Reuters Business Insights - The UK Wealth Management and Private Banking Market Outlook 2004

FINANCE
The European Wealth Management and

Private Banking Market Outlook
Optimizing customer value in a demanding marketplace
By Barbara Kubis-Labiak
TLFeBOOK
Barbara Kubis-Labiak
Barbara has a BA (Hons) in Business and Management and is currently at the end of her
MSc in International Finance degree. Barbara started her career working as an intern for
the European Commission in Brussels, and then in 1999 she joined Datamonitor
Financial Services department as an analyst. Barbara's work at Datamonitor involved
various projects and reports, including the FinTab project, where she helped to develop
an online data resource covering the insurance, banking, investments and payment cards
sectors. Barbara also authored a number of reports: Retirement Provision in Germany
2001-2008, Retirement Provision in Germany 2002, European Mutual Funds 2001, UK
Wealth Management, Distribution of life insurance and pensions in Europe 2002 and
Central and Eastern European Life and Pensions 2002, as well as consultancy projects,
for example Motor insurance distribution in central Europe, Competitors in occupational
pensions in Germany, Bausparkassen in Germany and many others.
Copyright 2004 Business Insights Ltd

This Management Report is published by Business Insights Ltd. All rights reserved.
Reproduction or redistribution of this Management Report in any form for any purpose is
expressly prohibited without the prior consent of Business Insights Ltd.
The views expressed in this Management Report are those of the publisher, not of Business
Insights. Business Insights Ltd accepts no liability for the accuracy or completeness of the
information, advice or comment contained in this Management Report nor for any actions
taken in reliance thereon.
While information, advice or comment is believed to be correct at the time of publication, no
responsibility can be accepted by Business Insights Ltd for its completeness or accuracy.
Printed and bound in Great Britain by MBA Group Limited, MBA House, Garman Road,
London N17 0HW. www.mba-group.com
ii
TLFeBOOK
Table of Contents
The European Wealth Management and Private
Banking Market Outlook
Optimizing customer value in a demanding marketplace
Executive Summary 10
European wealth management and private banking market overview 10
Customer focus: incorporating lifestyle services 11
Fee structures and advertising strategies 11
Tackling the strategic issues in wealth management 12
Chapter 1 Introduction 16
Report structure 16
The European wealth management and private banking market overview 16
Customer focus: incorporating lifestyle services 16
Fee structures and advertising strategies 16
Tackling the strategic issues in wealth management 17
Chapter 2 The European Wealth

Management and Private Banking
Market Overview 20
Summary 20
UK mass affluent customers 21
Market drivers 21
Wealth creation and reduction factors 22
GDP and other economic factors 22
Liquid wealth concentration 24
Market overview 25
Regional analysis 27
The influence of income 29
Competitors 31
Private client wealth managers 32
iii
TLFeBOOK
Stockbrokers primary focus is on direct equity investment 33
Retail asset managers 35
Future hurdles 36
Retail banks 37
Online banks 39
IFAS are key competitors 40
Fund supermarkets 42
European mass affluent customers 44
France has the most affluent individuals in Europe 45
Number of European mass affluent individuals segmented by
country 46
Market trends 49
Banking services 49
Safety and advice 50
The housing boom 50
Competition 51
Retail banks and bancassurers 51
Financial advisers 52
Brokerage services 53
Cross-border strategies 53
Europe 54
The Middle East 55
Asia 56
Drivers of cross-border activity 57
Organic growth 57
Onshore 58
Brand 58
Banking on proven business 58
Banks demonstrating cross-border organic growth 59
Mergers and acquisitions 59
The Middle East 60
Deutsche Bank 60
Emerging markets 62
Asia 62
Middle East 62
Central and Eastern Europe 63
UK expansion 64
Offshore markets 64
Chapter 3 Customer Focus: Incorporating

Lifestyle Services 68
Summary 68
Introduction 68
iv
TLFeBOOK
Lifestyle services 69
Lifestyle services in the wealth management proposition 69
Third-party lifestyle services 70
Benefits of including lifestyle services into the wealth management
proposition 71
Associated difficulties 72
Conclusions 73
Chapter 4 Fee Structure Analysis and

Advertising Strategies 76
Summary 76
Introduction 76
Fee structures 77
Overview 77
Affluent wealth managers 77
Lower HNW wealth managers 78
Upper HNW wealth managers 78
Transaction and handling charges by investment type in the UK 79
Tier structures 79
Transparency issues 80
Performance-related fees 80
Advertising strategies 82
Chapter 5 Tackling the Strategic Issues in

Wealth Management 84
Summary 84
Introduction 85
Wealth management in retirement in the UK 85
Market overview and developments 85
Different needs and attitudes 86
Future retirees in the future 87
Pensions in the UK 88
Self invested personal pensions (SIPPs) 91
The facts 92
Executive pension plans (EPPs) 95
Small self-administered schemes (SSAS) 97
Unapproved retirement benefit schemes 98
Unfunded unapproved retirement benefit schemes 99
Funded unapproved retirement benefits schemes 99
Assets under management 99
TLFeBOOK
Pensions for the wealthy in Europe 100
Multi-manager investment structures 102
Overview 103
Competition 107
Property investment 108
Overview 108
Real estate investment trusts 108
Real estate derivatives 108
Property funds 108
Lease structures in Europe 109
Property investments for wealthy individuals 111
Proportion of pan European wealth managers offering exposure to
property investments 111
Future prospects 114
Hedge funds 114
Overview 114
Regulations 115
UCITS 3 116
UK 116
France 116
Germany 117
Italy 118
Spain 118
Performance 119
Fee structures 120
Internal compliance 121
Distribution factors 122
Chapter 6 Appendix 124

Definitions 124
Advisory portfolio management 124
Asset management 124
Bull market 124
Bear market 124
CAGR 125
Discretionary portfolio management 125
Equity fund 125
Execution only stock broking 125
First/second/third tier fee 125
Fund supermarket 126
Hedge funds 126
Independent Financial Advisor (IFA) 126
Liquid assets 126
Liquid asset bands 127
Liquid assets 127
Lower high net worth competitor 127
vi
TLFeBOOK
Upper high net worth competitor 127
Mass affluent 128
Mass market 128
Non-core competitor 128
Premier bank 128
Private banks 128
UCIT 129
List of Figures
Figure 2.1: Identifying the dynamics of mass affluent wealth creation 21
Figure 2.2: Change in the savings and investment assets between 1997 and 2002 24
Figure 2.3: The mass market, mass affluent and high net worth share of total retail liquid assets
in 1997 and 2002 25
Figure 2.4: Number of UK mass affluent individuals with liquid assets between 30,000-
200,000, 19972002e
26
Figure 2.5: Aggregate liquid assets of UK mass affluent individuals with liquid assets between
30,000-200,000, 19972002e 27
Figure 2.6: Asset concentration, 19972002 44
Figure 2.7: Individuals holding between 50,000 and 100,000 in liquid assets account for more
than 56% of the European mass affluent population 47
Figure 3.8: Lifestyle services in the wealth management proposition 69
Figure 5.9: Overview of multi-manager investment structures 105
Figure 5.10: Key drivers behind the multi-manager trend 106
List of Tables
Table 2.1: Standard average house price versus house price growth segmented by region, 1997
2002 28
Table 2.2: Growth in average house prices per region, Q4 2002 to Q3 2003 29
Table 2.3: Number of individuals with pre-tax earned income over 50,000 and total value of
pre-tax earned income for this segment, 30
Table 2.4: Proportion of total UK population in each region compared to proportion of total
50,000+ segment in each region, 2000 30
Table 2.5: Thresholds and costs for the big fours premier banking offerings, 2003 33
Table 2.6: Beneficial ownership of UK shares, billion, 19982002 35
Table 2.7: UK personal deposit account balances by competitor, 19972001 37
Table 2.8: Current account rates for selected retail and online banking players, December 2003
40
Table 2.9: Top 10 UK IFAs by turnover, 2002 41
Table 2.10: Number of funds and fund managers offered by selected fund supermarkets, 2003 42
Table 2.11: Number of European mass affluent individuals as a proportion of total population,
segmented by country, 2002e 45
vii
TLFeBOOK
Table 2.12: European liquid assets as a proportion of total assets, 1997 and 2002 45
Table 2.13: European mass affluent individuals and liquid assets, 19972002 46
Table 2.14: Number of European mass affluent individuals segmented by country, 1997200247
Table 2.15: Value of mass affluent liquid assets segmented by country, 19972002e 48
Table 2.16: Banks demonstrating cross-border organic growth, 19972001 59
Table 2.17: Banks that have merged or acquired to cross borders, 19962002 61
Table 4.18: Transaction and handling charges by investment type, 2002 79
Table 5.19: Number of full and insured plans in force with non-insurance companies, by SIPP
competitor, 2003 94
Table 5.20: Number of full and insured plans in force with insurance companies, by SIPP
competitor, 2003 95
Table 5.21: Proportion of pan European wealth managers offering exposure to alternative
investment vehicles 111
Table 5.22: Proportion of pan European wealth managers offering exposure to property
investments, classified geographically 112
Table 5.23: Major barriers to the property investment in Europe 112
Table 5.24: Pan European wealth managers expectations for changes in private clients exposure
to property over the following two years 113
Table 5.25: Customers primary motivation for investing in alternative investments, % of wealth
manager responses, total Europe 120
Table 5.26: Percentage of wealth managers offering hedge funds or envisaging doing so in the
next two years, 2003 122
viii
TLFeBOOK
Executive Summary
TLFeBOOK
Executive Summary
European wealth management and private banking

market overview
Significant proportions of mass affluent individuals total assets can be held in
alternative and non-liquid form. In the UK mass affluent sector, one of the most
important asset classes in this respect is property. Residential house prices have
experienced extraordinary growth in the UK in recent years and ensured that real
estate has become both an important component and source of mass affluent wealth.
A number of market drivers denote the environment for wealth creation including
house price growth, GDP growth, stock market growth and average earnings. For
example, the buoyant growth in residential house prices immediately stands out as a
key factor in wealth creation, rising at a CAGR of 11.9% between 1997 and 2002.
The distribution of liquid assets has continued to become more concentrated in the
hands of affluent individuals. Mass affluent individuals share of retail liquid assets
increased from 34.2% to 36.4% between 1997 and 2002, suggesting that they have
fared better overall than mass market investors in the market downturn.
Mass affluent individuals make up nearly 11% of the total UK adult population.
With 5.1 million individuals, the mass affluent segment is considerably larger than
the High Net Worth (HNW) segment, which only accounted for 1.2% of the total
UK adult population in 2002.
London and the South East have by far the greatest concentration of individuals
earning over 50,000 in pre-tax earned income relative to population size. London
accounts for 12.1% of the UK population but comprises 22.7% of the 50,000-plus
income segment.
During the period 19972002, affluent individuals in major European countries

continued to increase their share of total retail liquid assets from around 31% in
10
TLFeBOOK
1997 to around 34% in 2002, while the proportion held by HNW individuals
increased even more dramatically from 21% to 28% over the same period.
With the contraction of the traditional European, U.S. and offshore wealth
management markets, wealth managers have been forced to look elsewhere in order
to restore flagging revenues.
Customer focus: incorporating lifestyle services

In their efforts to provide superior levels of service some private banks and wealth
managers in particular family-run offices at the ultra high net worth level have long
provided specific non-financial services to their clients mainly as a component of
their customer service proposition.
While some wealth managers are focusing on doing more in terms of lifestyle
services, for the vast majority these types of service tend to remain quite discrete
and are rarely marketed as another element in the offering.
There are a number of factors fuelling the growth in client demand for lifestyle
services including growing affluence of individuals and increasingly busy lifestyles.
By offering to help wealthy clients in their aspirations to purchase luxury items

wealth managers can maintain a role in the management of non-financial assets
alongside financial assets and generate revenues in areas such as advice on how to
structure and finance purchases.
Fee structures and advertising strategies

Affluent wealth managers have, on average, 46% higher thresholds for discretionary
portfolios than for advisory portfolios. In contrast, lower HNW managers have
marginally higher (6%+) thresholds for advisory portfolios compared to
discretionary portfolios.
11
TLFeBOOK
There are major differences in the make up of annual asset based fees and the actual
transaction costs set by UK wealth managers. Tier structures dominate the UK
wealth management industry with a minority offering flat fees and even fewer
allowing an element of negotiation in the pricing.
Poor fund performance over the past couple of years has left investors disillusioned
with their wealth and investment managers, particularly when those managers
continue to receive substantial salaries despite losing their clients vast sums of
money.
Following the recent fall in equity prices, wealth management customers with
distressed portfolios are likely to question the value of the service they receive.
In the UK, approximately one third of affluent wealth managers charge an annual flat
fee for discretionary portfolios (usually between 0.50% and 1.25%).
Tackling the strategic issues in wealth management

In December 2002, the UK Government launched its Green Paper on pensions and
pension tax rules. Amongst the proposals, the Government is considering rising the
minimum retirement age at which an individual can draw a pension, from 50 to 55 by
2010.
Wealth managers looking to target retired individuals as a client group must

recognize and respond to the considerable differences in attitudes and needs within
this segment.
Retired executives, for example, are likely to be much more financially aware and
liable to take a much greater interest in their retirement package, while the self-
employed tend to look towards investing in their business with the aim of selling or
passing on the business at a later stage.
Wealthy consumers have a greater volume of assets to invest and also have more
complex financial needs than ordinary individuals resulting in the introduction of
12
TLFeBOOK
new pension products to meet these needs, while also allowing the government to
benefit from the extra tax revenue that such wealthy individuals create.
Unfavorable market conditions have been a primary factor in the development of

multi-manager investment structures by European wealth managers. The prolonged
market downturn of recent years has significantly impacted wealth managers
investment performance, denting revenues and forcing them to consider the logic of
running all investment management in-house given the cost this typically entails.
Property funds offer an efficient investment opportunity for wealthy clients to

diversify their portfolios.
Recent research using UK property investment data has revealed a poor correlation
between returns from property investments and traditional investment classes,
further signifying the wisdom of investing in real estate to diversify a portfolio.
Property may also provide some means of hedging against inflation.
In the UK, hedge funds are not available to the general public - only to qualified
private investors and they cannot be advertised to private clients. The Financial
Services Authority controls the regulation of hedge fund distribution.
13
TLFeBOOK
14
TLFeBOOK
Chapter 1
Introduction
15
TLFeBOOK
Chapter 1 Introduction
Report structure
The European wealth management and private banking market overview
This opening chapter focuses on the affluent banking sector and onshore liquid savings
and investments of mass affluent customers in the UK. It offers access to key statistics
providing a clear picture of the scale, composition and direction of the developing UK
mass affluent landscape, it also offers a comprehensive overview of the main provider
groups operating in the UK market, for example the IFAs and fund supermarkets. This
chapter also focuses on the onshore liquid wealth of affluent customers in France,
Germany, Italy, the Nordic region, Spain and the UK.
The important issue of cross-border expansion in wealth management is examined with a

focus on the emerging markets, explaining why wealth managers have been forced to
look elsewhere for their revenues.
Customer focus: incorporating lifestyle services
This chapter opens with the discussion concerning the incorporation of lifestyle services
into the wealth management proposition. It also assesses the merits and drawbacks for
wealth managers seeking to offer their clients such services.
Fee structures and advertising strategies
This chapter aims to examine the complexity and multitude of the pricing structures in
place by UK wealth managers. It provides a comprehensive understanding of the fee
landscape in the current UK wealth management arena.
16
TLFeBOOK
Tackling the strategic issues in wealth management
This chapter focuses on four issues in the wealth management market, including wealth
management in retirement, multi-manager investment structures, property investment
and hedge funds.
17
TLFeBOOK
18
TLFeBOOK
Chapter 2
The European Wealth

Management and Private
Banking Market Overview
19
TLFeBOOK
Chapter 2 The European Wealth
Management and Private
Banking Market Overview
Summary
Significant proportions of mass affluent individuals total assets can be held in
alternative and non-liquid form. In the UK mass affluent sector, one of the most
important asset classes in this respect is property. Residential house prices have
experienced extraordinary growth in the UK in recent years and ensured that real
estate has become both an important component and source of mass affluent
wealth.
A number of market drivers denote the environment for wealth creation including
house price growth, GDP growth, stock market growth and average earnings. For
example, the buoyant growth in residential house prices immediately stands out as
a key factor in wealth creation, rising at a CAGR of 11.9% between 1997 and
2002.
hands of affluent individuals. Mass affluent individuals share of retail liquid assets
increased from 34.2% to 36.4% between 1997 and 2002, suggesting that they
have fared better overall than mass market investors in the market downturn.
Mass affluent individuals make up nearly 11% of the total UK adult population.
With 5.1 million individuals, the mass affluent segment is considerably larger than
the High Net Worth (HNW) segment, which only accounted for 1.2% of the total
UK adult population in 2002.
London and the South East have by far the greatest concentration of individuals
earning over 50,000 in pre-tax earned income relative to population size. London
accounts for 12.1% of the UK population but comprises 22.7% of the 50,000-
plus income segment.
During the period 19972002, affluent individuals in major European countries

continued to increase their share of total retail liquid assets from around 31% in
1997 to around 34% in 2002, while the proportion held by HNW individuals
increased even more dramatically from 21% to 28% over the same period.
20
TLFeBOOK
With the contraction of the traditional European, U.S. and offshore wealth
management markets, wealth managers have been forced to look elsewhere in
order to restore flagging revenues.
UK mass affluent customers
Market drivers
Many factors influence the size and nature of the liquid assets held by mass affluent
clients and the connections to other types of asset wealth are important concerns in
liquid wealth generation. Significant proportions of mass affluent individuals total assets
can be held in alternative and non-liquid form. For the UK mass affluent sector one of
the most important asset classes in this respect is property. Residential house prices have
experienced extraordinary growth in the UK in recent years and ensure that real estate
has become both an important component and source of mass affluent wealth.
Figure 2.1: Identifying the dynamics of mass affluent wealth creation
Alternative and non

