World Wealth Report 2012 SDA Bocconi, Milan June 19, 2012
Welcome Roberto Manini Vice President Financial Services
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Today s Agenda High Net Worth Market Sizing and Impact of Key Drivers of Wealth Scalability Key to Hitting Growth Targets and Improving Client Relationships Questions and Answers 4
High Net Worth Market Sizing and Impact of Key Drivers of Wealth
MARKET SIZING AND GROWTH: KEY FINDINGS Key Findings Market Size and Growth Global HNWI population grew 0.8% and HNWI wealth declined 1.7% in 2011: The $1m-$5m segment (90% of all HNWIs) grew both in number of HNWIs (1.1%) and wealth (0.8%) The HNWIs in the upper wealth bands (above $5m) experienced a decline both in population and wealth Wealth declined for the second time in four years Asia-Pacific became the largest region for HNWI population (up 1.6% to 3.37 million), though North America continues to be the largest region for HNWI wealth (US$11.4tn). The performance of key drivers of wealth was mixed in 2011: GDP grew 2.7% but lost momentum in the second half of 2011 Volatility, largely driven by European concerns, caused investors to look for safe-haven assets Asset classes experienced mixed results, with poor equity and real estate performance and an investor preference towards capital preservation through cash and fixed income The 2012 outlook is uncertain and will be driven by economic and political uncertainties: The likelihood for repeated flare-ups in Europe, China s resilience, and headwinds in mature markets Political leadership changes and dysfunction, and impact of policy decisions on investor/social sentiment Note: HNWIs hold at least US$1 million in financial assets excluding collectibles, consumables, consumer durables and primary residences; Ultra-HNWIs hold at least US$30 million in financial assets excluding collectibles, consumables, consumer durables and primary residences 6
MARKET SIZING AND GROWTH: HNWI POPULATION Though regional differences emerged, the global number of HNWIs remained flat in 2011, growing 0.8% to reach 11.0m Number of HNWIs by Region (Millions), 2007-2011 After overtaking Europe last year, Asia-Pacific continued its upward growth trajectory to surpass North America for the title of largest HNWI market globally. Note: Chart numbers may not add up due to rounding Source: Capgemini Lorenz Curve Analysis, 2012 7
MARKET SIZING AND GROWTH : HNWI WEALTH However, in wealth terms, global HNWI financial wealth experienced a decline across all regions in 2011 (except ME) HNWI Financial Wealth by Region (US$ Trillions), 2007-2011 Wealth declines at the same time as HNWI population growth can be attributed to the losses felt by HNWIs in the upper wealth bands, where the largest share of global wealth is held. Note: Chart numbers may not add up due to rounding Source: Capgemini Lorenz Curve Analysis, 2012 8
MARKET SIZING AND GROWTH : LEADING MARKETS BY HNWI POPULATION Minimal shifts occurred within the top 12 countries by HNWI population, with the top three still capturing ~53% of total share HNWI Population by Country (k), 2010-2011 After three years of global wealth fragmentation, 2011 saw a marginal increase in wealth concentration among the big three markets of the U.S., Japan, and Germany. Source: Capgemini Lorenz Curve Analysis, 2012 9
COUNTRY SNAPSHOTS ITALY # of HNWIs ( 000) Italy 2011 Economic Review Number of HNWIs for Italy (Thousands), 2010-2011 200 Change (2010-11) (1.3%) Drivers of Wealth (+) Real GDP grew by 0.4% in 2011 as compared to 1.4% in 2010 Real estate prices grew by 4.8% in 2011 170,4 168,3 150 100 50 0 2010 2011 Inhibitors of Wealth (-) National savings as a percent of GDP stood at 16.5% in 2011 The rate of unemployment rose steadily to 9.1% in 2011 The euro weakened in 2011 due to the region s debt and banking crises Market capitalization reduced by 25% in 2011 Note: HNWI numbers have been rounded up to one decimal place for representation while the change is calculated based on complete numbers Source: Capgemini Lorenz curve methodology; EIU Country Reports March, 2012; EIU Data, March 2012; Global Property Guide, March, 2012 10
Impact on Financial Markets Political and Economic Factors MARKET SIZING AND GROWTH : DRIVERS OF WEALTH SUMMARY The Euro Zone crisis, coupled with political uncertainty and unrest in MENA a, changed the dynamics of global markets in 2011 High Public Debt and Sovereign Risks Political Uncertainty and Dysfunction Bad Luck with Natural Disasters Political Unrest in MENA Region Year of Turmoil and Highly Correlated Assets Increased Market Volatility + Lack of Perceived Safe-Haven Assets Investors Searching for Yield a. MENA stands for Middle East and North Africa Source: Capgemini Analysis, 2012 11
MARKET SIZING AND GROWTH: WORLD GDP GROWTH World GDP grew at a relatively slower rate in 2011 vs. 2010, burdened by the Euro Zone s sovereign debt crisis Real GDP Growth Rates, World and Select Regions (%), 2009 2011 Slowing demand from Western Europe, Japan s natural disasters, high oil prices, and elevated risk aversion led to decelerated growth in emerging economies of Asia-Pacific and Latin America. Note: Aggregate real GDP growth rates are based on GDP weights calculated by EIU Source: Capgemini Analysis, 2012; Economist Intelligence Unit, March 2012 12
