OffshoreMarkets 12/8/03 2:55 PM Page 1 Opportunities for Action in Financial Services Crafting New Approaches to Offshore Markets
Crafting New Approaches to Offshore Markets The European offshore-wealth market, traditionally centered in Switzerland, is changing and presenting the wealth management industry with many challenges. Lower revenues, higher relative costs, a slump in equity markets in recent years, and more aggressive oversight from regulators in industrial countries including pending tax reforms in the European Union are threatening to undermine the market s growth prospects. And, as if those challenges weren t enough, young European investors are increasingly turning away from offshore providers, preferring onshore financial institutions in their home markets. Given this environment, offshore players should think carefully about the sustainability of their competitive positions. If they are to retain or increase their slice of the wealth management business in Europe and other parts of the world, they may wish to consider new growth strategies, including supplementing their offshore businesses with onshore offerings. Larger competitors in particular should ensure that they profit from strong growth in newer offshore markets in Asia, the Middle East, Latin America, and Eastern Europe. Growth Strategies for Changing Markets Having enjoyed a period of rapid growth in the 1990s, offshore competitors in Europe and North America now find themselves in an increasingly difficult market where superior execution, strong product innovation, and sound investment strategies have become critical to remaining competitive. Those are tough goals at any time. Today they re even more daunting
because offshore investors are already reacting to the expected changes in European withholding-tax regulations, which will take effect in 2005 provided that preliminary intergovernmental agreements are finalized. At that time, many European countries, including Switzerland, will start imposing a 15 percent withholding tax on earnings from accounts that lack the required documents proving adequate payments to relevant national authorities. By 2010 that rate will increase to 35 percent. These regulatory changes are likely to make the lower end of the offshore wealth market less attractive and may well signal a period of continued decline in the traditional European offshore market. In anticipation of these events, some investors are already sending their money to offshore centers outside Europe while others are bringing funds onshore. But the main hurdle for wealth management players is growth. We believe that there are four basic strategies for those companies interested in pursuing opportunities in the offshore market. First, they can play an active role in the continuing consolidation of the offshore market. While some players are still opting to grow organically which can take years in today s offshore environment others are seeking to spread their rising fixed costs by gaining share in their home markets. That means merging with or acquiring local competitors. The Swiss market, for example, is consolidating rapidly as players seek greater scale to achieve sustainable profitability. Last year s merger of Lombard Odier and Darier Hentsch, and Coutts s recent acquisition of Bank von Ernst, are just two examples of such consolidation. Second, players can focus on a niche, selecting specific customer segments or products. For example, they may wish to focus on particular bands of wealth by
catering to investors with, say, $10 million to $100 million. Alternatively, they can develop product expertise or refine specialized offerings, such as principal-protected products, and sell them through their own distribution networks or even through those of other banks. Indeed, successful product innovation that addresses wealthy customers needs is a good way to maintain and grow the offshore business in today s uncertain times. Third, because many offshore investors are likely to move their holdings onshore, wealth managers can ensure that they have attractive onshore offerings that complement their offshore ones. For example, some of the largest Swiss players are now developing their onshore-wealth-management businesses in Europe in order to prepare for expected changes in the market. Western Europe remains the largest source of offshore funds, but the center of the industry may be shifting. (See Exhibit 1.) For instance, leading players Exhibit 1. Offshore Banking s Center May Be Shifting Total assets of countries residents 1 ($trillions) 18 10 8 6 4 2 0 Onshore North America Japan Mixed Other Western European countries Asia 2 Australia Germany United Italy Kingdom France Offshore Latin America Eastern Europe Middle East 20 40 60 80 100 Share of wealth held offshore 3 (%) SOURCE: BCG wealth market-sizing database, 2003. 1 Based on investors countries of residence. 2 Excludes Japan. 3 Wealth held outside investors countries of residence.
in Asia and Latin America are reporting pretax returns of more than 60 percent. 1 In addition, prosperity in some Eastern European countries has produced a new crop of offshore investors. Offshore competitors active in those countries have prospered particularly as onshore markets have suffered from local currency inflation and devaluation. Fourth, larger competitors can expand beyond their home markets by targeting young, fast-growing offshore markets elsewhere in the world that offer major opportunities to experienced players with wellgrounded strategies. In some cases, they may want to follow some of their clients, many of whom are shifting money to Singapore and Hong Kong. Those hubs offer a platform for taking advantage of Asia s burgeoning offshore markets. The Promise of Asia In contrast to Europe and North America, the wealth management market in Asia is thriving, and offshore bankers are reaping the rewards. (See Exhibit 2.) In 2002, the number of wealthy Asian households grew by 200,000, reaching 2 million, and their assets increased from $1.9 trillion to $2 trillion. The economic performance of wealth managers in Asia, meanwhile, improved at an even faster pace, according to the BCG Wealth Manager Performance Survey, conducted in 2003, and our experience working with clients. On average, revenues and profits for wealth managers in Asia-Pacific grew by more than 15 percent in 2002. At a time when simply holding ground in the worldwide offshore market would have been 1. See Winning in Challenging Times: Global Wealth 2003, BCG report, July 2003.