Offshore assets Liquid assets
liquid assets
Diversification
HNW
Diversification
Wealth creation factors

Wealth reduction factors
Repatriation
Mass
affluent
Liquidation
Money
sheltering
Mass
market
Source: Datamonitor Business Insights Ltd
21
TLFeBOOK
Wealth creation and reduction factors
Across all categories of assets there are a number of drivers behind wealth creation and
reduction as well as important shifts between asset categories. These all play a key role
in affecting the pot of liquid assets available for saving and investment.
For any given individual, factors contributing to wealth creation include salary income,
positive returns from financial asset investment, property value appreciation, positive
returns from business stakes and entrepreneurial activity, and the receipt of inheritance
and gifts. Conversely, wealth reduction factors revolve around expenditure and negative
investment returns or movements in asset values, as well as passing on wealth in the
form of gifts to others.
A number of market drivers provide an indication of the environment for wealth creation
including house price growth, GDP growth, stock market growth and average earnings.
For example, the buoyant growth in residential house prices immediately stands out as a
key factor in wealth creation, rising at a CAGR of 11.9% between 1997 and 2002.
Property is an important component of mass affluent individuals total assets and the
meteoric rise in house prices and trend toward property ownership for investment
purposes has filtered through to the liquid element of mass affluent wealth.
GDP and other economic factors
However, while GDP growth slowed in 2000 to 2002, earnings growth continued to
ensure that important fundamentals for mass affluent wealth creation remained in place.
(It should be noted that there was growth of 0.9% in the fourth quarter of 2003i). In the
concluding statement of the International Monetary Funds statement on the UKii: in
i
National Statistics Online
ii
December 18, 2003
22
TLFeBOOK
the face of sizable global shocks over the last few years, the economic performance of
the United Kingdom has been enviable: growth has been resilient; investment has
remained above its historical average in relation to GDP; unemployment has been stable
at a low level; and inflation has remained close to target. The economy's strength has
reflected the buoyancy of domestic demand, supported by stimulative macroeconomic
policies.
Average earnings in the UK grew at a CAGR of 4.5% since 1997, and by 4.4% and
3.5% respectively in 2001 and 2002. However, as of January 2004 average earnings
(seasonally unadjusted data including bonuses) in the whole economy rose by 6.8
percentage points in the year to January 2004. This figure was 3.7% up on December
2003. The higher level of increases in January reflects bonus payments, primarily in the
finance service sector, and the timing of these payments. Average earnings in the
manufacturing sector rose by 3.4% and average earnings in the service sector rose by
7.7% in the year to January 2004. In the public sector the increase was 4.1%iii.
There has also been a noticeable change in the allocation of retail liquid assets over the
19972002 period, with the proportion of retail liquid assets in deposits shifting
notably from 52.1% in 1997 to 64.6% in 2002. The proportion held in mutual funds
(unit and investment trusts) also increased slightly, up from 13.5% to 15.3% over the
same period. By comparison, direct bond and direct equity holdings have suffered. The
proportion of retail liquid assets accounted for by direct equity in particular fell from
30.1% to 16.4% between 1997 and 2002. The shift in asset allocations highlight the
declining value of equity holdings and the shift into more balanced and conservative
asset classes - principally cash.
iii
Incomes Data Services (IDS)
23
TLFeBOOK
Figure 2.2: Change in the savings and investment assets between 1997 and
2002
4.3% 3.7%
100% Direct bonds
90%
Proportion of total retail liquid
16.4% Direct equity

assets in each asset class
80% 30.1%
70% 15.3% Mutual funds
60% 13.5%
50%
40% Deposits
64.6%
30% 52.1%
20%
10%
0%
1997 2002
Source: Datamonitor Global Savings and Investments Database Business Insights Ltd
Liquid wealth concentration
hands of affluent individuals. Mass affluent individuals share of retail liquid assets grew
from 34.2% to 36.4% between 1997 and 2002, suggesting that they have fared better
overall than mass market investors in the market downturn. The share of HNW
individuals has grown more distinctly, rising from 26.5% to 34.7% over the same
period, and by comparison mass-market individuals share of retail liquid assets is
estimated to have fallen from 39.2% to 28.9% over the last five years.
24
TLFeBOOK
Figure 2.3: The mass market, mass affluent and high net worth share of total
retail liquid assets in 1997 and 2002
100%
Proportion of total liquid retail assets
90% 26.5%
26.5% High Net Worth
34.7%
80%
70%
60%
34.2% Mass affluent
50% 36.4%
40%
30%
20% Mass market
39.2%
39.2% 28.9%
28.9%
10%
0%
1997 2002
Source: Datamonitor Global Wealth Model 2003 Business Insights Ltd
Market overview
Mass affluent individuals make up nearly 11% of the total UK adult population. With
5.1 million individuals in the UK the mass affluent segment is considerably larger than
the HNW segment, which only accounted for 1.2% of the total UK adult population of
in 2002.
25
TLFeBOOK
Figure 2.4: Number of UK mass affluent individuals with liquid assets
between 30,000-200,000, 19972002e
6,000 30%
Ye
ar
25%
-o
5,000
n-
MA individuals (000s)
Year-on-year growth
y
ea
20%
rg
4,000
ro
15%
wt
h
3,000 10%
5%
2,000
0
1,000
-5%
0 -10%
1997 1998 1999 2000 2001 2002
Overall mass affluent individuals hold approximately 340 billion in liquid assets. From a
base of 4.4 million in 1997, the number of mass affluent individuals in the UK grew by a
further 0.7 million to 2002, which equates to a compound annual growth rate of 3.0%.
However, the majority of growth occurred between 1998 and 1999 in light of the
extraordinary stock market growth that accompanied the technology bubble. Since
2000, the number of mass affluent individuals declined by 5.7% in 2001 and a further
5.0% in 2002. The growth in the value of mass affluent liquid assets has followed a
broadly similar pattern.
26
TLFeBOOK
Figure 2.5: Aggregate liquid assets of UK mass affluent individuals with
liquid assets between 30,000-200,000, 19972002e
450 Ye 25%
ar
400 -o
n- 20%
ye
Year-on-year growth
MA liquid assets, bn
350 ar
gr 15%
300 ow
th
250 10%
200 5%
150
0
100
-5%
50
0 -10%
1997 1998 1999 2000 2001 2002
Regional analysis
The growing competitive emphasis being placed on targeting affluent individuals outside
of traditionally targeted areas of the UK such as London and the South East is making
the assessment of regional affluence an important requirement. While there is no data
available that cross-references regional location and liquid wealth, there are a number of
indicators that can be used to ascertain the most affluent regions of the UK including
house prices, income and ownership of particular investment vehicles such as equity and
unit trusts.
House prices in the South East, Greater London and the South West regions are
reaching their peak having experienced spectacular rises. Consequently, growth in house
prices for these hot spots is going to slow down significantly. Regions, which in 2002
and 2003 recorded a slow growth rate, are set to become the new hot spots and will
reduce the disparities in regions.
27
TLFeBOOK
Around the time of publishing this report, Nationwide reported its forecasts for house
price growth in 2004, and according to some, this report is likely impose more pressure
on the Bank of England to further increase the interest rates. Nationwide now expects
house prices to rise by 15% in 2004 rather than by the 9% it estimated at the beginning
of the year.
At present, prices are increasing most significantly in affordable areas outside London
and the South East region is experiencing the lowest growth. According to Nationwide,
prices have risen by more than 36% in Wales in the 12 months to March 2004 and by
more than 33% in the North. Nationwide also concludes that the slowdown in growth
in London prices can be attributed to the decrease in financial sector employment, as
well as the downward trend in expectations of future price growth.
Table 2.1: Standard average house price versus house price growth
segmented by region, 19972002
Region Average standard CAGR growth in average

house price 2002 house price 19972002
East of England 126,714 14.7%

East Midlands 112,220 14.0%
London 214,253 16.1%
Northern Ireland 80,315 7.9%
North West 83,522 8.7%
North East 76,857 7.8%
South East 190,586 15.4%
South West 152,873 16.7%
Scotland 72,198 4.1%
West Midlands 118,497 12.0%
Wales 88,409 9.7%
Yorkshire and the Humber 78,596 8.7%
UK 121,426 11.9%
Source: Datamonitor analysis of Halifax House Price Index Business Insights Ltd
28
TLFeBOOK
Table 2.2: Growth in average house prices per region, Q4 2002 to Q3 2003
North Yorkshire North Wales Scotland West Midlands

& Humberside West
Growth rate 22.34% 20.86% 16.04% 15.59% 15.47% 12.54%
East Northern East Greater South South

Anglia Ireland Midlands London West East
Growth rate 10.96% 9.43% 9.04% 4.99% 4.28% 3.65%
Source: Datamonitor, analysis of Halifax Data Business Insights Ltd
The influence of income
Income provides another important indicator of affluence and, in particular, of the ability
to create new wealth in particular regions. Many competitors consider income
thresholds for their mass affluent service, making this an important indicator.
The analysis reveals that London and the South East have by far the greatest
concentration of individuals earning over 50,000 in pre-tax earned income relative to
their population size. London accounts for 12.1% of the UK population but comprises
22.7% of the 50,000 income segment. The South East accounts for 13.6% of the UK
population and comprises 23.5% of the 50,000 income segment. The East of England
is the only other region to have a larger proportion of high earners than its share of the
UK population, implying it too has a high relative concentration of affluent individuals.
Other regions accounting for an important proportion of the high earner segment include
the North West (7.4%), South West (7.1%), West Midlands (6.0%) and Scotland
(6.0%). This makes them attractive regions to target in absolute terms, although in
relative terms there is a lower concentration of affluent individuals in these areas.
29
TLFeBOOK
Table 2.3: Number of individuals with pre-tax earned income over 50,000
and total value of pre-tax earned income for this segment,
by region, 2000
Region Number of individuals Total value of earned Average earned

(000s) income (m) income ()
North East 21 1,820 86,667

North West 93 8,430 90,645
Yorkshire & Humber 63 5,650 89,683
East Midlands 69 6,210 90,000
West Midlands 76 6,960 91,579
East of England 150 15,500 103,333
London 286 37,700 131,818
South East 296 31,500 106,419
South West 90 8,120 90,222
Wales 24 2,050 85,417
Scotland 76 6,780 89,211
Northern Ireland 16 1,550 96,875
Total UK 1,260 132,270 104,976

Notes: (i) Income data by region refers only to individuals with over 50,000 in total earned
income and relates to taxpayers only; (ii) Total earned income includes self-employment income,
employment income and pension income, but excludes investment income
Source: Datamonitor analysis of Inland Revenue statistics Business Insights Ltd
Table 2.4: Proportion of total UK population in each region compared to

proportion of total 50,000+ segment in each region, 2000
Region Proportion of total UK Proportion of total UK

population individuals with over 50k
in pre-tax earned income
North East 4.3% 1.7%

North West 11.5% 7.4%
Yorkshire and the Humber 8.4% 5.0%
East Midlands 7.1% 5.5%
West Midlands 9.0% 6.0%
East of England 9.2% 11.9%
London 12.1% 22.7%
South East 13.6% 23.5%
South West 8.4% 7.1%
Wales 4.9% 1.9%
Scotland 8.6% 6.0%
Northern Ireland 2.9% 1.3%
UK 100.0% 100.0%
(i) Total earned income includes self-employment income, employment income and pension
income, but excludes investment income
Source: Datamonitor analysis of Inland Revenue statistics Business Insights Ltd
30
TLFeBOOK
The ownership of equity and unit trust investment vehicles provides another proxy for
affluence and financial sophistication of different regions. In terms of share ownership
the South East is the most attractive region as it has the highest proportion of
households owning shares (33%) and also the largest proportion of the British
population (14%). Other regions with above average share ownership include the East
of England (32% of households), London (28%) and the South West (27%).
Of the remaining regions the North West is probably the most attractive on a broad level
given the large population and close to average share ownership. Scotland and
Yorkshire & Humber also have close to average share ownership but smaller
populations.
Competitors
The competitive landscape in the UK mass affluent savings and investment arena is
highly complex, with a range of service propositions competing to a greater or lesser
extent for the attention of mass affluent customers and assets in a host of different
capacities. There are specific competitor types with a vested interest in the mass affluent
sector: private client wealth managers, IFAs, stockbrokers, retail asset managers, fund
supermarkets, retail banks and online banks.
The competitive picture is further complicated by the fact that the lines between these
competing propositions are often blurred because they do not always operate on a
stand-alone basis. For example many online banks will also offer stock broking services,
while retail banks will also offer the funds of their groups asset management division.
Ownership structures also mean that many competing propositions, while distinct, often
form part of the same financial services group. For universal banking concerns this
extends across the majority of the competing service propositions. Barclays, for
example, has retail banking (including online banking), stock broking, wealth
management and asset management divisions. This highlights the importance of
distinguishing, both internally and in external communication, which services are
31
TLFeBOOK
appropriate for which customers, in order to avoid duplication of effort in targeting the
mass affluent sector.
Private client wealth managers
Private client wealth managers are among the most directly focused on the mass affluent
savings and investment marketplace offering portfolio management and financial
planning services to private clients. Their dedicated focus on the mass affluent segment
is established through the use of investment thresholds and on the basis of the nature of
the services they offer.
Among the biggest wealth managers catering to the UK mass affluent are Gerrard,
Charles Stanley, Rathbones and Carr Sheppards Crosthwaite. Barclays acquisition of
Gerrard (announced in October 2003) will have a significant impact on the mass affluent
sector. This deal will allow Barclays to increase its size and recognition in the provision
of portfolio management services to affluent UK individuals at a time when the market
appears to be improving.
A number of dedicated wealth management services aimed at mass affluent individuals

have been launched in recent years. These were highly differentiated from mass-market
retail services and often introduced completely new brands such as Inscape, the wealth
management service from Abbey National.
The economic challenge of serving the mass affluent market profitably has highlighted
the need to have a clearly defined concept of the target market and a business model that
is viable in terms of both revenue generation and costs.
Investment thresholds generally serve as a poor indicator of the target market and the
level of client loading/service being delivered. Analysis of a range of UK mass affluent
wealth managers reveals that generally, average portfolio sizes rise in line with
increasing thresholds, however this relationship is not particularly strong and there are
32
TLFeBOOK
many exceptions. Even more acutely, thresholds provide minimal indication of the level
of client loading to be expected.
Table 2.5: Thresholds and costs for the big fours premier banking offerings,
2003
Barclays Lloyds TSB NatWest HSBC (a)
Income threshold 60,000 60,000 50,000 75,000

Joint income threshold na 80,000 70,000 100,000
Asset threshold 70,000 100,000 na (b) 30,000
Cost per month 10 No fee or 15 (c) 12.50 No fee
Current A/C interest rate 0.10% 0.1% - 3.2% 0.5% - 2.0% 0.1% - 1.25%
Customers 125,000 na 200,000 na
Notes: (a) Salary must go into current account. Those with a mortgage over 150,000 with HSBC
are also eligible, (b) Also takes assets into consideration but no explicit threshold, (c) Payment of
fee depends on level of money in current account
Source: Datamonitor company analysis Business Insights Ltd
Average portfolio sizes offer a reliable indication of private client wealth managers
actual target market, as this is what dictates the economics of managing and serving a
particular customer base.
However, it should be noted that many private client wealth managers fall above or
below the average client-loading ratio for a given target market suggesting there is still
plenty of variation in service levels and composition within different offerings. This
variation must be accounted for in higher fees charged or compensated for in other areas
of the cost base. The wide range of variation also suggests that it is increasingly likely
that several private client wealth managers operate outside of the optimal range for their
given target market.
Stockbrokers primary focus is on direct equity investment
Stockbrokers main focus in targeting the mass affluent market is in the area of direct
equity investment, although increasingly many are expanding the range of investment
33
TLFeBOOK
products they offer. In particular there are a number of fund supermarket/sharetrading
combinations that now exist such as Ample, Self Trade and TD Waterhouse.
The UK market is made up of both traditional stockbrokers and more recent online
broking entities. While execution-only services tend to be squarely focused on the self-
directed market there is also a range of competitors offering advisory services geared
towards advice seeking mass affluent customers.
The large UK universal banks including Barclays, HSBC, Lloyds TSB, HBOS,
NatWest, Abbey and Alliance & Leicester all have sizeable stock broking arms. Barclays
Stockbrokers is the largest retail player in the market.
With significant exposure to declining equity values retail stockbrokers have suffered
harder than many other competitor types under the market downturn. Beneficial share
ownership by private individuals grew strongly on the back of the late 1990s bull market
(see page 124 for a definition), but since 2000 the value of beneficial share ownership
attributable to individuals has declined from 290 billion to 166 billion, an absolute fall
of 43%. Private individuals share of total beneficial share ownership also fell from
16.0% in 2000 to 14.3% in 2002. This reflects the fact that individuals have suffered
more heavily than institutions and the strong element of a flight to safety that they have
undergone.
While total stock trading volumes did not peak until 2001, individual investor trading
peaked a year earlier when both execution-only and advisory/discretionary volumes fell.
More significantly, there was a large drop in execution-only trading, from 14.3 million
trades in 2000 to 10.9 million in 2001. As retail investors were burned by tech stock
declines, confidence in their own ability was shaken causing many stockbrokers to stop
trading altogether with some turning instead to advisory and discretionary services.
34
TLFeBOOK
Table 2.6: Beneficial ownership of UK shares, billion, 19982002
bn 1998 1999 2000 2001 2002 CAGR
Individuals 250.8 275.8 289.9 229.9 165.5 -9.9%

