With the approach of WealthBriefing’s first anniversary, the end of the year upon us which suggests that a review of the last 12 months is i...

With the approach of WealthBriefing’s first anniversary, the end of the year upon us which suggests that a review of the last 12 months is in order. Indeed, the world of global wealth management has been packed full of developments in the last year – providing plenty of interest for our readers to digest.

Overall, few in the industry would argue that 2005 has not been a good year. Profits at most private banks/wealth managers have been strong – possibly the best year since 2000 for many in the industry.

The good times have flowed quite evenly across the wealth management centres. Swiss private banks have prospered, UK wealth managers are happy and booming markets in the Middle East and Asia have led to a gold rush-like atmosphere developing in many of the countries in these regions.

Impressive profits among US wealth managers showed plenty of momentum across the Atlantic too.

Smaller offshore centres in Europe may have faired less well as a result of the European Union's Savings Tax Directive, but some, such as Luxembourg, have shown an impressive agility to adapt. Jersey and Guernsey also say they were well equipped to deal with the changes in 2005.

Regulatory pressures – although ever present – have become a little less all-persuasive this year, compared with last year. Even Swiss private banks are saying the heat if less intense than in previous years.

What about that favourite topic of consultants: industry consolidation? There have been signs of this, but no more than before. Indeed, consolidation looks to be taking place more in the UK than in Switzerland, despite the plethora of independent wealth managers in the latter.

The booming global wealth management market appears to be accelerating the trend towards the “star” culture that is emerging among some relationship managers and the firms where they work. This is set to accelerate in 2006.

Profits
Profits have been bumper in many of the industry's participants, fuelled by strong advances in major stock markets, oil money, the Asian economic boom, and in Switzerland’s case, the strong US dollar.

A snapshot of the major stock markets shows some impressive gains that have underpinned wealth management growth. The Swiss Market Index has so far this year risen by 31.5 per cent and the Nikkei 225 is up around the same level. Less impressive, but still strong, the FTSE 100 has so far recorded a 12.7 per cent gain this year.

Although the price of oil has fallen slightly since it approached $70 a barrel in late August, oil prices are still historically high. And plenty of oil money from the major producer countries is finding its way into private bank accounts.

The Swiss private banks have particularly taken advantage of this as they are benefiting from Middle East money preferring, in many instances, to place their money in banks from neutral countries as America’s war on terror continues.

The breakneck speed of the Asian economic boom is creating an ever increasing pool of millionaires in the region – a pool which is proving a rich fishing ground for global wealth managers.

Singapore is fast becoming the hub of much of this activity. The city state, which always modelled itself on Switzerland, now appears to be becoming Asia’s private banking centre. Demand for private bankers in Singapore is greater than ever and appears to show no sign of abating with UBS looking to recruit another 1,000 private bankers in the region by 2007.

Singapore might be the centre of much of the activity, but the attention is on the powerhouse economies of China and India. Under World Trade Organisation rules both economies are due to open up their financial sectors to greater foreign competition late next year.

India is ahead of the curve and private banking activity is flourishing there, led by the two major French banks, ABN Amro, HSBC and Merrill Lynch. But local players such as ICICI Bank, IndusInd Bank, among many others, are launching services targeting the country’s wealthy.

Moves in China are centered on the likes of UBS, Deutsche Bank and HSBC buying minority stakes in local asset managers, or forming joint ventures. Openly targeting China’s growing ranks of millionaires still does not sit easily with the country’s communist political system, despite widespread economic and social reform.

A closer look at which firms made money in global wealth management in 2005 reveals the usual names, but with a few smaller firms exerting greater influence.

UBS goes from strength to strength: Expect record results for the bank in 2005 when they are released in early February. The bank’s third quarter results for its wealth management division, excluding the US, showed an impressive 21 per cent quarter-on-quarter growth in pre-tax profits.

And its asset gathering machine shows no signs of slowing down – attracting a massive SFr19.2 billion in new money just in the last quarter!

