most relevant criteria for a new landowner client is more likely to be based around minimum acreage.

Coutts says that if it is looking at minimum assets for a potential new client, its criteria is £1 million. “For property/business owners/investors, the criteria would be based around total net assets, in which case we would look for £5 million plus. The flexibility applied here, may be based on individuals who are very likely to reach either criteria within the next 12 and in some cases, 24 months,” concluded Ms Brown.

“We don’t publish or even have one,” said David Cathie, managing director, Adam & Co, the Edinburgh-based private bank, when discussing a minimum assets thresholds. “A potential client may have their wealth wrapped up in their business but be clearly successful and in line to benefit from a significant dividend or to sell the existing business in whole or part in the future.”

Mr Cathie says that rather than focus on assets, Adam & Co will look at what a client’s needs are, their life-stage, appetite for risk and timescales. “Our wealth managers have a great deal of flexibility with regards the clients they take on. We do set growth targets and if a client is not going to generate the revenue for the relationship to work - and it works both ways - the wealth manager can win additional clients to compensate for that,” he added.

Adam & Co does not offer stripped down service for less wealthy clients. “We certainly don’t segment by how valuable they are,” said Mr Cathie. “We offer the best service we can. If it’s not working and a client is not using us sufficiently, we’ll have a conversation around that, but it’s very rare.”

Mr Cathie says that it is in times of global recession that private banking comes into its own. “No one’s unaffected, but our clients are better placed to ride out the recession than most. Our model is based on long term relationships and it is at times like these that private banking works well as you know your client and they know you. Wealth management relationships are both a science and an art and clearly they must work for both parties. They are not for everyone.”

RBC Wealth Management sets its threshold at a minimum $1 million of liquid assets. “We believe that our value proposition is best suited to high net worth clients with a need for integrated wealth management solutions involving discretionary and advisory investments, tax advice, trusts, banking and credit facilities," said Phil Cutts, head of advisory, British Isles.

However, the firm also has an emerging high net worth client base, who must have a minimum of $250,000 in liquid assets. “Thresholds are flexible only in specific cases, when we see the potential for increased wealth in the future and where the client is connected to an existing relationship with us," said Mr Cutts.

Profit challenges

There are profitability challenges inherent in providing services to each assets segment. The majority of firms have a minimum of $1 million in investable assets as the high level of service they provide to clients is not profitable at lower levels.

“Assets thresholds have always been fluid at the best of times and figures are largely ball park, with the ball park being six, seven or eight figures.

A key question firms need to ask is whether that client it profitable within the current proposition, yes or no. If not, what proposition could work?” according to Scorpio’s Mr Harvey.

Isabella Fonseca, a senior analyst, from consultants Celent believes that there is not necessarily a ‘sweet spot’ in terms of thresholds, with the optimum assets figures varying from firm to firm. At any level, the ability to meet clients exacting requirements at an appropriate price is a must for both client and firm. Wealth managers can no longer afford to be all things to all people.

“Assets under management have shrunk considerably and at the same time clients require much more time and attention from their CRM,” said PricewaterhouseCoopers in a recent report.

Scorpio’s Mr Harvey says that the smart decision by firms is to focus on the mid-net worth individuals which he defines as those with between $500,000 and $5 million. “This differs by geography and by business model, with pure discretionary relationships working profitably at below $500,000 in some instances.”

Cold reality

Industry insiders suggest that if you look at most firms stated assets threshold, the reality is often about half that advertised. Some firms are reducing asset thresholds, especially for high net worth and private banking services according to Ms Fonseca. “However, what firms are addressing more strictly is the account opening process, given that they need to understand the client better in terms of risk profile and validating the client such as source of funds,” she said.

Ms Fonseca says that wealth management strategies are changing at firms as they add more wealth management applications for advisors and diversify vendor solutions. There is a focus on those individuals with investable assets between $250,000 and $10 million, from the mass affluent to high net worth. “Firms are looking at ways to reach out to lower net worth clients with more self service focused models,” she said.

However, Mr Clemens from Tulip Financial Research sees no reason at all to go after the less affluent due the relatively high costs involved in achieving the same return. He views the exception to this as targeting younger clients whilst they are building wealth. “However, wealth focussed banks have never really done this effectively except with regards attracting the offspring of existing clients,” he concluded.

Whilst the decision as to whether to reduce assets thresholds rumbles on, those firms that decide to pursue the merely affluent at the expense of the ultra-wealthy may be jumping the gun. Wealth creation may have stalled, but this is likely to be only a temporary blip. Merrill Lynch forecasts that the growth in financial wealth of HNW individuals will grow more than 8 per cent a year, reaching $48.5 trillion by 2013.

 

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