Total UK 1,503.70 1,807.00 1,810.70 1,554.10 1,154.60 -6.4%
Individuals as a 16.7% 15.3% 16.0% 14.8% 14.3%
%of total
Source: Datamonitor, ONS Business Insights Ltd
The fees and commissions charged by stockbrokers have undergone a process of radical
change over the past few years. Online trading has driven down the costs of all forms of
stock broking services and flat fees are now an increasingly common phenomenon,
particularly for execution-only and frequent trading services.
Many stockbrokers over recent years have sought to expand their services into wealth
management and a wider range of investment products and services. This has the
potential to give them more prevalence in targeting the mass affluent customer base and
in capturing a larger share of mass affluent savings and investment assets. This reflects
the fact that share trading alone (particularly execution-only share trading) can only
reach a limited self-directed customer base that has been particularly hard to come by in
recent years.
Retail asset managers
Retail asset managers are most directly focused on funds distributed through IFAs,
private client and other sales channels. As a result the only real interaction asset
managers have with mass affluent customer is mainly in their direct distribution
channels. Fidelity is by far the largest competitor in this field on the basis of unit trust
and OEIC funds under management. Its nearest rivals include INVESCO Fund
Managers, Scottish Widows, Threadneedle, Schroders and M&G Securities. The vast
proliferation of funds (and fund of funds) over the last decade has meant that competing
for client attention and achieving differentiation is increasingly difficult.
35
TLFeBOOK
Retail funds under management in unit trusts and OEICS fell by over 25% between
2000 and 2002 with considerable impact on profitability and investor confidence.
However, UK fund managers saw a rise in profitability over the course of 2003
benefiting from net cash inflows, stable pricing and a recovery in the stock market.
During the period before April 2004, fund managers were also gearing up for the ISA
season and therefore substantially increased marketing budgets to encourage retail
investors to use up their ISA allowance. Jupiter Asset Management for example is
reportedly budgeting for an increase of 20% in marketing costs. The push on the ISA
front is also taking other forms with some fund managers planning discounts on fees
while others are increasing commissions for IFAs to secure stronger sales and
distribution.
While the stock market turnaround and ISA season offer some opportunity for retail
asset managers, they will need to improve on weaknesses in areas such as price
competitiveness and transparency that have frustrated many mass affluent customers.
Future hurdles
One big challenge in relation to ISAs will be to find methods to counter the effect of
changes to tax laws that have allowed investors to shield dividend income. From April
2004, ISA investors are no longer able to claim back the 10% tax credit on dividends
paid into ISAS, reducing the benefit of using ISAs to buy shares or equity funds.
The FSA is also imposing stricter regulation on fund advertising from June 2004 that
will limit fund managers ability to use historical or favorable performance arguments in
their marketing materials. Fund managers will no longer be allowed to pick the
performance statistics that show funds in the best light but will instead be required to set
out standardized data on past performance showing returns on a year-by-year basis over
five years. The FSA is also banning managers from linking past performance with future
possible performance. While these changes are highly positive from the customers point
36
TLFeBOOK
of view they will also reduce the potential impact of promotional messages, particularity
among funds that are not performing so well.
Retail banks
In the mass affluent savings and investment arena retail banks are most directly focused
on deposits and simpler investment products. Deposits held in current accounts and
savings accounts are heavily dominated by the top seven banks comprising the
traditional big four (Lloyds TSB, RBS/NatWest, Barclays, HSBC) HBOS, Abbey
National and Nationwide. Most UK mass affluent customers will have a current account
relationship with one of these providers and this potentially gives them a strong platform
for cross-selling other savings and investment products. Some of these customers will
have been identified and targeted with premier banking or other specialist affluent
services, but many will stay with the standard retail banking offerings. Others may
remain unidentified within the customer base.
Table 2.7: UK personal deposit account balances by competitor, 19972001
bn 1997 1998 1999 2000 2001 CAGR

9701
Halifax/HBOS 81.1 85 87.9 89.8 123 11.0%

Bank of Scotland 20.2 21.5 21.8 27 na na
Lloyds TSB 50.7 53.3 58 63.8 69.6 8.2%
Royal Bank of Scotland 30.7 32.5 38.6 63.8 68.5 22.3%
NatWest 24.9 25.9 27 na na na
Barclays 31.6 32.7 34.6 38.9 67.8 21.0%
Woolwich 19.9 20.5 18.8 20.2 na na
Abbey National 38.9 44.9 49.7 51.3 57.4 10.2%
HSBC (incl. First Direct) 32.7 34.1 41.3 45.3 50.7 11.5%
Nationwide Building Society 28 33 37.4 41.6 49.7 15.4%
Total of above 358.7 383.4 415.1 441.7 486.7 7.9%
Other 96.3 100.6 103 111.5 112.6 4.0%
Total market 455 484 518.1 553.2 599.3 7.1%

Note: Revision to historical numbers may have occurred in this table. In such instances this is due
to improved methodology. Figures include current account balances and all retail subsidiary
undertakings in the UK, including wealth management operations.
Source: Datamonitor estimates based on company accounts Business Insights Ltd
37
TLFeBOOK
After some failed attempts to introduce dedicated mass affluent private banking/wealth
management services, (e.g. Create and MLHSBC) UK retail banks appear to have
settled on premier banking propositions as the main method of targeting the mass
affluent market. These offer a more personalized banking service than the mass market
offering, usually with a named relationship manager, and additional banking and non-
banking benefits. With premier banking offerings now representing the main thrust in
targeting mass affluent clients, in-house mass affluent wealth management services have
consequently been refocused to target a slightly higher net worth individual and
diversified to incorporate a wider range of services.
While the premier banking offerings of Barclays, Lloyds TSB, HSBC and RBS/NatWest
are broadly similar there is some variation in the income and asset thresholds they apply.
NatWest has the lowest annual income threshold at 50,000 compared with HSBC,
which has the highest threshold at 75,000. However, in terms of investable assets
HSBC is the lowest at 30,000 compared with Lloyds TSB that requires 100,000.
NatWest does not have an explicit investable asset threshold, but does consider asset
levels when assessing applications.
The large captive customer bases of many retail banks means that they are at a distinct
advantage because of the sizeable pool of affluent clients they can target. The key to
success in the mass affluent space will therefore firstly be successfully identifying
affluent clients within their retail customer base and, secondly, ensuring they have a
sufficiently powerful proposition to move them up to premier banking offerings. This
platform should in theory be profitable, opening up cross-selling and advisory
opportunities that could expand share of wallet.
There are some fundamental criticisms that tend to get regularly leveled at the large UK
retail banks by affluent customers. These include the fact that they are not very price
competitive, tend to push their own products and lack the internal communication to
have an effective single relationship with the customer. These are all areas where
38
TLFeBOOK
premier banking offerings are going to have to become more competitive if they are to
expand their share of the mass affluent market.
Online banks
In the UK market almost all of the major retail banks offer online banking to their
customers, but there are also the now well-established Internet banks including Egg,
Cahoot, Smile, First Direct and Intelligent Finance that operate without a branch
network. As at the end of 2002 Egg was by far the largest with over 2.5 million
customers. All of the Internet banks above are subsidiaries of larger UK high street
banks with the exception of Egg, which is publicly quoted but remains 79% owned by
Prudential. Credit card giant Capital One also introduced savings products for the first
time in the UK in early 2003 over its online and telephone channels as cost-effective
means of funding its retail lending.
The Internet is fast becoming the channel of choice for affluent customers wishing to
perform routine financial transactions. In 2002 there were 9.9 million Internet banking
customers. This figure is forecast to grow to 15.5 million individuals by 2007. By 2008,
40% of transactions will happen online, compared to the current 20%iv. The Internet is
particularly attractive to affluent individuals who are disproportionately time-pressured
and will often have access to the Internet at their place of work or at home.
While the main thrust of competition for online banks is deposits through current and
savings account products, many have developed a decent range of savings and
investment products including fixed rate investments, cash and equity ISAs, unit trusts
and share trading services. The online channel has some inherent advantages in
iv
The Guardian, July 31, 2003
39
TLFeBOOK
comparing and transacting investments and if online banks can exploit this and further
develop their product ranges it will enable them to compete more comprehensively for
mass affluent customers assets.
While online banks can potentially exploit their cost advantages to offer mass affluent
customers a competitive deal on an increasing range of products the precise role of the
Internet channel is still not suitable for all products and services, or as a fully-fledged
sales channel. Indeed, in a number of areas the branch has considerable advantages,
particularly for investment advice and sales of complex investment products. While
government-led product simplification could lend additional weight to the online channel
in some areas, it is unlikely it will ever be a universal solution to mass affluent
customers often complex savings and investment needs.
Table 2.8: Current account rates for selected retail and online banking
players, December 2003
Bank Current account % Gross
Lloyds TSB Classic Plus 4.41

Cahoot Current no chequebook 3.4
IF Current account 2.72
Bank of Scotland Current 2.5
Halifax Current 2.5
Abbey The abbey account 2.5
Alliance & Leicester Premier current A/C 2.1
First direct Bank account 1.98
HSBC Premier bank account 0.25
Barclays Bank Bank account 0.1
Note: Comparison relates to highest rate no fee current account available as at December 2003 for
a 5,000 balance.
Source: Datamonitor, Moneyfacts Business Insights Ltd
IFAS are key competitors
Within the UK mass affluent sector IFAs are a key competitor type, often having strong
relationships with mass affluent clients who are more likely than mass market customers
to seek out independent advice and financial planning services in comparison to mass
40
TLFeBOOK
market customers. While IFAs have these established relationships they are in general
heavily focused on life and pensions products rather than savings and investments.
Table 2.9: Top 10 UK IFAs by turnover, 2002
Rank Company Turnover (m)
1 Bradford & Bingley Group 100

2 H S B C Trust Company 85.7
3 Lloyds T S B IFAs 70
4 Woolwich IFA Services 68.2
5 Towry Law Financial Services 61.2
6 Inter-Alliance Group plc 50
7 Hargreaves Lansdown Asset Management 41
8 Morgan Stanley Quilter 31.2
9 Chase de Vere Investments 29.6
10 Alexander Forbes Financial Services 27.7
Total 814.6
Source: Datamonitor, Matrix-Data Business Insights Ltd
Bradford and Bingley is the largest IFA with close to 100 million in turnover. Only five
other IFAs have a turnover exceeding 50 million: HSBC Trust Company, Lloyds TSB
IFAs, Woolwich IFA Service, Towry Law and the Inter Alliance group.
The FSA is proposing to scrap the polarization restrictions that are currently in force in
the UK, and depolarize the advice market under guidelines set out in CP166 (the FSA's
Consultation paper 166 called 'Reforming Polarisation: Removing the barriers to choice
- Including feedback on CP121', published in January 2003).
). Under the current polarization regime those who advise on packaged products have
to be either independent and advise on products from across the market or represent one
company and only sell its products.
The FSA envisions that removing polarization restrictions will allow firms to be able to
sell not only their own products (if they produce any) but also the products of any other
provider. There will be no limit on the number of providers whose products can be sold
41
TLFeBOOK
and firms advising customers will be obliged to recommend the most suitable product
from the range on which advice is being given rather than the whole market.
Firms may hold themselves out as independent only if they offer advice across the whole
market, offer customers the opportunity to pay by fee for advice and present themselves
in a clear and unambiguous way to their clients.
IFAs therefore will need to look carefully at their business models in order to decide
whether to remain independent or become multi-tied. Smaller IFAs with strong client
relationships could benefit from maintaining relationships and staying independent,
whereas larger IFAs could cut training costs and increase efficiency by limiting the
products they advise on and relying on their reputations as fair advisors.
Fund supermarkets
In the mass affluent savings and investment marketplace fund supermarkets are primarily
focused on unit trust and investment trust distribution and providing a range of
informational content relating to investments and online fund comparison tools. There
are a number of fund supermarket offerings in the UK, with a varying range of funds and
fund manager coverage. FundsDirect has the widest range of funds with 1,500 funds
from 80 managers. Its nearest rival is FundsNetwork with 840 funds from 50 managers.
The remaining fund supermarkets analyzed all have a more limited range.
Table 2.10: Number of funds and fund managers offered by selected fund
supermarkets, 2003
Provider Number of funds Number of fund managers
Ample 400 24
Charcolonline 493 30
Egg Investments 250 25
FundsNetwork 840 50
FundsDirect 1,500 80
Selftrade 364 15
TD Waterhouse 395 23
Average of above 606 35

Source: Datamonitor company analysis Business Insights Ltd
42
TLFeBOOK
The declining inflows to equity-related investments indicated that fund supermarkets
suffered heavily in light of the market downturn. Fund supermarkets rely on clients to
select their own investments and while many offer a host of helpful research and
information in this respect they have little or no advisory capability to support investors,
which has become critical in recent years.
For other fund supermarkets there may be possibilities to form partnerships or links with
IFAs to achieve a similar goal. However, in general, broker fund supermarkets (those
targeted specifically at IFAs) have been much more successful than direct-to-client fund
supermarket propositions. Gross sales of unit trust/OEIC ISAs to retail investors
through fund supermarkets amounted to 1.1 billion in 2002. This equates to
approximately 17% of all gross retail unit trust/OEIC ISA sales.
There are few fund supermarket competitors that have not expanded their product and
service coverage outside of mutual fund and ISA products. FundsNetwork and
FundsDirect remain pureplay fund supermarkets but most of the other fund supermarket
offerings are now incorporated into wider investment propositions that include services
such as share trading, savings accounts, bonds, contracts for differences, exchange
traded funds, covered warrants, futures and options.
In expanding their range of savings and investment products fund supermarkets could
also consider the prospect of moving into wrap platform provision. To some extent fund
supermarkets already have what is arguably a wrap offering with a platform through
which an IFA can purchase funds for a client. Injecting further capital into the
development of the platform in order that it can administer other products besides unit
trusts and ISAs could be cheaper than developing a completely new platform. The fact
that some fund supermarkets have existing IFA relationships could also be advantageous
in terms of brand awareness and the fluency of the front end. Fund supermarkets also
have existing relationships with fund managers, giving them a head start over other
platform managers.
43
TLFeBOOK
European mass affluent customers
Despite the deterioration in economic and financial market conditions, overall onshore
retail savings and investments have continued to grow over the longer-term. Spain and
France have seen the largest growth in total liquid assets with a rise of 40% and 35%
respectively between 1997 and 2002. The UK, by comparison, has seen the slowest
growth with a rise of only 12% between 1997 and 2002.
Between 1997 and 2002 affluent individuals in major European countries continued to
increase their share of total retail liquid assets from 31% in 1997 to 34% in 2002, while
the proportion held by HNW individuals increased even more dramatically from 21% to
28% over the same period. These figures go a long way towards explaining why FSIs
are increasingly looking to the wealthiest section of their customer base to drive revenue
growth. During this period the proportion of liquid wealth held by mass market
individuals fell from 47% to 38%.
Figure 2.6: Asset concentration, 19972002

Proportion of total retail liquid assets
100%
90% 21.4% High net worth
28.1% liquid assets
80%
70%
60% 31.5%
34.0% Mass affluent
50% liquid assets
40%
30% 47.1%
Mass market
20% 37.9% liquid assets
10%
0%
1997 2002
44
TLFeBOOK
France has the most affluent individuals in Europe
Affluent individuals make up a higher proportion of the population in France than any
other major European country, at 9% of the population. This declines to 8% in
Germany, Italy and the UK, and 6% in the Nordic region and Spain. The lower level of
affluent individuals in Spain is due to the lower level of affluence across the whole
society, reflected in a lower savings and investment per-capita ratio. In the Nordic
region, where the level of affluence is high, there is a slightly lower level of affluent
individuals because the distribution of wealth is more evenly spread than in other major
European nations.
Table 2.11: Number of European mass affluent individuals as a proportion of

total population, segmented by country, 2002e
Individuals (000s) France Germany Italy UK Nordic Spain

Region
Total population 59,380 82,356 57,999 58,802 24,020 41,301

Mass affluent individuals 5,441 6,857 4,741 4,724 1,443 2,311
Mass affluent population 9.2% 8.3% 8.2% 8.0% 6.0% 5.6%
as a percentage of the
total population
See Appendix for methodology and definitions relating to these numbers.
Table 2.12: European liquid assets as a proportion of total assets, 1997 and
2002
1997 2002e % Change

Liquid assets by asset band
HNW liquid assets, bn 1,314 2,138 62.70%
MA liquid assets, bn 1,937 2,588 33.60%
MM liquid assets, bn 2,896 2,882 -0.50%
Total retail liquid assets 6,147 7,608 23.80%
% of total liquid assets