Credit Suisse was still sorting itself out in 2005, as the “one bank” philosophy being driven by chief executive Oswald Gruebel percolates through the organisation. Yes – and it's farewell to Credit Suisse First Boston as a brand on January 1 2006.

The Swiss mid-sized players – the names of some appear to be perpetually in the firing line when it comes to consolidation or weak performance – managed to survive another year but with some changes.

Julius Baer’s acquisition of UBS’s three private banks and GAM represented one of the biggest stories of the year in wealth management. This appears to have bolstered Julius Baer’s fortunes for the time being, but more on this later.

Vontobel and Bank Sarasin continued to muddle through, with some management changes at the top at Sarasin and a number of interesting moves at Vontobel including December’s acquisition of a Swiss hedge fund specialist.

EFG International was created out of EFG Private Bank and listed on the Swiss stock exchange a few months later. The bank announced a number of acquisitions and further ones are expected in 2006 – EFG has plenty of spare cash and is an obvious bank to watch in 2006.

Many of the smaller Swiss private banks weathered consolidation pressures in 2005 by becoming more profitable for the reasons stated above.

In the UK, Coutts, HSBC Private Bank, SG Hambros, and many of their competitors all had a good year. The local private client stockbroker market was dominated at the beginning of the year by the Rensburg takeover battle between Rathbones and Investec.

An unexpected growth in private client equity trading provided a useful end of year bonus for many private client groups in the UK.

Fleming Family & Partners became the star wealth manager in the UK during 2005 after a number of deals in the last few months added to the multi-family office’s fortunes. Again, one to watch in 2006.

The big US players in global wealth management continued to notch up impressive growth rates in their local market, but have been less successful abroad in 2005. Morgan Stanley saw a fall-out from its changes at the top earlier in the year, which filtered down to its private client business.

The appointment of James Gorman, the former head of Merrill’s private client business, to head up Morgan Stanley’s private client business should help to stabilize things when he joins in February next year.

Merrill, Citigroup, JP Morgan, Northern Trust and Bear Stearns all flourished at home with strong profit results and impressive asset gathering achievements. But they appear to be unable to duplicate these results abroad.

Recent talk of Goldman Sachs setting up a dedicated private banking business created a stir in the market, but we will have to wait until next year to see what is behind these rumours, if anything.

Consolidation?
This year saw some consolidation in the sector – but not much. Fleming Family & Partners bought Sagitta Asset Management, Rensburg entered into a deal with Investec, Swissfirst merged with Bellevue Holdings, which runs Bank am Bellevue and Bellevue Asset Management, Royal Bank of Canada bought Abacus, and there were others.

There was much acquisition activity in 2005, but much of this was a transfer of assets usually from one larger organisation to another such as Fortis buying Dryden Wealth Management from Prudential, or Coutts selling its Bank von Ernst (Liechtenstein) subsidiary to EFG International.

And then there was of course the sale of UBS’s three private banks - Ehinger & Armand von Ernst, Ferrier Lullin and Banco di Lugano – and GAM to Julius Baer, which surprised many by its audacity.

Many strategic stakes were taken in asset/wealth management businesses, particularly in China and India, where the likes of UBS, HSBC, Merrill and Deutsche all either acquired parts of asset management businesses or entered into joint ventures.

But contrary to what many experts have been saying, consolidation did not gather pace in 2005. In Switzerland, the number of independent private banks was about the same at the end of the year as there were at the end of 2004.

Could 2006 be different? Much will depend on the market conditions – another good year will inevitably stave off some sales, but even when markets do take a knock, few wealth managers are willing to part with their businesses at a price acceptable to any perspective buyer.

All is Quite on the Regulatory Front
The European Union's Savings Tax Directive introduced at the beginning of July this year passed with little fanfare. Nevertheless, many private client firms in offshore centres throughout Europe have paid tidy sums of money on compliance issues and sent much time ensuring they've met the deadline.