MARKET SIZING AND GROWTH: MARKET CAPITALIZATION Market capitalization is a key driver of HNWI wealth growth, and declined by 19% in 2011 due to fears about the Euro Zone Market Capitalization by Region (US$ Trillions), 2004 2011 Markets across the globe declined in 2011 due to increasing risk aversion among investors as the EMEA region (epicenter of the sovereign crisis) led the fall in global market capitalization. a. Benchmark indices taken: MSCI AC Americas, MSCI AC Asia Pacific, and MSCI AC Europe Note: Falls in benchmark indices (which adjust for free float) were less impacted than market capitalization in the Americas and EMEA Source: Capgemini Analysis, 2012; World Federation of Exchanges, January 2012 13
MARKET SIZING AND GROWTH: VOLATILITY Global macroeconomic cues dominated sentiments and 2011 turned out to be the second most volatile of last 15 years Daily Volatility of DJ World Index a, 1997-Jan 2012 Although the EU leaders have taken many steps in order to contain the sovereign debt crisis to-date, weak growth and Euro Zone flare-ups are expected to add to volatility in 2012. a. Index Volatility, as calculated by Capgemini Source: Capgemini Analysis, 2012; Dow Jones World (W1) Index Daily close values from January 1st, 1997 to December 31st, 2011, February 2012; http://online.wsj.com/article/sb10001424052970204632204577128763787544458.html, Accessed on 8 Feb2012 14
MARKET SIZING AND GROWTH: FUTURE OUTLOOK OF GDP GROWTH Global economic growth is expected to slow down to 2.2% in 2012 due to the sovereign debt crisis-led Western European slowdown Real GDP Growth Rates (%), 2012F 2013F Various policy initiatives to control the debt contagion and spur growth are expected to materialize during 2013, resulting in a relatively accelerated pace of economic growth. Source: Capgemini Analysis, 2012; Economist Intelligence Unit, May 2012; Global Economic Prospects May 2012, The World Bank, May, 2012 15
Scalability Key to Hitting Growth Targets and Improving Client Relationships
SPOTLIGHT: KEY FINDINGS Key Findings Spotlight The wealth management business is facing challenges of increased regulations, diminished profitability, and heightened market volatility. Legacy business models are not meeting the needs of many wealth management firms: Lack of flexibility to adapt quickly to changing business conditions Prevent business growth while maintaining high levels of profitability, client and advisor satisfaction Scalability is difficult to achieve, but key levers can help successfully navigate challenges: Optimizing processes through automation Using sophisticated central product specialist teams Adopting an effective HNW client segmentation model Maintaining a Scalability-led focus on acquisitions Next-generation business models can be achieved by understanding three dimensions: Begin with identifying the effects of legacy business models Understand what worked and what did not work in past scalability investments Identify appropriate balance between business-led focus on core competencies and technology enablement 17
SPOTLIGHT: CHALLENGING WEALTH MANAGEMENT LANDSCAPE - INCREASING COSTS While wealth management AUM has increased since 2008, the cost of operations has risen at a pace higher than income growth AUM (US$ Trillions) vs. Cost to Income (C:I) Ratio Growth (%), 2007-10 Wealth management firms are likely to further feel the pressure of rising costs in the near future, requiring firms to realign their operating strategies to help improve overall profitability. Note: Though there is a subtle difference between the terms private banking and wealth management, they have been used interchangeably in this presentation Source: Capgemini Analysis, 2012; The Scorpio Private Banking Benchmark 2011 18
SPOTLIGHT: CHALLENGING WEALTH MANAGEMENT LANDSCAPE - KEY CONCERNS Wealth management firms are grappling with internal business concerns, which the tough external environment has added to Key Concerns Arising From Changed Market Circumstances for Wealth Management Firms Within Firms Control Beyond Firms Control Profitable AUM Growth Unparalleled Market Volatility Rising Competition Increasing Client Trust Internal Concerns Wealth Management Concerns External Concerns Increasing Regulatory Overview Developing a Loyal Advisor Base Parent Ownership Backlash Against Financial Services Industry Cultural Differences across Regions Business Models at Wealth Management Firms Are Not Yet Positioned to Face the Changed Market Circumstances and Convergence of Challenges Source: Capgemini Analysis, 2012 19