HNW liquid assets, 21.4% 28.1%
MA liquid assets, 31.5% 34.0%
MM liquid assets, 47.1% 37.9%
Note: European figure refers to the big five European countries plus the Nordic region. See Appendix for
methodology and definitions relating to these numbers. MM= Mass market, MA= mass affluent
45
TLFeBOOK
There were 25.5 million affluent individuals in the main European countries in 2002.
Four countries dominate the mass affluent market in the main European countries.
Germany is the largest of these with 6.9 million individuals in 2002, followed by France,
Italy and the UK. The concentration of affluent wealth in these major countries accounts
for why they have been so important in the thinking of transnational wealth managers,
such as UBS, which has focused its Wealth Management Initiative on the big five
European nations (France, Germany, Italy, Spain and the UK).
Table 2.13: European mass affluent individuals and liquid assets, 19972002
1997 1998 1999 2000 2001e 2002e CAGR
Total population (000s) 319,662 320,156 320,982 321,885 323,343 323,856 0.3%
Mass affluent individuals 19,620 20,049 24,444 25,984 25,640 25,516 5.4%
(000s)
% of total 6.1% 6.3% 7.6% 8.1% 7.9% 7.9%
Total liquid assets (bn) 6,147 6,648 7,614 7,898 7,798 7,608 4.4%
Mass affluent liquid assets, 1,937 2,076 2,446 2,669 2,597 2,588 6.0%
(bn)
% of total 31.5% 31.2% 32.1% 33.8% 33.3% 34.0%
Note: See Appendix for methodology and definitions relating to these numbers.
Number of European mass affluent individuals segmented by country
The number of mass affluent individuals increased in most major European countries in
the period 1998 to 2002. The level of growth has been variable however. Spain
experienced the fastest growth from the end of 1997 to 2002 at 47%, as the country
continued to close the gap in affluence with its EU neighbors. France experienced the
second fastest growth. In both countries exposure to equity-linked investments is
limited, protecting affluent individuals from declining equity markets.
46
TLFeBOOK
Table 2.14: Number of European mass affluent individuals segmented by
country, 19972002
Individuals (000s) 1997 1998 1999 2000 2001e 2002e CAGR
Germany 5,240 5,368 6,614 6,723 6,789 6,857 5.50%

France 3,851 3,970 4,734 5,153 5,267 5,441 7.20%
Italy 3,801 3,946 4,597 5,016 4,807 4,741 4.50%
UK 4,049 3,942 4,925 5,281 4,977 4,724 3.10%
Spain 1,571 1,730 2,057 2,251 2,341 2,311 8.00%
Nordic region 1,110 1,093 1,517 1,559 1,458 1,443 5.40%
Total 19,620 20,049 24,444 25,984 25,640 25,516 5.40%

Note: See Appendix for methodology and definitions relating to these numbers.
The Nordic region saw a dramatic fall in the number of affluent individuals in 2001,
reflecting its strong exposure to the bursting of the technology bubble. The UK, with its
developed equity culture, saw a steady decline in the number of affluent individuals from
2000 to 2002 and experienced the lowest growth across the 19972002 period,
compared to other European countries analyzed in this report.
Figure 2.7: Individuals holding between 50,000 and 100,000 in liquid assets
account for more than 56% of the European mass affluent population
17%
Liquid assets between
150,000 - 300,000
27%
Liquid assets between 56%
100,000 - 150,000 Liquid assets between
50,000 - 100,000
47
TLFeBOOK
The number of individuals in different mass affluent asset classes is similar in different
European countries. In all major European countries the majority of mass affluent
individuals hold between 50,000 and 100,000.
Germany has the largest amount of aggregate liquid assets held by affluent individuals at
687 billion, or 26% of the market in the major European countries (France, Italy,
Germany, Spain, UK and the Nordic region). France, at 561 billion, the UK at 489
billion and Italy at 473 billion, also have large and significant amounts of liquid assets
held by mass affluent individuals. These four countries are by far the largest markets in
Europe for assets held by affluent individuals. Spain has a much smaller market with
only 237 billion.
Table 2.15: Value of mass affluent liquid assets segmented by country, 1997
2002e
Liquid assets, bn 1997 1998 1999 2000 2001e 2002e CAGR
Germany 511 549 654 682 679 687 6.1%

France 386 418 482 538 542 561 7.7%
UK 408 416 503 553 514 489 3.7%
Italy 369 402 453 507 479 473 5.1%
Spain 157 181 209 234 240 237 8.6%
Nordic region 106 109 147 155 143 141 6.0%
Total 1,937 2,076 2,446 2,669 2,597 2,588 6.0%

See Appendix for methodology and definitions relating to these numbers.
The liquid assets held by mass affluents grew rapidly in the period 1998 to 2002. In
major European countries they grew by almost 20% or more during this period. Growth
was fastest in the period 1997 to 2000, and slowed or reversed depending on the
country in the period 2000 to 2002.
Aggregate liquid assets grew fastest in Spain between 1997 and 2002, from 157 billion
to 237 billion. This fast rate of liquid asset growth is the reason why several
international banks including Credit Suisse have targeted the country to launch services
48
TLFeBOOK
for mass affluent customers. Conversely, liquid assets in the UK and the Nordic region
declined rapidly between 2000 and 2002 due to falling equity levels.
Liquid assets held by mass affluent individuals are spread quite evenly across the asset
bands. 935 billion are held by mass affluent Europeans with 50,000 to 100,000 in
liquid assets. 767 billion are held by mass affluent Europeans with 100,000 to
150,000 in liquid assets. And 35% of mass affluent liquid assets, or 895 billion are
held by those with 150,000 to 300,000 to invest.
The even spread of liquid assets across the mass affluent asset bands is broadly
replicated in all the major European nations.
Market trends
The market for selling financial services to affluent customers varies considerably
between different geographies. However, certain themes can be highlighted across the
current European affluent marketplace.
Banking services
Recent years have seen a return to an increased emphasis on offering core banking
services to affluent customers as a means of strengthening relationships, increasing
customer loyalty and increasing cross-selling. This can be seen in the movement away
from dedicated investment services towards a renewed emphasis on premier banking, a
core component of which is the superior banking services that affluent customers are
offered. These can include dedicated banking managers to help with banking issues
supported by Internet and telephone channels offering high levels of service. The change
is driven partially by the equity bear market (see page 124 for a full definition), which
has reduced the profitability of investment services and partially by an increasing
understanding that affluent customers are a customer segment with their own specific
needs. Affluent customers are often in responsible and demanding job roles, while
simultaneously dealing with the demands of family, property and so on. Affluent
49
TLFeBOOK
customers requirements of financial services providers therefore often center on time
limitations and the desire to gain efficiency and quality, as well as outsourcing certain
responsibilities to trusted others.
Safety and advice
Following the prolonged bear market the much-vaunted development of the self-
directed and financially confident affluent customer has been stunted. The desire for high
quality and impartial advice remains strong in this segment of the population. Some
competitors whose services were designed to appeal to a new breed of self-directed and
ambitious affluent investor have struggled to attract customers, particularly if they have
failed to provide strong advisory services. At the same time conservative products such
as bonds and capital protected products have increased in popularity among affluent
customers. Some providers have benefited from this. Banks such as SCH and BBVA in
Spain have strong capabilities in adding protection to their mutual funds and this has
helped to protect them from the competition of international asset managers who have
been less responsive in introducing these products.
The housing boom
In the last five years the housing markets in major European countries have been rising
at a rate of around 9% annually. In 2003, the average UK home saw its price rise by
15.4%. Affluent customers have been among the most important investors and thus
strong home loan offerings have become important hooks for affluent customers.
Particularly effective have been sweeping accounts, which offer the customer the ability
to move their money between mortgage, saving and current accounts, depending on
where it is needed and where it will be most profitable. Financial services organizations
have been able to use these as a means of attracting affluent customers, and gaining a
large share of their wallet with the potential of developing the relationship into other
areas of financial planning. Barclays Openplan offering is a good example of this and
has been particularly successful in developing relationships with Spanish affluent
customers.
50
TLFeBOOK
Competition
One of the fastest changing elements of European retail financial services in recent years
has been the way that competitors have approached the mass affluent market. As has
been well documented, from the late 1990s onwards there was a great deal of new
activity in the market, as competitors became starkly aware of the burgeoning size and
financial potential of the mass affluent population in Europe. Affluent customer wealth
across the major European countries increased at more than 11% per annum in the three
years to 2000v. Competitors rushed to create offerings specifically designed to draw
revenues from this market, and between 1999 and 2002 there was a multitude of new-
dedicated affluent competitors entering the market.
Since 2002, in many ways this trend has been reversed. The difficult economic outlook
of this decade has created a return to basics in the mass affluent market. Current
competitors can be categorized into five main types:
Universal banks;
international banks;
mass affluent services;
financial advisers;
brokerage services.
Retail banks and bancassurers
Retail banks and bancassurers across Europe are by far the most important competitors
in the European affluent financial services market. This is largely because for the
majority of European affluent customers, retail banks form their primary banking
v
Datamonitors Global Wealth Model
51
TLFeBOOK
relationship, giving them significant advantage in developing an affiliation with their
customers to deal with the full range of their needs. And yet the approach that these
competitors adopt to service, maintain and exploit this valuable customer group varies
widely. Some retail banks offer no specific approach to these customers, preferring to
view them as part of their mass-market customer base and offering them the same
products and services.
In the Nordic region the theme is for a high degree of devolution to individual branches,
allowing affluent customers to be dealt with in a flexible manner through a personal
relationship. Other competitors have reduced the threshold of their private banking
offerings (traditionally available to HNWs with 300,000+) and made them available to
affluent individuals. Others have developed packages of products and services for their
affluent customer bases combining banking, investment and non-banking offerings into
premium financial services propositions.
A small number of the larger competitors such as Barclays, Credit Suisse and Citigroup
are attempting to develop a significant presence in the affluent/HNW market across
major European markets. These players have often sought to capitalize on an
international reputation and innovative product and service offerings. However, they
have found it difficult to break the ties between affluent individuals and local retail
banks, particularly as these banks have strengthened the products and services they offer
to affluent customers in recent years, reducing the competitive advantage of
international players.
Financial advisers
Financial advisers are leading competitors in the mass affluent investment market in
Germany and the UK. Leading players in the UK include the major IFA networks,
Hargreaves Lansdown and Towry Law. In Germany leading competitors include MLP,
which is specifically focused on the professional market, and AWD. In other European
countries, banks and bancassurers are more dominant, however the financial advice
market is growing. Financial advisers are a rapidly increasing force in the affluent
52
TLFeBOOK
financial services markets in countries such as France and Italy, where they have not
traditionally had a large share of the market. This is thanks to a combination of the
financial advisers ability to aggressively target the affluent population with life and
investment products, and disillusionment with the investment expertise, independence
and advisory capabilities of banks. Other types of financial intermediaries such as
accountants and lawyers are important, although they are a less transparent factor of
competition in the affluent financial services market.
Brokerage services
Brokerage services both online and offline are also key competitors for the affluent
market investment business. Many have struggled during the equity downturn, but have
adapted their businesses to focus on a core of regular traders and to offer a wider range
of investment opportunities, including those that are not linked to positive equity
performance.
Finally there are new forms of competition in the market such as fund supermarkets,
account aggregation services and wrap account providers, which do not yet hold an
important part of the market but have the potential to have an critical impact in the
future.
Cross-border strategies
As the competition for clients in the wealth landscape intensifies, wealth managers are
being forced to go further afield in search of new sources of assets under management.
For many wealth managers, this means chasing funds cross-border, often into uncharted
territory.
This section examines the key growth regions of Europe, Asia and the Middle East and
assesses the various strategies that wealth managers have employed to enter these
53
TLFeBOOK
markets. There are three core cross-border strategies that wealth managers employ to
enter new markets:
Organic growth;
mergers and acquisitions;
strategic alliances/joint ventures.
The strategy employed by each wealth manager varies greatly across the different
geographies studied, although in general organic growth is the most popular strategy.
Europe
European countries as a whole encourage evolution growth through foreign investment

and foreign banks. The creation of the European Union has made it a great deal easier
for banks to operate on a pan-European basis and for foreign banks to launch businesses
in EU countries. In the UK for example, the FSA has the responsibility for awarding
passports to banks wishing to conduct business. The FSA will award a passport to a
foreign bank if the bank has already received permission from the regulatory body in its
home country.
As a result, foreign banks account for 55% of total assets in the UK banking sector. On
the other hand, France tends to be less accommodating, non-French residents hold just
over 30% of the market capitalization of the Paris Bourse.
The European private banking industry has been hit very hard by the market downturns
and many institutions have found that they need to look outside of their own country in
search of clients. In almost every European country, competition for clients is intense
because clients know that they can increasingly demand better services and more
innovative products.
54
TLFeBOOK
Wealth managers deal with this intensive competition in different ways: some have
chosen to scale down operations and concentrate on their home markets, whereas others
are expanding now in order to be at a competitive advantage when the markets begin to
pick up again.
Around half of European cross-border expansions are through organic means. This is a
good indication of the ease with which banks can now move cross-border in Europe and
gain banking licenses in foreign countries.
The Middle East
The Middle East stands in stark contrast to Europe when it comes to regulations and
restrictions on foreign banks trying to enter local markets. Thus, whilst the region is
relatively abundant in its population of wealthy individuals, it is more difficult for foreign
banks to become established and easier for Arab-owned banks to build on brands
already well respected in the region.
However, countries such as Bahrain allow international financial institution operations,

subject to the issuance of a banking license. Countries such as Iran and Syria have only
allowed privately owned banks to operate in recent years. Iran issued its first private
sector banking license at the start of 2002 and Syria issued three private sector banking
licenses on the May 25, 2003, its first since the creation of the state in 1963.
Kuwait and Saudi Arabia allow foreign ownership in banks of up to 49% and 40%
respectively. Saudi Arabia allows the introduction of Gulf Co-operation Council (GCC)
branches and as of 1999, allowed foreign ownership of mutual funds managed by Saudi
commercial banks.
The UAE, Oman and Qatar go one step further and do not allow new non-GCC banks
from establishing operations because their countries are over-banked. The UAE
55
TLFeBOOK
allows foreign banks to open representative offices; Qatar also allows this, provided the
banks were established before 1970.
Asia
Asia has long been seen as a potentially lucrative wealth management marketplace; just
about every large private bank has or has had a presence in the region over the years.
Despite the fact that places such as Hong Kong, Japan or Singapore are relatively
mature in terms of private banking, Asia is still a strong growth area. Countries such as
India, Thailand and Malaysia are underdeveloped in terms of private banking, whilst new
countries are opening their borders to foreign investment and banking. The opening of
Chinas borders is the hot topic at present and many institutions such as ABN Amro,
Citigroup and Standard Chartered are aiming at making the most of this potentially
highly profitable wealth management market. There are over 3.4 million individuals in
China with liquid assets of more than $50,000vi.
However, whilst Asia is not as restrictive to foreign business as the Middle East, many
countries do still have state-run banking systems that impose restrictions on foreign and
local banks.
Governmental regulation in many Asian countries is causing consolidation and local

banks are being forced to merge in an effort to make them more competitive. For
example, the Singaporean government has reduced its number of banks from the original
five (Keppel Capital Holdings, United Overseas Bank (UOB), Overseas Union Bank
(OUB), Oversea-Chinese Banking Corporation (OCBC) and the state bank,
Development Bank of Singapore (DBS)) to three by forcing the merger of OCBC with
vi
Datamonitor, 2003
56
TLFeBOOK
Keppel (July 2001) and UOB with OUB (January 2002). The Singaporean government
is now planning to reduce this further to just two banks with speculation suggesting that
DBS is safe and one of the new UOB and OCBC banks will have to disappear.
In Malaysia, the central bank, Bank Negara, ordered all 58 Malaysian banks to merge
into just six banking groups. The Malaysian government also requires foreign banks to
operate as locally controlled subsidiaries and does not allow retail investors to buy into
equity.
As mentioned earlier, parts of the Asian market have been relatively well trodden by
foreign banks for years, and because of this, almost 70% of private banks studied chose
to grow cross-border organically.
Drivers of cross-border activity
The drivers that cause client assets and therefore wealth managers to flow either into
or out of a country fall into two categories, opportunistic and defensive. Within these
two categories, there are at least five factors driving cross-border activity, the first two
of which are opportunistic and the others defensive, including:
Growth in the number of HNWI (opportunistic);
opening of emerging markets (opportunistic),
pressures on banking secrecy (defensive),
tax amnesties (defensive);
growth of global wealth services (defensive).
Organic growth
This section examines some of the business models that wealth managers have used
when organically expanding cross-border. The strategies used to tap into new or
57
TLFeBOOK
growing client bases range from banks expanding their already successful cross-border
business to moving business focus as new assets flow geographically.
Onshore
Since 1999, UBS Private Client Services has been focused on onshore wealth
management, building its presence in the European and Australasian markets. It has
managed to build and grow its presence in these locations organically by opening up
new offices in new areas or expanding in existing locations. Its strategy of focusing on
new onshore markets left UBS well placed to take advantage of the shift in assets and in
December 2002, the bank confirmed its commitment to the onshore market by
simultaneously making redundancies in Switzerland and allocating five core onshore
markets for further expansion. The five markets targeted were Germany, France, Italy,
Spain and the UK. While UBS has employed an organic growth strategy to expansion in
Europe, the bank is willing to acquire local competitors when the opportunity arises.
UBS recently acquired Lloyds Bank S.A in France to bolster its expansion in the market.
Brand
Dresdner Bank AG is another bank that has managed to avoid the harshest effects of the
market downturn, which can be attributed (at least in part) to its policy of focusing on
its most successful core markets where it benefits from the strength of its brand.
Although the bank is German in origin, the private bank (like UBS) is based in
Switzerland. Dresdner took an opposite view to UBS in 2000 and identified onshore
business in Western Europe as a slow growth area for private banking.
Banking on proven business
Barclays has traditionally enjoyed a first-rate reputation in the UK retail banking market,
however, whilst it has a presence in many Euro zone countries, it is not a household
name. Therefore, when seeking to grow cross-border business, the bank needed to be
able to rely on strong products and services to ensure success. Barclays Private Clients,
the wealth management arm of Barclays, has also profited from Openplan, attracting
58
TLFeBOOK
some 95,000 affluent and high net worth clients in the UK and Spain to the product.
Offset plans are one of the most innovative ideas of the wealth management industry in
the last few years. The products offset the interest paid on savings against that charged
on the mortgage. The benefit for customers is that the interest paid on a mortgage is
usually higher than the interest paid on current accounts. Barclays quickly identified
Openplan as a growth product and decided to launch it in other European countries,
targeting the Spanish market in September 2001. To date, Barclays has increased its
share of the Iberian mortgage market from just 0.5% to 5%, with 20,000 Spanish
clients.
Banks demonstrating cross-border organic growth