Exhibit 2. Traditional Centers Face New Competition Post-tax net profit margin for offshore businesses, 2002 (%) 30 25 20 30 25 20 25 20 25 15 10 5 0 Switzerland Caribbean Luxembourg Miami/ New York 1 United Kingdom offshore Singapore/ Hong Kong Assets 1,700 under management ($billions) 900 850 500 500 450 SOURCE: BCG analysis. 1 Major North American offshore centers. considered an accomplishment, such gains were outstanding. Several factors contributed to these results. The first one is the strong performance of several of the region s economies. Growth in China and South Korea has remained high. And savings rates in the region have continued at impressive levels, boding well for sustained asset accumulation among wealthy Asian investors. The second factor is that Asia has the advantage of being a relatively immature wealth market. For years, many Asian investors favored cash, direct investments, and property, and often preferred to manage their own assets. As a result, while private banking boomed
in North America and Europe, it remained relatively underdeveloped in Asia. Then the Asian financial crisis severely damaged the holdings of many investors in the region. The property market declined dramatically. Yields on cash accounts plummeted as interest rates declined to 40-year lows. Finally, equity markets crashed, undermining investors faith in their own skills. Asian investors began looking for other state-of-the-art wealth-management options, embracing sophisticated investments, such as structured products and hedge funds. These products demand professional expertise. Thus, in recent years, wealth managers in Asia have adopted the European offshore-business model and have nurtured an emerging demand for professional advice. The approach is based on client relationship managers rather than sales-oriented brokers and has proved successful in turning skeptical Asian investors into clients. The greatest promise in Asia lies in China, Taiwan, Hong Kong, and South Korea. Although China and Korea remain closed markets, their future growth potential is too big to ignore. China is already the single biggest wealth market in Asia outside of Japan, with assets of $500 billion, and Korea is not far behind. Once these countries float their currencies and allow their citizens to hold assets in foreign currencies, growth will skyrocket. With the fundamentals in place sustained economic and asset growth, and immature but fast-developing demand for advice wealth managers in Singapore and Hong Kong stand to benefit from the exodus of funds from more established offshore centers. For wealth managers elsewhere in the world, the question is whether to seize the Asian opportunity and, if so, how to maximize it.
Questions for Offshore Players Offshore players that want to make the most of their existing businesses should consider the following questions: Are you realizing the full potential from your current operations when it comes to revenues and costs? Existing opportunities within current operations may well provide the most promising avenues for growth. Developing new segments or new products within your existing markets may be attractive strategies. You should review your target markets and ensure that your selected segments and approaches constitute a viable business. For example, you must make certain that your pricing strategies and account minimums provide sufficient revenues. What are your ambitions and what is your competitive advantage? Where do you want your business to be in three to five years? Look carefully at your best-performing businesses and consider how you might use them to develop new pathways to growth. You should then consider whether your objectives might be better achieved through a merger or joint-venture partners. Such partners can, for example, provide useful local expertise and client access that complement your own strengths. What markets would you target to achieve your ambitions? Are they just offshore markets, or are they offshore and onshore? How can onshore markets help you achieve your goals? You may want to consider a more integrated approach that allows for the onshore migration of some traditional offshore investors. Meanwhile, you should con-
tinue to serve those that remain offshore and take advantage of the growth in new offshore markets in Asia, the Middle East, Latin America, and Eastern Europe. And make sure that you fully understand the implications of the forthcoming changes to European tax regulations and what they mean for your businesses. * * * Substantial upheaval is coming to offshore markets. As always, change will favor those institutions that are best prepared and have proactively adjusted their business models. It is time for wealth managers to review their businesses in order to retain and increase their competitive advantage in offshore markets. When appropriate, they should integrate their offshore and onshore offerings. For players with ambitions in the global wealth-management market, an offshore business is an attractive and potentially very profitable business. Victor Aerni Jorge Becerra Roman Scott Victor Aerni is a vice president and director in the Zürich office of The Boston Consulting Group. Jorge Becerra is a senior vice president and director in the firm s Miami office. Roman Scott is a vice president and director in BCG s Singapore office. You may contact the authors by e-mail at: aerni.victor@bcg.com becerra.jorge@bcg.com scott.roman@bcg.com The Boston Consulting Group, Inc. 2003. All rights reserved.
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