SPOTLIGHT: ISSUES WITH LEGACY BUSINESS MODEL - SUB-OPTIMAL BUSINESS MODELS Inherent issues in firms legacy business models have led to poor performance during changing market dynamics Impact of Sub-Optimal Business Models on Wealth Management Firms Longstanding Issues Relatively New Issues Specific Drivers Fragile Client Trust Diminished Client-Advisor Interaction Time Inadequate Focus by Top Management on Key Issues Vulnerability to Ageing Advisory Sales Force Smaller Real Market Size of Growth Economies Inefficient Client Segmentation Model Diluted Brand Proposition Sub- Optimal Business Models Lack of Effective Digital Transformation Strategy Fundamental Shift New Market Cycles Wealth management business profitability will be severely constrained if firms fail to realign their operating practices to improve client and advisor satisfaction. Source: Capgemini Analysis, 2012; www.wealthbriefing.com; A New Era in the Global Wealth Management Industry, FPL Advisory Group, 2012 20
SPOTLIGHT: ISSUES WITH LEGACY BUSINESS MODEL - NEW MARKET CYCLES The shorter duration of recent bull and bear markets has added to the rise in market volatility over the last few years Historical Bull and Bear Markets in the US, DJIA a, 1930-2012 Higher volatility in market prices and unpredictable market cycles may lead to poor client portfolio performance at many wealth management firms. a Dow Jones Industrial Average Source: Capgemini Analysis, 2012; Yahoo Finance, 2012; http://www.p360.org/dsg.aspx?data_set_group_id=359&count=all&transpose=row accessed on April 9, 2012 21
SPOTLIGHT: BENEFITS OF AND CHALLENGES TO ACHIEVING SCALABLE BUSINESS MODELS While the benefits of building a scalable business model can be significant, challenges exist across many levels Scalability Benefits and Challenges Scalability Benefits Improved Profitability Increased Costs Scalability Challenges Wealth Management Firm Level Regulatory Compliance Business Agility Improved Employee Engagement Regulation Customization Based on Client Profile Acquisition Fallacy Improved Brand Distribution Level Client Satisfaction Advisor Satisfaction High Advisor Dependency Source: Capgemini Analysis, 2012; Executive Interviews, 2012 22
SPOTLIGHT: WAY FORWARD - SCALABILITY LEVERS FOR WEALTH MANAGEMENT FIRMS (1/2) Leading firms are focusing on process- and strategy-based levers to embed scalability in their business models Scalability Levers For Wealth Management Firms Lever Criticality Adopting an effective HNW client segmentation model based on asset size, risk appetite, and financial/investment needs Scalability-led focus on acquisitions Process and Strategy- Based Scalability Levers Optimizing processes through automation of back-end operations (such as regulatory filings, client reporting, and MIS) Focusing on markets/operations with potential scale for profitability (and exiting other markets/operations) Choosing open architecture or managed-architecture platform for scalable growth (depending on firm DNA) Implement leading enterprise-wide customer relationship management (CRM) systems Negligible Low Medium High Very High High number of process and strategy-based levers highlight the need for developing a robust next-generation business model as part of firms overall business strategy. Source: Capgemini Analysis, 2012 23
SPOTLIGHT: WAY FORWARD - SCALABILITY LEVERS FOR WEALTH MANAGEMENT FIRMS (2/2) Advisor- and client-based levers can also play a key role in embedding scalability within firms business models Scalability Levers For Wealth Management Firms (continued) Lever Criticality Maximizing advisor effectiveness through sophisticated central product specialist teams Advisor- Based Scalability Levers Creating advisor teams that include a healthy mix of experience to cater to client needs while grooming new talent Utilizing professional expertise (or vendors) to implement a robust hiring and training plan for new advisors Client Based Scalability Levers Increasing client satisfaction by creating virtual advisors to leverage evolving Internet and mobile channels Implementing self-driven investment portals to capture nonmanaged client assets Negligible Low Medium High Very High Several levers are related to one another, such as the virtual advisor lever requiring strong segmentation lever ability, so firms need to analyze the right approach. Source: Capgemini Analysis, 2012 24
SPOTLIGHT: WAY FORWARD - SUMMARY In summary, firms must address the new industry reality by focusing on business model scalability and specific levers Steps Towards Achieving Next-Generation Business Model Identify legacy business model issues Re-focus on core competencies to expand business Create a mix of business and technology teams to decide on specific levers to be implemented (with co-design of services) Identify areas in which to leverage IT tools while implementing specific scalability levers Leverage best practices while implementing levers of scalability A Robust Scalable Business Model with a Strong Focus on the Client- Advisor Relationship Senior commitment is an important step to scalability, combined with stakeholder collaboration from across the organization (across advisors, asset management, operations, and technology). Source: Capgemini Analysis, 2012 25
Questions & Answers
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