Table 2.16: Banks demonstrating cross-border organic growth, 19972001
Date Company Home country Deal country/ies
1997 Bank Leumi Israel USA

1997 Merrill Lynch USA Bahrain
1997 Merrill Lynch USA UAE/Dubai
2000 JP Morgan US UK
2000 Dresdner bank AG GermanyCentral/Eastern Europe
2000 Dresdner bank AG Germany Latin America
2000 Dresdner bank AG Germany Middle East
2001 UBS Switzerland Europe (onshore)
2001 Bank Austria Creditanstalt Austria UAE
2001 Bank Hapoalim Israel New York
2001 Israeli Discount Bank Israel Switzerland
2001 Old Mutual/ Gerrard Private Bank South Africa UK
2001 Barclays Private Clients UK Europe
Source: Datamonitors Mergers and Acquisitions Database Business Insights Ltd
Mergers and acquisitions
This section examines some of the mergers and acquisitions that have taken place in the
wealth management battlefield. However, acquiring business in familiar territory does
not always equate to success.
59
TLFeBOOK
The Middle East
The Middle East has long been regarded as a potentially lucrative market for wealth
management providers, with many high net worths originating from the region and other
wealthy expatriates seeking to live there for tax reasons. However, as highlighted earlier
by Merrill Lynch, an abundance of wealth in the region has not meant that success
comes easily. Ahli United Bank is one example of a bank that has utilized its familiarity
with the region to chip into the Arab markets. In 2000 Ahli United Bank was formed
from the merger between two successful financial service institutions, the Bahrain-based
Al Ahli Commercial Bank (ACB) and the London-based United Bank of Kuwait (UBK).
From its inception, the bank realized that it was unable to take on the likes of Credit
Suisse or UBS on the same playing field; instead it needed to employ a different model
utilizing strategic acquisitions and alliances.
Deutsche Bank
Many wealth managers have found that cross-border expansion is much easier when the
target markets are within the same continent. However, Deutsche Banks experience of
buying Bank Worms in France did not work out as expected. Deutsche Bank has a large
wealth management presence in mainland Europe through its high net worth service,
Deutsche Private Banking, and via its mass affluent service, Deutsche 24.
Deutsche bank had a 28.95% stake in Banque de Luxembourg and in 2001 Deutsche
Bank bought Banque Worms, a French private bank, from AXA. Deutsche hoped the
Banque Worms brand would spell success in France. It inherited an instant presence in
France with Worms client assets and it intended to leverage its large distribution
network. However, Deutsche did not clearly define its strategy for private banking in
France with some critics citing the possibility that it had bought the largest bank
available. When the problems associated with an undefined strategy began to show and
the downturn in global markets, Deutsches private banking business suffered. In the
first quarter of 2002 PCAMs (private client assets under management) net income was
down to 9 million from 127 million compared to the same period in 2001, with the
PCAM division as a whole recording an operating loss. As a result, there were 300 job
60
TLFeBOOK
losses in its private banking businesses, in addition to the sale of all non-core business.
In November 2002, the bank sold its stake in Banque de Luxembourg to French Banque
Federative du Credit Mutuel. Deutsche Bank and then announced plans to sell off the
private banking part of Banque Worms at the end of 2002.
Table 2.17: Banks that have merged or acquired to cross borders, 19962002
Date Primary Home Secondary Deal Deal type

company country company country/ies
1996 Investec UK Bank Clali Israel Acquisition

2000 Anglo Irish Bank UK Banque Europe Acquisition
Marcuard Cook
2000 HSBC UK Republic US, Europe Acquisition
Bank of
New York
2000 Credit Suisse Switzerland DLJ US Acquisition
2000 UBS Switzerland Paine Webber US Merger
2001 Alpha Trust Greece Taylor-Young UK Acquisition
2001 Credit Suisse Switzerland Frye-Louis US Acquisition
2001 HSBC UK Bank of China Acquisition
Shanghai
2001 Deutsche Bank Germany Banque France Acquisition
Worms
2001Morgan Stanley Dean Witter US Quilter & Co UK Acquisition
2001 Ahli United Bank Gulf Bank of Kuwait Acquisition
Kuwait BKME
and the Middle East
2001 Bordier & Cie Switzerland Berry UK Acquisition
2001 BoE South Africa Stenham Guernsey Acquisition
Gestinor
2002 HSBC Holdings UK Household US Acquisition
International
2002 BNP Paribas France Chase Spain Acquisition
Manhatten
2002 Citigroup USA Shanghai China Acquisition
Pudong
2002 Bank Hapoalim Israel Israel NY Acquisition
Discount Bank
2002 Man Group UK RMF Switzerland Acquisition
2002 HSBC Premier UK GF Bital Mexico Acquisition
2002 ABN Amro Holland Banco Portugal Acquisition
Comercial Portugues
2002 HSBC Private Holdings Switzerland HSBC BVI* Acquisition
International Trustees Ltd
* British Virgin Islands
Source: Datamonitors Mergers and Acquisitions Database Business Insights Ltd
61
TLFeBOOK
Emerging markets
With the contraction of the traditional European, U.S. and offshore wealth management
markets, wealth managers have been forced to look elsewhere in order to restore
flagging revenues. The most prominent of these markets have been Asia, the Middle
East and Central and Eastern Europe, which have seen far greater interest from foreign
players during the last year.
Asia
Until recently, the main hubs for wealth management activity have been Hong Kong and
Singapore, with the latter becoming increasingly popular due to its efficient tax
environment, wide range of products and services, and a stable and well-regulated
financial market. In 2003 EFG Private Bank and Gerrard Private Bank opened new
offices in these areas, which are now experiencing fierce competition.
During 2003 players looking to expand in Asia have increasingly looked to alternative
emerging markets such as India, Thailand and Malaysia. There are currently few
wealth management firms operating in these markets, few market leaders and rapidly
developing customer preferences.
Alongside the general development in Asia, the Holy Grail for many players has been
China. The Chinese market currently has poor quality personal banking services
provided by state run banks and a dire need for good financial planning, asset
management and investment guidance. China represents a strong market opportunity to
all foreign players with sound financial standing and experience in Asia.
Middle East
A positive market outlook in the Middle East is increasingly attracting banks and the
region has already attracted banks such as Citigroup Private Bank, JP Morgan, UBS,
62
TLFeBOOK
HSBC and Socit Gnrale, Standard Chartered Bank, Dresdner Bank and Merrill
Lynch.
When it comes to regulations and restrictions on foreign banks, the Middle East stands
in stark contrast to Europe. It is therefore more difficult for foreign banks to become
established in the region and easier for Arab-owned banks to build on brand.
The market is developing however, for example, the Dubai International Financial
Centre (DIFC) has gained free-zone status, winning a degree of autonomy that will
allow it to implement its own best-of-breed legislation, and regulate itself independently
of the UAE Central Bank. As a new global jurisdiction for financial institutions, the
DIFC will offer its participants a highly attractive investment environment, including
100.0% foreign ownership, zero rate tax and the freedom to repatriate capital and
profits without restrictions.
Central and Eastern Europe
Central and Eastern Europe has long been seen as an attractive market opportunity for
wealth managers and consequently, Poland, Hungary and the Czech Republic are now
open, competitive and dominated by many foreign players, which already well
established. Wealth managers such as Raiffeisen Bank, Citibank, ING, HVB, BNP
Paribas, Fortis and Deutsche Bank have all made their way into these markets since the
collapse of the Communist bloc and over the last few years, have begun to develop a
wealth management presence in these countries.
More recently, Russia has been identified as a valuable market opportunity. The country
offers an undeveloped private banking sector, which remains moderately unscathed by
foreign banks. There is the other issue that many Russians remain untrusting of banks
and prefer to keep their money in their own homes. In 2002 the number of Russian high
63
TLFeBOOK
net worths grew to 77,700 individuals and this figure is expected to increase
substantially by 2007vii.
UK expansion
There is still much speculation regarding the potential of the UK wealth management
market. It seems there are still large-scale players that view the UK market as an
opportunity, but are remaining cautious as to its future development.
The fact that the UK market is already extremely competitive did not deter the large
number of wealth managers that attempted to enter or expand in the market in 2003.
Anglo Irish Bank (AIB), for example, launched a UK wealth management service to act
concurrently with AIBs network of corporate banking across the UK. Deutsche Bank
completed recruitment for its UK team in 2003 to assist in the expansion of its UK
business over the next few years.
Offshore markets
The offshore markets were unstable in 2003, with pressure exerted on them from all
corners. Regulatory pressures and tax amnesties have compounded any profitability
problems and caused many players to economize on their offshore presences.
Switzerland was worst affected in 2003 and the major Swiss banks led the rest of the
industry by shifting their focus to the onshore markets.
Regulation has been a major issue in offshore markets. Pressure from the United States
has increased as the country is targeting offshore funds and offshore centers with the
aim of eradicating money-laundering and terrorist funding. According to U.S. estimates,
vii
Datamonitors Global Wealth Model
64
TLFeBOOK
offshore financial centers deprive the country of $70 billion (55 billion) every year
through uncollected tax.
The European Commission has also increased pressure on the European havens, with a
focus on Switzerland. The Commissions aim is to prevent investors from taking
advantage of differing laws across the EU and to reduce banking secrecy, tax evasion
and fraud.
65
TLFeBOOK
66
TLFeBOOK
Chapter 3
Customer Focus: Incorporating

Lifestyle Services
67
TLFeBOOK
Chapter 3 Customer Focus:
Incorporating Lifestyle
Services
Summary
In their efforts to provide superior levels of service some private banks and wealth
managers in particular family-run offices at the ultra high net worth level have long
provided specific non-financial services to their clients mainly as a component of
their customer service proposition.
While some wealth managers are focusing on doing more in terms of lifestyle
services, for the vast majority these types of service tend to remain quite discrete
and are rarely marketed as another element in the offering.
There are a number of factors fuelling the growth in client demand for lifestyle
services including growing affluence of individuals and increasingly busy lifestyles.
By offering to help wealthy clients in their aspirations to purchase luxury items

wealth managers can maintain a role in the management of non-financial assets
structure and finance purchases.
Introduction
This chapter addresses the issue of incorporating lifestyle services into the wealth
management proposition. It assesses the merits and drawbacks for wealth managers
seeking to offer their clients such services.
68
TLFeBOOK
Lifestyle services
Lifestyle services is an umbrella term that refers to a wide range of services designed
to support, facilitate and improve the lifestyles of the individuals to whom they are
provided. This section focuses on four major categories of lifestyle services, including
lifestyle organization services aimed at assisting in organizing and facilitating aspects of
individuals lives such as leisure, entertainment, shopping and event planning, travel
services aimed at supporting and arranging individuals travel requirements, property
and home services aimed at assisting with individuals household and property
requirements and luxury asset acquisition services.
Lifestyle services in the wealth management proposition

Figure 3.8: Lifestyle services in the wealth management proposition
Lifestyle services
Property
Lifestyle Travel Luxury asset
& home
organisation services acquisition
services
Event planning; Liasing with estate Researching travel Art & collectibles
Wedding services; agents; options Numismatics
Restaurant bookings; Property search; Airport taxi/limousine Private jets
Tickets for theatre/ Surveyors; services Yachts and boats
sports events; Conveyancing; Booking accommodation Luxury real estate
Research for special Home maintenance and Villa rentals
interests and hobbies; gardening; Creating personalised
Tracking down elusive House moving services; itineraries
items; Arranging utility Car, boat, and jet hire
Arranging special gifts; connections; Organising weekend
Coordinating Organising repairs and breaks
deliveries; and redecoration; Arranging romantic
Car repairs and Change of address getaways
servicing; notification. Visa, passport and
Pet care. immunisation
69
TLFeBOOK
In an effort to provide superior levels of service some private banks and wealth
managers - and more particularly family offices at the ultra high net worth level - have
long provided specific non-financial services to their clients mainly as a component of
their customer service proposition. This may have included educating a wealthy clients
children about financial responsibility or organizing domestic staff for the home.
However, these have generally been offered as perks and rarely considered as an
additional or integrated component of the wealth management proposition. In this
respect the trend towards offering lifestyle services is still at an early developmental
stage in both the United States and more particularly Europe.
While some wealth managers are focusing on increasing their lifestyle services, for the
vast majority these types of service tend to remain quite discrete and are rarely marketed
as another element of the offering. Nevertheless, lifestyle services are starting to
infiltrate into wealth managers offerings. Currently these tend to be a limited number of
lifestyle services, perhaps focused on one region or a specific section of the business.
This trend is being pushed forward by a number of drivers on both the supply side and
the demand side, which are ensuring that lifestyle services are emerging as a growing
sector. On the supply side there have been a number of important drivers influencing
wealth managers motivation and ability to offer lifestyle services. These include
technological development, increasing tendency towards supplier aggregation of
providers requiring extensive management, reduced customer loyalty and intensifying
competition between wealth managers.
Third-party lifestyle services
Lifestyle services can be offered both directly or in partnership with third party providers
and are being developed to varying extents by many different types of companies. Some
of these will only compete in single service lines, while others have amassed a wider
range of lifestyle related services. Dependent on the precise services wealth managers
seek to offer, alternative suppliers could include credit card providers such as
Mastercard or American Express that are increasingly aggregating a number of travel
70
TLFeBOOK
and concierge services into lifestyle programs to support their more prestigious credit
cards.
Where lifestyle services are provided by a third party rather than the wealth manager
then providers can become potential partners for co-operation rather than direct
competition, with the wealth manager essentially being a distribution channel for lifestyle
services. While there will inevitably be some competition between different distribution
channels, the wealth manager is not competing in undertaking the services, although it
may have a role in coordinating lifestyle services providers.
Benefits of including lifestyle services into the wealth management

proposition
The development of alternative revenue lines is critical. One aspect of this is occurring
on the investment side through greater proliferation of alternative investments such as
property, hedge funds and other alternative asset classes whose performance and
revenues are not directly correlated with stock market performance. Another approach
is through greater cross selling of banking, lending and insurance products, particularly
among wealth managers that form part of larger financial services, which already have
existing capabilities in these areas.
However, the provision of non-financial or lifestyle services represent a third option for
diversifying revenue flows. While there is no disclosed evidence of the precise financial
gains available, arrangements between wealth managers and lifestyle service providers
will generate fees or commissions for referring on clients. Furthermore, specific lifestyle
services such as property search will also inevitably create spillover opportunities in
terms of cross-selling financial services products such as mortgages or advising on tax
and investment implications of buying a house.
The purchase of luxury items such as a holiday home, yacht or private jet has a direct
impact on wealth managers in that it removes significant amounts of liquid assets from
their accounts. By offering to help wealthy clients in their aspirations to purchase luxury
71
TLFeBOOK
items wealth managers can maintain a role in the management of non-financial assets
structure and finance purchases. In this way luxury asset acquisition does not represent
an immediate and unrecoverable loss to wealth managers.
Another advantage in offering these lifestyle services is that it can provide useful
information about customers lifestyles and behaviors that can be filtered back. This in
turn can increase customer knowledge and allow wealth managers to both respond more
effectively to client needs and identify opportunities for developing new financial
services products or cross-selling existing products.
Private banks and wealth managers have always prided themselves on their ability to
provide HNW clients with superior service levels. By showing greater consideration of
the clients lifestyles and needs outside of pure financial services and responding with
relevant solutions, wealth managers can add another dimension to their customer
service. This additional level of engagement also has the potential to expand the client
relationship and engender greater customer loyalty. Indeed on the face of it such a
strategy also ties in well with the increasing focus of some players on adopting a holistic
approach to their wealthy clients to allow them to both enjoy and invest their money.
Associated difficulties
Some financial services organization managers and employees are reluctant to move into
offering unfamiliar non-financial services. An element of cultural change may therefore
be necessary in some cases to ensure the successful implementation of a lifestyle service
offering.
The provision of lifestyle services by wealth managers will in many cases involve
utilizing a third party provider. As such, wealth managers that offer or recommend
particular services will, to a certain degree, be held accountable for those services
despite having no direct control over their delivery. There is therefore the risk that
72
TLFeBOOK
should these services not live up to expectations that this will reflect badly upon the
wealth manager in question.
While some customers will be receptive to the offer of lifestyle services from their
wealth managers others may be less keen, especially if there is the perception of wealth
managers trying to push additional unwanted services upon them. This has implications
for the way lifestyle services are marketed.
Conclusions
Overall, it is clear that there are both advantages and disadvantages for wealth managers
in developing lifestyle services. Players must therefore carefully consider their approach
if they are to maximize the potential gains. The different strategic options for wealth
managers are considered in greater detail in the next chapter.
One risk for wealth managers is that offering both financial and non-financial services
might impact their strong image of expertise in the financial services sector. The
incorporation of lifestyle services may distract clients from the core capabilities of
wealth managers and dilute the potency of the brand in the financial services arena. This
is more likely to impact niche players or products specialists rather than those wealth
managers, which seek to provide a one-stop shop approach to wealth management, for
whom the development of lifestyle services is a somewhat more natural extension of
their business model. Nevertheless, there are many important branding decisions to be
considered.
73
TLFeBOOK
74
TLFeBOOK
Chapter 4
Fee Structure Analysis and