Groups such as the Swiss Bankers Association say banks had experienced little difficulty in 2005 towards issues like banking secrecy from policy makers in Brussels and Washington. But they add that the issue is bound to return to the top of the financial regulatory agenda some time soon.

The deadline for the European-wide Markets in Financial Instruments Directive – the next major cross-border regulatory issue wealth managers will have to deal with – has been put back until April 2007. The extension ensured that many financial firms showed little concern about the directive in 2005. Some firms are clearly experiencing regulatory fatigue and there might be some evidence that regulatory bodies are taking this concern on board.

Salaries: Heading North
Inevitably the boom in global wealth management is placing upward pressure on salaries in the sector, but 2005 appears to be the year when some top private bankers entered a “star”-like culture similar to their colleagues in investment banking and fund management.

Sign-up bonuses for some top wealth managers – particularly those with contacts and assets in the Middle East and Asia – were reported during the year to be as much as $5 million.

The difference of course from investment bankers and fund managers is that their names are not so well known – if at all.

But this is set to change as the global wealth management industry took a further step towards greater transparency in 2005.

From the point of view of WealthBriefing, let’s hope this trend continues in 2006.

To top off our review of the year, below is a section of our weekly Quotes of the Week , which recall some of the major events and trends in 2005 from the point of view of the people who were at the cutting edge of these developments:

“In a private client world which is consolidating, we want to be one of the consolidators…we can buy assets and enhance value quickly,” said Ausaf Abbas, head of Merrill Lynch Global Private Client in Europe, the Middle East and Africa in early 2005.

“A private banker without hobbies might find it tough to recruit new clients,” said Luc Denis, chief executive of Schroders Swiss private banking operations. Mr Denis believes a good private banker needs to have hobbies—and preferably expensive ones.

"We continue to benefit from opportunities as they arise by hiring people or firms, or acquiring firms,” said UBS chief executive Peter Wuffli. Mr Wuffli was referring to acquiring further private banking and wealth management outfits.

“We are just at the beginning of brand building as a formal discipline in wealth management,” said Michael Maslinski, head of the wealth management consultancy that bears his name and one of the leading experts on branding for the sector.

“Few would argue that meeting clients’ needs or expectations should not be at the core of a wealth management business. However, it is arguable whether “meeting clients’ expectations” should be the driver of business strategy, particularly as measuring how well firms meet client expectations is rarely conducted with much rigour,” argues MDRC, a UK-based research consultancy.

“No doubt we are close to making an acquisition, if not two,” said Philip Amphlett, head of private banking at EFG in London in August. EFG went on to acquire two wealth managers in November.

"We firmly believe that Spain has enormous potential for demanding clients seeking custom-tailored services, long-term relationships, independent investment advice and the utmost discretion,” said Philippe Bertherat, one of the eight managing partners of Pictet. Mr Bertherat was announcing the launch of Pictet’s private banking operations in Spain in September.

"Client research shows that many investors are often uncomfortable about knowing if they have selected the right financial institution and constructed the right investment product mix to achieve their investment goals," said Sebastian Dovey, managing partner of Scorpio Partnership, in an Opinion of the Week in October.

“In a plutonomy there is no such animal as ‘the US consumer’ or ‘the UK consumer’, say the study. Instead there are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take,” from Citigroup’s study on the growing power of the wealthy in the US, UK and Canada, released in November.

"We believe the potential asset pool from which private client wealth managers can seek to make a living remains largely untapped," said Bridgewell Securities on its report in November on the UK wealth management sector.

“Private banks the size of Vontobel, but with a network of cooperation partners, should emerge stronger from the consolidation process ... Independence is a clear objective for the (Vontobel) family,” said Herbert Scheidt, Vontobel’s chief executive, on being asked in November about consolidation pressures on Swiss private banks.

“I fully expect banking secrecy will again rise to prominence as an issue,” said Urs Roth, chief executive of the Swiss Bankers Association, during a visit to London in early December. Mr Roth has earlier said that banking secrecy and related issues were currently less prominent as an issue among European Union regulators.