Advertising Strategies
75
TLFeBOOK
Chapter 4 Fee Structure Analysis and
Advertising Strategies
Summary
Affluent wealth managers have, on average, 46% higher thresholds for

discretionary portfolios than for advisory portfolios. In contrast, lower HNW
managers have marginally higher (6%+) thresholds for advisory portfolios
compared to discretionary portfolios.
There are major differences in the make up of annual asset based fees and the
actual transaction costs set by UK wealth managers. Tier structures dominate the
UK wealth management industry with a minority offering flat fees and even fewer
allowing an element of negotiation in the pricing.
Poor fund performance over the past couple of years has left investors
disillusioned with their wealth and investment managers, particularly when those
managers continue to receive substantial salaries despite losing their clients vast
sums of money.
Following the recent fall in equity prices, wealth management customers with
distressed portfolios are likely to question the value of the service they receive.
In the UK, approximately one third of affluent wealth managers charge an annual
flat fee for discretionary portfolios (usually between 0.50% and 1.25%).
Introduction
The media highlights public frustration concerning the multiple layers of charges levied
by wealth managers, even in poor market conditions. This chapter aims to examine the
complexity and multitude of the pricing structures in place by UK wealth managers, with
a focus on advertising in wealth.
76
TLFeBOOK
Fee structures
Overview
UK wealth managers use a variety of pricing schedules to levy annual fees and
transaction and handling charges. These range from tiered pricing structures to flat fees
charged as Sterling values and as percentages. The pricing schedules implemented in the
UK are focused on in this chapter as a case study example for analysis by companies
across Europe, as well as within the UK itself.
Affluent wealth managers
Affluent wealth managers in the UK have on average 46% higher thresholds for
discretionary portfolios than for advisory portfolios. In contrast, lower HNW managers
have marginally higher (6%+) thresholds for advisory portfolios compared to
discretionary portfolios.
Affluent wealth managers, with around 4,395 million in assets under management, have
an average of 60 client relationship managers. Approximately one third of affluent
wealth managers charge an annual flat fee for discretionary portfolios (usually between
0.50% and 1.25%).
Approximately 45% of the affluent wealth managers have structured three or more tiers
into their pricing schedule of annual fees and charges. Annual fees may range from
0.50% to 1.75% in the first tier of pricing and between 0.35% and 0.60% in the third
tier of pricing, 1% is the most common first tier fee, charged most commonly up to
500,000.
Approximately 40% of affluent wealth managers offer advisory portfolio management

services, a third of which charge an annual flat fee (usually between 0.75% and 1.00%)
and approximately 25% of the wealth managers have structured three or more tiers in
their pricing schedule of annual fees and charges. Annual fees may range from 0.75% to
77
TLFeBOOK
1.75% in the first tier of pricing and between 0.25% and 0.75% in the third tier of
pricing.
Lower HNW wealth managers
On average, 11% of lower HNW wealth managers charge an annual flat fee for
discretionary portfolios (usually 1.00%) and approximately 64% of the lower HNW
wealth managers have structured three or more tiers in their pricing schedule of annual
fees and charges, annual fees may range from 0.60% to 1.25% in the first tier of pricing
and between 0.25% and 0.60% in the third tier of pricing. Approximately 36% of Lower
HNW wealth managers offer advisory portfolio services, only three of which charge an
annual flat fee (usually 1.00%).
Upper HNW wealth managers
Upper HNW competitors require similar minimum discretionary and advisory portfolio
sizes, and they have a significant range of minimum portfolio size requirements for both
discretionary and advisory portfolios.
Approximately a third of the upper HNW wealth managers charge an annual flat fee for
discretionary portfolios (usually between 0.75% and 1.00%). Approximately 62.5% of
the upper HNW wealth managers have structured three or more tiers in their pricing
schedule of annual fees and charges. Annual fees may range from 0.75% to 1.25% in the
first tier of pricing and between 0.25% and 0.75% in the third tier of pricing.
78
TLFeBOOK
Transaction and handling charges by investment type in the UK
Table 4.18: Transaction and handling charges by investment type, 2002
Tier 1 Tier 2 Tier 3

UK Equities
Mean 1.44% 0.70% 0.43%
Mode 1.75% 0.50% 0.50%
Standard Deviation 0.41% 0.29% 0.13%
Minimum 0.50% 0.15% 0.25%
Maximum 1.95% 1.25% 0.75%
UK Fixed Interest
Mean 0.98% 0.45% 0.25%
Mode 1.00% 0.50% 0.25%
Minimum 0.20% 0.10% 0.05%
Maximum 1.85% 1.25% 0.75%
Overseas Equities
Mean 1.18% 0.58% 0.34%
Mode 1.00% 0.25% 0.50%
Minimum 0.00% 0.15% 0.05%
Maximum 2.50% 1.25% 0.75%
Overseas Fixed
Interest
Mean 1.21% 0.55% 0.34%
Mode 1.00% 0.25% 0.50%
Minimum 0.50% 0.00% 0.05%
Maximum 2.50% 1.25% 0.75%
Note: First / Second / Third Tier Fees represent various levels of charges incurred by client based
on amount invested.
Source: Datamonitor; PAM 2003 Business Insights Ltd
Tier structures
There are major differences in the make up of annual asset based fees and the actual
transaction costs set by UK wealth managers. Tier structures dominate the UK wealth
management industry with a minority offering flat fees and even fewer allowing an
element of negotiation in the pricing. Transaction fees vary as well, with tier structures
overwhelming the fee schedule. Indeed, this serves as caution for investors who
disregard and/or ignore transaction costs and merely sign up with competitors levying
79
TLFeBOOK
low annual charges and vice versa. Usually, where lower management fees are
scheduled, higher transaction costs follow. This leads to skepticism on whether these are
mere devices to acquire clientele.
In the UK, approximately one third of affluent wealth managers charge an annual flat fee
for discretionary portfolios (usually between 0.50% and 1.25%) and around 45% of the
affluent wealth managers have structured three or more tiers into their pricing schedule
of annual fees and charges. Annual fees may range from 0.50% to 1.75% in the first tier
of pricing and between 0.35% and 0.60% in the third tier of pricing and 1% is the most
common first tier fee, charged most commonly up to 500,000.
Transparency issues
The transparency of fee structures in the UK wealth management arena is another major
issue. Under a UK industry sponsored disclosure code launched in response to the
Myners reportviii on institutional investment in the UK, fund managers, stock brokers
and wealth managers agreed to provide their clients with a breakdown on broker
commissions and trading costs. The code is vague on how to calculate and disclose the
impact of market conditions on trading. Experts emphasize that the industry as a whole
needs to come up with a common methodology to calculate market impact to avoid
any regulatory intervention leading to more legislation.
Performance-related fees
Poor fund performance over the past couple of years has left investors disillusioned with
their wealth and investment managers, particularly when those managers continue to
receive substantial salaries despite losing their clients vast sums of money. As a result,
pressure on pricing has grown and pushed sections of the industry towards more
viii
Paul Myners, chairman of Gartmore Investment Management, was asked to investigate possible
distortions in institutional investment decision-making and published his report on March 6, 2001.
80
TLFeBOOK
performance related fees. The aim is to incentivize the fund manager to produce
superior rather than merely satisfactory performance that benefits both the investor and
the fund managers, who are able to charge higher performance related fees rather than
simple management fees. Following the recent fall in equity prices, wealth management
customers with distressed portfolios are likely to question the value of the service. In
this market a wealth manager offering performance-related fee structures is likely to be
popular, creating a marketing opportunity for customer catchers. The wealth manager
would thus take reduced fees if performance is poor and a greater bonus if the
performance were good. The problem is clearly that if funds fail to perform, fee
revenues will decrease dramatically, meaning that either insurance or hedges will need to
be taken out against this possibility. The fee structure may also encourage a short-term
approach to portfolio management with portfolio managers taking short-term gains in
order to ensure their fees rather than managing for the customers long-term good.
The development of performance related fees on funds has become more and more
commonplace during the past 18 months, particularly following the establishment of the
offshore fund management boutique Bedlam Asset Management, which has a very
unusual fee structure. It is based on the belief 'no gain, no fee'. Each quarter, investors
must see a return net of fees of at least 1.25% (equal to just over 5% pa) before the
company can charge an investment management fee. Once this rate has been achieved,
Bedlam can charge a quarterly fee of up to 1.4%. Unlike most investment managers,
Bedlam has no initial investment charges; it does not receive commissions or other
benefits for managing funds or charge any other fees or penalties to clients. According
to Lesley Cartmell, director at Bedlam: What we wanted was to charge a performance
fee, but we are not allowed to do it under UK regulation. The philosophy behind the
charging structure is based on the long-bond rule. If a fund manager cannot beat the
long-bond rate, the manager should not be doing the job.
81
TLFeBOOK
Advertising strategies
Advertising strategies were traditionally under-used by private banks, however,

increasing competition within the market has vastly increased the need for wealth
managers to stand out from their peers. Currently, promotional initiatives vary, as
wealth managers endeavor to advance client acquisition and recognition of both brand
and private banking capabilities. For example Lombard Odier Darier Hentsch, Genevas
oldest private banking group, launched a new advertising campaign with the slogan: "A
Different Perspective for a Bigger Picture". The campaign aimed to exemplify the banks
confidence in the future and its values amassed over the last 200 years.
Also, Barclays implemented the second wave of its fluent in finance campaign and
announced a six-figure sum deal to sponsor The South Bank Show and the shows
awards. The bank also launched an initiative to strengthen the marketing of Barclays
Private Clients (BPC) and to develop the various Barclays brands.
According to industry opinion, advertising is currently a fashionable but dangerous fad.

While some players are implementing campaigns or promotional activities as part of a
strategy, others are merely reacting to a trend. In particular there is a temptation for
private banks to try to respond to players such as ING Direct, which mass advertises its
high interest savings accounts. However, as customers that are attracted to such services
tend to be more price conscious, they are unlikely to use a private bank anyway.
82
TLFeBOOK
Chapter 5
Tackling the Strategic Issues in

Wealth Management
83
TLFeBOOK
Chapter 5 Tackling the Strategic Issues
in Wealth Management
Summary
pension tax rules. Amongst the proposals, the Government is considering rising
the minimum retirement age at which an individual can draw a pension, from 50 to
55 by 2010.
Wealth managers looking to target retired individuals as a client group must
recognize and respond to the considerable differences in attitudes and needs within
this segment.
Retired executives, for example, are likely to be much more financially aware and
liable to take a much greater interest in their retirement package, while the self-
employed tend to look towards investing in their business with the aim of selling or
passing on the business at a later stage.
complex financial needs than ordinary individuals resulting in the introduction of
new pension products to meet these needs, while also allowing the government to
benefit from the extra tax revenue that such wealthy individuals create.
Unfavorable market conditions have been a primary factor in the development of
multi-manager investment structures by European wealth managers. The
prolonged market downturn of recent years has significantly impacted wealth
managers investment performance, denting revenues and forcing them to consider
the logic of running all investment management in-house given the cost this
typically entails.
Property funds offer an efficient investment opportunity for wealthy clients to
diversify their portfolios.
Recent research using UK property investment data has revealed a poor
correlation between returns from property investments and traditional investment
classes, further signifying the wisdom of investing in real estate to diversify a
portfolio. Property may also provide some means of hedging against inflation.
In the UK, hedge funds are not available to the general public - only to qualified
private investors and they cannot be advertised to private clients. The regulation of
hedge fund distribution is controlled by the Financial Services Authority.
84
TLFeBOOK
Introduction
This chapter focuses on four strategic issues in the wealth management market including
wealth management in retirement, multi-manager investment structures, property
investment and hedge funds.
Wealth management in retirement in the UK
Market overview and developments
HNW and mass affluent retired individuals are segmented into the following age groups:
55-65, 66-75 and 75+. While not all HNW and mass affluent individuals in these
categories will be retired, this measure has been used as the most appropriate for the
purposes of this chapter. High Net Worth individuals are defined as those holding
200,000 (300,000) or more in liquid assets. Mass affluent individuals are defined as
those with between 30,000 (45,000) and 200,000 (300,000) in liquid assets.
Overall, in the 55+ age groups, the high net worth market is growing faster than the
mass affluent market both in terms of number of wealthy individuals and in terms of
liquid assets. Despite this, mass affluent are still an extremely important market for
wealth managers to consider when developing their retirement offering because of their
size. As expected, mass affluent form a far greater proportion of the market in terms of
the number of individuals, accounting for around 90% of the market in the 56-65, 66-75
age groups and 84.2% in the over 75 group. The underlying trend across both the HNW
and mass affluent wealth brackets however, is that UK wealth is concentrated amongst
the older age groups, which makes this client segment an especially important client
group for wealth managers to consider and to cater for.
While the retired/over 65 segment is already an important market for wealth managers
due to its size, this importance is set to increase as the demographics of the UK change.
The UK population, as in many other European countries, is aging as life expectancy
85
TLFeBOOK
increases. According to the Office of National Statistics, life expectancy in the UK will
rise from 77.2 to 82 by 2045-50. If retirement ages remain static, this increase will
extend the retirement period for the average Briton by 4.8 years. This will bring
additional considerations for wealth managers, not only in terms of the possibility of an
extended client relationship, but also in terms of the need to guarantee that the portfolio
will be able to provide for the retiree that much longer.
One of the most important trends for wealth managers within the retired population is
the fact that women are forming an ever-greater proportion of retired individuals. This
fact alone means that wealth managers will be forced to consider this group much more
heavily when targeting their client base. According to the Government Actuary
Department, in 2000, men aged 65 could expect to live to the age of 81, while women
could live to the age of 84. This trend of women outliving men is likely to continue and
projections suggest these ages will increase by a further two years by 2021. The most
significant issue for wealth managers however, is the fact that it tends to be men that
deal with investments and financial planning.
pension tax rules. Amongst the proposals, the Government is considering increasing the
minimum retirement age at which an individual can draw a pension, from 50 to 55 by
2010. The move comes in recognition of increasing life expectancy, the aging population
in the UK and the likely prospect that people may be retired longer than they have
actually worked. In addition, the recent stock market conditions and their consequent
effects on the values of portfolios may force people to work longer in order to repair the
damage. As a result, wealthy individuals may be forced to continue working longer than
planned or be forced to wait to receive their pension income.
Different needs and attitudes
Wealth managers looking to target retired individuals as a client group must recognize
and respond to the considerable differences in attitudes and needs within this segment.
Whereas many customer segmentation strategies focus on a particular lifestyle or
86
TLFeBOOK
profession, the wealthy retired group encapsulates the entire spectrum of wealthy
individuals. There is therefore considerable variation in the need states and wealth
management and planning attitudes of these individuals.
Retired executives for example, are likely to be much more financially aware and liable
to take a much greater interest in their retirement package, while the self-employed tend
to look towards investing in their business with the aim of selling or passing it on at a
later stage. Elderly females generally tend to take less interest in the management of
investments than men. Wealth managers need to consider these differing needs very
carefully in order to tailor their offering in the best possible way for retired clients.
As a result, as people get older, they tend to become far more conservative in their
investment choices and risk preferences. Generally speaking, there is a shift away from
equity or other high-risk investments in favor of fixed income products. This caution has
been accelerated by recent stock market conditions, lower interest rates and poor
investment returns.
Another trend, which is increasingly seen amongst retired wealthy individuals, is the
desire to continue and often increase their role in the management of their investments.
Reasons behind this trend include the fact that many retired individuals also wish to
maintain an active interest in what is happening to their investments, not least because it
gives them something to keep them busy and their minds active. However, this desire to
maintain an active role causes an issue for wealth managers looking to convert clients to
a more discretionary management structure.
Future retirees in the future
Wealth managers will have to adopt a different approach in the future if they want to
follow a clients wealth to the next generation. The current generation of retired wealthy
individuals is generally still looking to cascade their wealth down to the next
generation/s. However, retired individuals are increasingly changing their attitudes,
looking instead towards spending the money and enjoying their wealth in retirement.
87
TLFeBOOK
This trend, sometimes known as Skiing (Spending the Kids Inheritance), has developed
not least because of increased encouragement to do so by the younger generations.
For some retired wealthy individuals there is also an inherent fear about giving away
assets in retirement in case they need them at a later stage. One of the most prominent
concerns is the potential need to pay for long-term care at a later stage.
Despite these trends, however, there is still a core demand for financial advice to pass on
wealth to family members and in learning of ways to avoid inheritance tax. Inheritance
tax planning tends to be the burning issue for people when they retire. In terms of
passing on the wealth, one of the most frequent methods traditionally has been to pay
for their childrens education. One significant recent development though, has been the
increased desire of wealthy retired individuals to help the next generation onto the first
step of the property ladder. As the number of people able to purchase their first home is
declining, a growing number of retired individuals are looking to provide the deposits or
help with mortgages to ease this situation for their relatives. Wealth managers have also
seen a trend towards stakeholder pensions that are being taken out by grandparents for
their grandchildren.
Pensions in the UK
The UK has a highly developed pensions industry and a high take-up of private pensions
compared with many other European countries. The government spends little on state
pension provision and private pensions have evolved largely in the last 20 years to reach
their modern state. However, successive governments have left their mark on the
pensions landscape. Today, Britain has a pension problem that arguably makes it a
blueprint for what the Europeans should be trying to avoid. While there are numerous
pensions options available in the UK today, the government is aiming to simplify the
pension process from April 2005. Simplification will replace the existing tax regimes
88
TLFeBOOK
with a single universal regime for tax-privileged pension savings. The numerous controls
in the current regimes will be replaced by two key controls, which will be:
The lifetime allowance;
the annual allowance.
A single lifetime allowance on the amount of pension savings that can benefit from tax
relief will be enforced. The value of the lifetime allowance will be set at 1.5 million on
introduction rising throughout the years as follows:
2007 - 1.6 million;
2008 - 1.65 million;
2009 - 1.75 million;
2010 - 1.8 million.
There are a wide variety of pension products on offer in Britain, roughly split into the
two pillars of occupational, and private or personal pensions. There are rarely limits on
who can join a pension (although occupational pensions are clearly related to
employment) and stakeholder pensions have opened up the market even further allowing
plans to be opened on behalf of other individuals.
The UK has two tax divisions of pensions: those that are tax approved and those that
are unapproved.
Most of Britains pension funds are located in the tax-approved schemes, which means
that they are eligible for favorable tax benefits that make private pensions a very
attractive savings vehicle. Government changes over the years have created eight
different tax regimes within approved second and third pillar pensions in the UK,
89
TLFeBOOK
depending on when a pension was taken out. The last round of changes was
implemented in 1989.
Pensions in the approved area are subject to common rules. These govern the
combination of pension types a person can hold and how much an individual can
contribute each year.
The pension scheme earnings cap was introduced in 1989. The Inland Revenue states:
The main effect of the cap is to set a ceiling on the contributions that can be paid to,
and the benefits that can be paid by, tax approved pension schemes. It generally applies
to people who contribute to a personal pension scheme, joined an occupational scheme
set up since 14 March 1989, or joined any occupational scheme from 1 June 1989,
which was set up before 14 March 1989.
The cap also applies to the recently created stakeholder pensions. In 2003-4 the
Earnings Cap was set at 99,000 per annum.
Many people in the UK belong to Defined Benefit pension schemes, also known as final
salary schemes. These pensions promise to pay the employee a fixed sum upon
retirement depending on the number of years they have worked and the salary level they
reach. Typically a final salary scheme will provide a pension worth two-thirds of an
employees final salary.
The earnings cap limits the amount of final salary replacement that can be achieved
through tax approved pension schemes. Occupational pension schemes are generally
eligible to receive tax relief on contributions from employers and employees. A scheme
member is allowed to make contributions to an exempt approved scheme at a rate of up
to 15% of total remuneration.
In the 2003-4 earnings cap year, two-thirds of a final salary capped at 99,000 will give
a pensionable income of 66,000 per annum. Most people in the UK would not have
90
TLFeBOOK
earnings or a pension of that size and so for them the earnings cap is not an issue.
However, for wealthy individuals, both the earnings limit and the maximum final salary
pension do not go far enough and is a considerable hurdle for them. Inland Revenue
statistics estimate that 405,000 individuals had incomes of 100,000 or more in 2003.
Pensions in the private sphere are a tool for individuals to build up retirement benefits
for themselves. Governments are keen to promote the take-up of second and third pillar
pensions as they look to shift the burden of retirement finance from the state onto the
individual. Many current proposals are aimed at promoting private pensions take-up
among the mass market.
complex financial needs than ordinary individuals. New pension products have been
created to meet these needs, while also allowing the government to benefit from the
extra tax revenue that such wealthy individuals create.
Pensions for more affluent consumers have been created because standard pensions offer
rather basic investment opportunities. Ordinary pensions generally invest in three main
areas equities, bonds and deposits. The more sophisticated pensions open to wealthier
individuals (but not exclusively) offer a greater degree of investment options that give
the scheme member a high level of control over their investments so allowing them to
maximize their potential returns.
Self invested personal pensions (SIPPs)
Personal pensions were originally created for use by the self-employed and employees
who were not members of occupational schemes. SIPPs are popular with the self-
employed because they tend to increase in attractiveness as a business grows and a self-
employed consumer becomes more affluent.
91
TLFeBOOK
The facts
SIPPs are a subsection of personal pensions and adhere to the same tax rules
governing third pillar products. SIPPs were formed in order to cater for individuals
with more complex financial needs and who wanted greater freedom in their
investment decisions. As the self-employed are not able to join occupational
schemes, personal pensions have long been a key tool for retirement financing for
these customers;
SIPPs are mostly sold through channels offering high quality advice to clients, and
are especially suitable retirement vehicles for the wealthy as they offer more facilities
than a personal pension, allowing the more sophisticated investor to maximize their
pension possibilities;
SIPPs are a third pillar pension product and a sub-category of personal pensions,
although key differences exist between the two, notably in the areas of trusteeship,
charges and permissible investments;
the SIPP, unlike a personal pension, is not an insured contract. Personal pensions
charges are levied based on the costs for the administration and expense of managing
the underlying investments. SIPPs are different, with fixed fees for the setting up and
administration of the plan each year. The cost of managing the underlying
investment is charged separately, usually with a cash account banked with the
administrator. Fixed rate fees may not be levied, however, if the customer invests in
the insurance companys own managed funds, although annual fund based fees will
be charged;
a personal pension (other than a SIPP) is rather limited in its investment options.
These are generally confined to equities, bonds and deposits. All investments other
than those in insurance company managed funds are prohibited;
SIPPS are not free to invest wherever they choose and there are clear boundaries
governing which investments are not allowed. Loans of any kind are forbidden,
borrowing is only permitted for property purposes, residential and leisure property
are prohibited investments, while property of any kind cannot be purchased after the
92
TLFeBOOK
members 65th birthday or pension date, personal possessions are not allowed as
investments, such as art, jewelry etc and other, including premium bonds, unlisted
share, shares traded on OFEX and gold bullion;
SIPPs form a small part of the total UK pensions market, bringing in just 37 million
(APE) in 2002 out of a total individual market of over 3 billion. Therefore, SIPPs
are not a major market for the big insurance companies;
there are two key types of competitor in the SIPP market: the insurance company
and the non-insurance company. Non-insurance companies are more prominent in
the SIPPs market than insurance companies, despite the fact that non-insurance
companies are liable to VAT. However, this has not always been the case and
insurance companies were the dominant force until recently. Insurance companies do
not have to levy this tax on their charges, as pension administration charges are
included in the normal product charges. This puts non-insurers at a disadvantage; so
to win business non-insurance companies need to be cheaper and more efficient than
insurance companies.
93
TLFeBOOK
Table 5.19: Number of full and insured plans in force with non-insurance
companies, by SIPP competitor, 2003
Non-insurance companies No. full plans No. insured plans

in force at 1.9.03 in force at 1.9.03
Advisory & Brokerage 236 0

AJ Bell 9,000 0
Aon Consulting nd nd
Barnett Waddingham 532 0
Carr Sheppards Crosthwaite 457 0
Dentons Pensions Management 635 0
Harsant Services 45 0
Hornbuckle Mitchell 1,000 1820
IPS Actuarial Services 2,650 0
JS&P Pension trustees 413 0
James Hay 31,000 0
Jupiter 131 193
Mattoli Woods 637 0
Michael J Field 500 0
Pointon York 1,250 0
PPML 24,011 0
Rathbones 600 0
SIPPcentre * 0
SIPPdeal * 0
St James Place nd nd
Taylor Patterson Assocs. 90 0
TD Waterhouse nd nd
Wensley Mackay 150 0
Wolanski & Co 917 1486
Average 3,908 167

Total 74,254 3,499
* These two companies are part of AJ Bell. The number of full plans in force for AJ Bell includes
business done through SIPPcentre and SIPPdeal.
Source: Datamonitor, Money Management Business Insights Ltd
94
TLFeBOOK
Table 5.20: Number of full and insured plans in force with insurance
companies, by SIPP competitor, 2003
Insurance companies No. full plans No. insured plans

in force at 1.9.03 in force at 1.9.03
Allied Dunbar 0 318

Axa 277 0
Canada Life 0 nd
Clerical Medical 0 nd
Eagle Star 0 nd
Friends Provident 0 1,684
GE Life 1,611 3,240
Legal & General 0 nd
Norwich Union 5,500 2,871
Prudential 0 nd
Scot. Equitable 0 2,144
Scot. Life 0 nd
Scot. Mutual 0 nd
Scot. Widows na na
Skandia na nd
Standard Life 0 nd
Suffolk Life 3,742 0
Winterthur Life 8,314 0
Zurich FS 0 24
Average 1,144 1,142

Total 1,944 10,281
Source: Datamonitor, Money Management Business Insights Ltd
Executive pension plans (EPPs)
There are two key types of customer who would be interested in EPPs: controlling
directors and senior executives/key managers. Controlling directors are a special group
of consumers who have particular business and pension interests and also different
restrictions on their pension allowances. The definition of a controlling director is
generally someone who is within 10 years of retirement or leaving pensionable service,
has been a director and has owned or controlled 20% or more of the ordinary share
capital of a company.
Although EPPs are not restricted to the level of employees that can use them, they are
clearly more favorable for those working at a senior level, such as non-controlling
95
TLFeBOOK
directors, top executives, key managers and senior personnel. These consumers choose
EPPs as they offer choice and flexibility, while allowing the employee to place greater
emphasis on pension benefits than cash or other benefits such as private healthcare
within the overall remuneration package. This consumer group is likely to be the
greatest user of EPPs, as controlling directors typically choose small self-administered
schemes (SSASs).
EPPs can be used to top up final salary and group pensions, which can be beneficial to
executives approaching retirement, but whose regular pension is not high enough. It is
worth remembering too that FSAVCsix are not open to controlling directors.
Executive pension plans are second pillar schemes, providing a contract between
employer and employee. EPPs are money purchase plans but have special conditions for
pension and capital gains tax planning. EPPs are largely similar to personal pensions,
although subtle differences exist, leaving the choice of EPP over personal pensions
dependant on the profile of the scheme member. However, proposed changes to the tax
treatment of the two pension types will largely dissolve any differences between the two.
The employer must pay contributions into EPPs, with voluntary additional contributions
from the employee if desired or necessary. Minimum employer contributions exist as per
other occupational approved schemes. An employer must contribute at least 10% of the
total contributions paid in any one year. This must be applied to the fund for each
member, rather than the fund total as a whole if an EPP is set up as a pooled fund for
several employees.
ix
Free Standing Additional Voluntary Contributions are a method by which members of company-
defined benefit schemes can save extra money towards retirement outside of the company scheme.
96
TLFeBOOK
Tax relief on contributions is the same as that for other occupational pension schemes.
Any funds in an EPP that are above the Inland Revenues limits and which cannot be
absorbed in the scheme must be returned to the employer, subject to 35% tax.
Small self-administered schemes (SSAS)
SSAS products are aimed at a very specific, fairly niche customer segment. They are
generally only suitable for company directors of small limited firms, although senior
executives can also be members, but they must sign forms acknowledging and accepting
the risk they shoulder by being part of the scheme. A SSAS must have less than 12
members and each member must be connected to another member, trustee or the
sponsoring employer. A company can only have one SSAS. Members are often also the
trustees and can carry out the everyday running of the plan, in which instance they must
appoint an administrator for the scheme.
SSASs are occupational schemes and are usually of the defined contribution kind. They
are largely similar to EPPs, and recent regulations have brought the two product types
even closer together. They attract tax relief on contributions like all approved
occupational schemes, but have additional tax advantages and enhanced investment
options. In essence, more can be paid into a SSAS than a SIPP, while SSAS also have
greater options when retirement comes. SSASs can also be an effective tool for
transferring a family company from one generation to the next.
Company directors and selected senior executives favor SSASs for their wide
investment opportunities and the links that a SSAS has with the sponsoring company.
The company makes contributions on behalf of members and these can be usefully
treated as a trading expense, entitling them to corporation tax relief. Another key
attraction is that there is no requirement to make regular contributions, enabling the
company to make contributions at times which suits it best and taking contribution
breaks when finance is more difficult.
97
TLFeBOOK
There are very clear guidelines provided by the Inland Revenue concerning which
investments are permitted and which are prohibited. The Revenue is also strict on how a
SSAS should be used for retirement benefits rather than to purely benefit the sponsoring
employer. Furthermore, the Inland Revenue is keen to ensure that non-relevant benefits
are given to members or those connected to them, such as non-retirement benefits like
a holiday home for use by a members family.
Trustees of a SSAS are given quite a free reign in how they invest the schemes funds.
These would include regular investments, such as company shares, futures, deposit
accounts and traded options.
Unapproved retirement benefit schemes
In the UK, approved pensions are subject to favorable tax relief from the Inland
Revenue. These products are the foundation of the British pensions market, covering
schemes such as SIPPS, FSAVCs, personal pensions, EPPS and stakeholder pensions.
These are the products affected by the earnings cap, although the vast majority of
pension holders in the UK do not earn enough to be concerned. However, it is
recognized that wealthier individuals required higher pensions than the mass market, and
that the earnings cap severely restricted their pensions options, resulting in unapproved
schemes being created to cater for these consumers. Unapproved pension plans do not
qualify for the generous tax relief offered by the Inland Revenue, but they do allow
unlimited benefits to be accumulated. The lack of tax relief means that they can be an
expensive option to exercise, so employers generally only offer these to employees that
are high up in the value chain of the organization and earning enough to require an
overflow pension.
Unapproved retirement benefit schemes (URBS) are niche products for employers to
demonstrate the high value of an employee to the firm. URBS are used mainly by
directors of family companies and small firms and senior executives. They are suited to
higher rate taxpayers, particularly where occupational pension schemes are full and
98
TLFeBOOK
funded to the maximum permitted. URBS are an also especially attractive tax-planning
tool for owner managers.
Unfunded unapproved retirement benefit schemes
Unfunded unapproved retirement benefit schemes (UURBS) are book reserves

promising to pay an employee on retirement. This is a promise to pay a certain amount
to an employee that is noted in accounts, but for which no contributions are paid i.e. no
fund builds up. This is typically a final salary arrangement, although a key advantage of
unapproved schemes is that since benefits are unlimited, a sum greater than two-thirds
of final salary can be paid out.
Funded unapproved retirement benefits schemes
FURBS offer more security than a UURBS. They are one-member arrangements and
there is no need for a pensioner trustee, unlike approved schemes. FURBS have wide
contribution advantages and are often used to manage the over-funding that may have
occurred in an EPP or SSAS. The appeal of FURBS has greatly reduced since the
introduction of National Insurance contributions on employers contributions and the
introduction of higher capital gains tax rates in 1998-99.
Assets under management
Wealthy consumers only account for around 12% of the adult population, but the
estimated assets under management held within pensions such as EPPs, SIPPs and
SSASs make up over a quarter of all assets under management (AUM) in the UK
pensions market. This further underlines the importance of the affluent individuals
pension and the products catering to them.
99
TLFeBOOK
Pensions for the wealthy in Europe
The UK has a mature and evolved private pensions market. Britain now has one of the
lowest levels of public expenditure on state pensions in the EU (as a percentage of GDP,
only Ireland has a lower rate) and there have been long-term moves to push the burden
of retirement provision away from the state and onto the individual. While the country
continues to suffer from a deep level of private pensions under-funding and an estimated
27 billion gap between what is being saved and what needs to be saved for a
comfortable retirement, many Britons do now have a form of second or third pillar
pension and acknowledge the fact that the state benefit is far from adequate.
This is generally not the picture for the rest of Europe. With the exception of Ireland,
Denmark and the Netherlands, which have highly developed pension mature models
much like the UK, but with a greater element of social partnership, countries within the
European Union still have infant private retirement finance systems.
In countries such as Austria, France and Italy, the state is the main provider of
retirement finances. Indeed, higher income tax regimes provide a high level of public
benefits in many areas of life and the state is regarded as being responsible for looking
after its citizens when they reach old age. The systems vary from country to country, but
generally the state provides a generous level of pension benefits in the first pillar, while
the second and third pillars remain underdeveloped and perhaps are only really used by
wealthier citizens.
The demographic crisis facing Europe is more pressing in continental Europe than in the
UK. The population is ageing while the workforce is shrinking, meaning that reduced
tax revenues will be funding a greater number of pensioners if the system is not changed.
Thus, governments are slowly acknowledging that the state cannot afford to keep
paying such high levels of benefits and that the responsibility will have to shift over to
the individual.
100
TLFeBOOK
Countries are moving slowly towards a model of private initiative and in the early stages
of reform are chiefly concerned only with the mass market and the underprivileged.
Wealthier individuals form a small part of the population and typically do not need to
worry about funding their retirement. Thus, while the UK has a complex collection of
pension and retirement solutions for wealthy individuals, most of Europe is a long way
off from even starting to think about HNW individual pension needs.
In May 2003, European Union finance ministers adopted the European Pension Funds
Directive, setting out the basis of regulatory standards for pension schemes within the
EU. The directive aims to free up investment by pension funds and encourage corporate
pension provision in order to ensure that occupational pension transactions attain a high
level of security and efficiency.
The focus of the directive is that it will facilitate the establishment of a pensions
common market. Multinational corporations will be able to centralize their pension
schemes and offer just a single pension fund rather than having a complex web of
pension offerings on a national basis. It is estimated that a large multinational
corporation with a presence in 15 member states could save around 40 million a year in
administration costs under the new directive.
The pensions industry will also experience change following the directive. Providers and
asset managers will become increasingly competitive, seducing large international
companies in order to maximize their customer base and potential revenues.
The impact of the new directive will be mostly felt by higher-level employees, including
wealthy individuals. The greatest potential of the new directive is for multinational
corporations and their mobile employees. Expatriate employees tend to be involved in
senior and executive positions, in contrast to lower value positions such as call center
operatives or administrators. Thus, the end consumers affected by the new directive will
commonly be earning above average wages and may even fall into the mass affluent or
HNW categories. Nationals from countries with developed private pensions systems,
101
TLFeBOOK
such as the UK, will not be affected by the directive so much in terms of their take up of
occupational pensions. It is most likely that employees from countries with strong state-
based systems will benefit from the directive and join their companys pan-European
occupational scheme.
While the directive will affect a limited number of wealthy individuals, the actual
products on offer are expected to offer wider opportunities than may be available on a
national basis, allowing a greater diversification and risk-acceptance than is traditional.
However, although the investment potential of a pan-European pension may be different
to the nationalized offering, it does not necessarily follow that consumers will be willing
to take them up. Many cultures in Europe are risk-averse compared to liberal countries
such as the UK. It will be difficult to shift perceptions of risk among consumers and it is
likely that only a minority will fully embrace the new options open to them. Indeed, the
reverse could also be true, with few Dutch or British investors wishing to use low-risk
products that may be popular elsewhere. On balance, little will change under the new
directive.
Multi-manager investment structures
Multi-manager investment offerings are considered to comprise two major sub-

categories: manager of managers (MoM) and fund of funds (FoF). The MoM approach
involves an institution investing in underlying securities via appointed investment
managers to whom it awards mandates for particular asset classes and geographic
sectors. This means that the MoM is responsible not just for identifying competitive
investment managers, but also for monitoring the overall portfolios at a stock-by-stock
and manager-by-manager level. By comparison, FoFs are investment funds that are built
using other investment funds/collective investments as the building blocks. They can be
either 'fettered' or 'unfettered'.
102
TLFeBOOK
Fettered FoFs are those that only invest in mutual funds run by the same management
group as the fund, while the unfettered approach relates to a FoF that is not obligated to
invest solely in internal funds.
Since fettered FoFs do not incorporate third party managers they are not considered to
be part of the multi-manager universe and are thus not covered in this brief. Similarly,
multi-manager offerings should not be confused with many fund supermarkets that now
offer a 'packaged' range, where a portfolio of funds is created with different investment
aims. Although this packaged range is closer to the multi-manager model, fund
supermarkets generally do not undertake the same detailed selection processes as true
multi-manager funds.
Overview
The fact that most wealth managers do not have the range of skills or the economies of
scale to offer investment management (or indeed advice) across a sufficiently wide range
of asset classes on a viable basis, limits their ability to achieve superior investment
performance and forces them to deploy resources inefficiently if they choose to conduct
all investment management in-house. The multi-manager concept can therefore serve as
a convenient means of widening the breadth of asset classes to areas where the wealth
manager lacks coverage (e.g. in emerging markets). This expands the scope of asset
allocation possibilities, thereby improving diversification and increasing wealth
managers ability to influence performance by strategically assigning and shifting asset
allocations (the major influence on performance). However, it should be noted that in
this sense, it is not the number of managers that allows for better performance but rather
the number of investment opportunities.
Furthermore, many industry experts view multi-manager structures as a strong approach

to introducing investment in hedge funds, property or private equity to clients.
Investment in these asset classes can be much more complex with highly volatile returns.
This greater volatility and the requirement for often narrow and specialist capabilities
means that multi-manager investment structures may well be a strong approach for
103
TLFeBOOK
opening up the possibility of superior returns, while managing the greater inherent risk
across a number of managers. They are also a means of getting access to boutique
investment managers with specialist skills in particular areas.
A wealth managers core skills often do not lie in investment management and
administration but instead in other equally important activities such as business
generation, relationship management, investment advice and asset allocation. By
focusing more exclusively on these activities wealth managers can free up relationship
management time to offer advice/sell a wider range of products, deliver better client
service and engender greater customer loyalty.
By comparison with direct investment in securities both FoFs and MoMs structures are
more expensive. However, the cost of investment is only one part of the equation since
wealth managers that maintain investment in-house effectively replace investment costs
with staff costs. The cost argument therefore revolves around the question of where the
wealth manager should spend the money - on staff to invest in securities, on selection of
the best funds, or on selecting the best managers.
104
TLFeBOOK
Figure 5.9: Overview of multi-manager investment structures
Multi-manager investment structures
In-house approach Funds of funds approach Manager of manager Manager of manager with
with in-house selection outsourced selection
Wealth manager Wealth manager Wealth manager Wealth manager
Invests in Appoints Appoints
Investment Selection
Invests in Fund products
managers specialist
Selects and monitors
that invest in that invest in
Investment
managers
that invest in
Underlying Securities
Manager of manager offerings have their origins in the institutional marketplace and
have been one of the fastest growing sectors of the global asset management industry,
however their place in the wealth management/private banking marketplace is a more
recent phenomenon that has been brought about by a number of market drivers (see
Figure 5.10).
105
TLFeBOOK
Figure 5.10: Key drivers behind the multi-manager trend
Poor market
conditions
Widening range of
asset classes Greater regulatory
scrutiny
Increasing
Competitive need Multi-manager
for differentiation Uptake
Rise to prominence of
specialist suppliers of
Increasingly demanding multi-manager solutions
customers
Unfavorable market conditions have been a primary factor in the development of multi-
manager investment structures by European wealth managers. The prolonged market
downturn of recent years has significantly impacted wealth managers investment
performance, denting revenues and forcing wealth managers to consider the logic of
running all investment management in-house given the cost this entails. The monumental
rise and fall of the stock market has also generated greater regulatory scrutiny in areas
such as mis-selling and research independence.
The declines in asset valuations have left many wealthy customers disgruntled and
mistrusting of wealth managers and has put a substantial amount of pressure on players
to achieve a stronger and more consistent level of investment performance. Increasingly
demanding customers have also become more explicit in highlighting their dissatisfaction
and their perceived risk associated with being tied to one investment manager across a
relatively narrow range of asset classes. The overall recognition among wealth managers
has been that if they are to realistically maintain a significant share of customer wallet
then this may not be achievable without incorporating other investment managers.
106
TLFeBOOK
With an ever-growing range of alternative asset classes it has also become harder for
wealth managers to cover all the bases in terms of investment opportunities effectively.
Similarly, from a wealth managers perspective the introduction of alternative
investments has also become an important means of diversifying revenues and
neutralizing poor returns in traditional equity investment vehicles, which have offered
little in the way of wealth accumulation or protection. With little experience in these
alternative asset classes this has often necessitated the involvement of third party
investment managers. Furthermore, asset classes, such as hedge funds, have been
perceived by wealth managers as too risky where they imply direct investment with a
single hedge fund manager. Consequently, hedge funds in particular have become a
popular candidate for fund-of-fund structures.
Competition
The other major dimension to the developing multi-manager trend has been that of
competition. Heightened competition between wealth managers as a result of new
entrants and other universal and investment banking players turning their attentions to
the sector has led to greater pressure to achieve differentiation in a crowded market.
While this has been addressed in a variety of ways, multi-manager structures have been
an important differentiator on the investment side.
These competitive forces have been supplemented by the rise to prominence of multi-
manager specialists, which are major advocates of these structures and raise awareness
among wealth managers and private banks. These specialists have also improved the
feasibility of introducing such structures for wealth managers by achieving economies of
scale in researching and manufacturing multi-manager funds, as well as consulting on
and providing specialist services in areas such as manager selection.
By adopting a more thorough approach to diversification across several asset classes

and investment managers multi-manager structures offer (particularly in the case of
MoM) superior risk management. This can be beneficial to performance, particularly
over the long-term. However, the quality of the risk management is dependent on the
107
TLFeBOOK
quality of the selection of managers and the research effort involved in making the
assessment.
However, diversification has its limits. The fact that some multi-manager structures are
diversified to such an extent (across several managers in several asset classes) means
that at an overall level, performance starts to tend towards the market average rather
than being superior.
Property investment
Overview
Investments in property may be made directly or indirectly. Direct investment entails

purchasing a complete or partial stake in real estate. More liquid, indirect investments
include real estate investment trusts (REITs), real estate equities or real estate
derivatives and property funds.
Real estate investment trusts
REIT is a company that owns and in most cases, operates income producing real estate.
To be a REIT, a company must distribute at least 90% of its taxable income to
shareholders annually in the form of dividends.
Real estate derivatives
Real estate derivatives may include warrants and certificates, which allow institutional
and private investors to gain exposure to property markets or to hedge existing
investment risk.
Property funds
Property funds invest in major housing developments, properties used for commercial
purposes and/or solely in real estate companies. They are classified as open or closed.
108
TLFeBOOK
Open funds facilitate unrestricted membership with the possibility of buying and selling
shares at any time. In contrast, closed funds provide access to large-scale projects
usually beyond the scope of individual investors, such as shopping malls or housing
estates. Property funds offer an efficient investment opportunity for wealthy clients to
diversify their portfolios. Warrants and certificates offer distinct advantages such as the
ability to profit from a rise or fall in the future average house price using the call (buy)
or put (sell) features. Other advantages include tax savings, low transaction costs,
diversified exposure and trading in any amount. In contrast, direct investments offer
fewer fiscal advantages, since these are usually less volatile and investment is generally
for longer periods. Related charges include stamp duty and transaction costs associated
with buying and selling properties (legal fees, search costs and valuations).
Recent research using UK property investment data revealed a poor correlation between
returns from property investments and traditional investment classes, further signifying
the intelligence of investing in real estate to diversify a portfolio.
Lease structures in Europe
Lease structures, which have a direct impact on fixed income streams (rents), vary
across Europe. Currently in the UK, typical lease lengths are around 15 to 20 years,
compared to Germany where they are only between five and 10 years. Typical leases in
Belgium, France and Italy are for nine or 10 years, although there are also allowances
for terms as short as three years.
In a falling property market, owners of rented properties in the UK with lease terms
ranging from 15 to 20 years are able to sustain rental earnings, not needing to lower
contracted rents despite loss of asset values. However, longer leases may also play
against investors if properties are unoccupied. This may be due to downward pressure
on rents or the property remaining vacant because of lack of demand.
In the years 2000 and 2001, UK companies had a huge appetite for space and as a result
bought excessively. The UK property market then suffered in the economic downturn as
109
TLFeBOOK
demand for rental space declined, leaving many properties vacant. Existing tenants,
forced to downsize, ended up with vacant property and even though rents fell, efforts to
sub-lease were unsuccessful. Europe is in a similar situation highlighting that the reasons
for downturn in the commercial property market are prompted by the wider economic
environment. Because of the vacancy rates, prime office and retail rents have fallen
across Europe in recent years. Prime office rents continued to fall in 2003, with second
quarter falls in Milan (7%) and Amsterdam (4%). City of London office rents fell an
average of 7% per quarter over the last three quarters of 2003.
According to the Royal Institution of Chartered Surveyors, enquiries for commercial

property rose at the fastest pace since the height of the stock market boom in 2000 in
the first quarter of this year. The RICS survey revealed a 22% increase in occupier
enquiries for office, retail and industrial space between January and March 2004,
compared with 9% in the last quarter of 2003.
Retail house price growth across Europe has been strong at 9% per annum between
1998 and 2002, implying a total growth of approximately 70%. Since this growth is
measured across houses, new and existing, and not listed companies, property funds
investing in equities are unable to provide investors with an exposure to this growth.
The minimal exposure offered is through listed construction companies owning houses.
Recent innovative product launches are however capturing this growth. Examples
include the Goldman Sachs warrants and certificates, Barclays House Price Index
Tracker Bond (an index-linked account that tracks the Halifax House Price Index) and
the RBSIs Nest Egg Account (seven-year, 100% capital guaranteed product linked to
the Halifax House Price Index). However, going forward, the residential property
market may not be so attractive across the UK and Europe with rising interest rates and
the advent and popularity of more tax efficient property vehicles.
110
TLFeBOOK
Property investments for wealthy individuals
Ninety-six wealth managers across Western Europe were interviewed as part of an in

depth b2b surveyx to gain an insight into the alternative investment market for private
clients. The results of which, specific to investments in property are presented below.
There is a wide difference in the proportion of wealth managers across Europe offering
investments in property. Over 70% of wealth managers in Germany and the UK offer
property investment vehicles, in comparison to a mere 38% in Spain and 21% in Italy.
Lack of in-house expertise and insufficient client demand were revealed as the primary
reasons for this difference.
Table 5.21: Proportion of pan European wealth managers offering exposure

to alternative investment vehicles
Currently offered Will be offered

in 1 2 years
Hedge funds 70.8% 77.1%

Capital protected products 71.9% 77.1%
Private equity investments 51.0% 59.4%
Property investments 55.2% 56.3%
Q. Which of the following alternative investments do you currently offer your private clients
exposure to?,
Source: Datamonitors European Alternative Investment Survey 2003 Business Insights Ltd
Proportion of pan European wealth managers offering exposure to property

investments
In the wider alternative investment classes, over 70% of pan European wealth managers
offer hedge funds and capital protected products, 15% more than those who offer
property. In the next two years, wealth managers expect this gap to widen to nearly
20%.
111
TLFeBOOK
Table 5.22: Proportion of pan European wealth managers offering exposure
to property investments, classified geographically
Property investments Yes No
Germany 81.0% 19.0%

UK 70.0% 30.0%
France 60.0% 40.0%
Spain 37.5% 62.5%
Italy 21.1% 78.9%
Q. Which of the following alternative investments do you currently offer your private clients
exposure to?
Table 5.23: Major barriers to the property investment in Europe
Insufficient Lack of Cost of Too risky Regulatory Other

client demand in-house setup/ difficulties
expertise running
UK 50.0% 10.0% 20.0% 15.0% 0.0% 5.0%

Spain 15.4% 46.2% 15.4% 23.1% 0.0% 0.0%
Italy 14.3% 21.4% 28.6% 0.0% 7.1% 28.6%
Germany 7.1% 14.3% 14.3% 0.0% 14.3% 50.0%
Q. What do you believe will be the major barriers to the wider proliferation of property?
Over a fifth of the wealth managers in Italy consider set up costs and lack of in-
house expertise as further hurdles to the offering of property as an investment class.
This may be the reason that only a quarter of Italian wealth managers offer property
services;
the increasing popularity of other alternative investment vehicles such as private

equity and hedge funds may be a further reason for the minimal growth expectations
in the proportion of wealth managers offering property;
x
Conducted by Datamonitor
112
TLFeBOOK
a question on the types of property investment vehicles offered to wealthy clients
across Europe indicated direct investment in real estate assets as the most popular
means of exposure across Europe, most noticeable in France and Germany;
63% of wealth managers across Europe revealed increasing portfolio

diversification as the primary client motivation to invest in property, followed by the
desire to hedge against equity downturns. These reasons signify client sentiment in
an era of market volatility, despite evidence of capital market recovery;
German clients, were revealed to be the largest patrons of property investments in

Europe, are motivated by a variety of reasons. These included both the intention to
manage portfolio risk as well as the motivation to secure a superior return;
approximately 8% of pan European wealth managers suggested other reasons for

clients investments in property, which may well include the desire to invest in a
sector renowned for its socially responsible behavior or the ability to offset tax
liabilities. The latter reason is certainly plausible due to the existence of tax efficient
property investment vehicles in both France and Germany, which have stimulated
much interest in the recent times.
Table 5.24: Pan European wealth managers expectations for changes in

private clients exposure to property over the following two years
Expectations Proportion of Wealth Managers
Increase steadily 11.5%

Increase slightly 26.4%
Stay the same 41.4%
Decrease slightly 18.4%
Decrease steadily 2.3%
Q. In general, how do you expect private clients allocation to property over the next 2 years?
When wealth managers were asked to estimate the growth of wealth allocation to
property vehicles, 41% of the respondents suggested consistent levels of client
113
TLFeBOOK
allocations to property over the next couple of years. Only 26% of wealth managers
estimated a slight increase in investment in property.
Future prospects
Property competes with a range of other alternative investment vehicles in attracting

private client wealth, which is perhaps why an overwhelming majority of wealth
managers expected client allocations to remain the same in the next two years. The
increasing popularity of other alternative investment vehicles such as currency, capital
protected products, private equity and hedge funds will attract wealthy individuals
assets as well.
Wealth managers are encouraged to review their in-house knowledge base and if needed
engage with professional property asset managers. This would enhance their knowledge
and skills base when offering the appropriate investment solutions to their wealthy
clients.
The fact that there is a high visibility of earnings in property provides good
diversification. Property is also a market set to recover that has significant tax
advantages and this deems it as an asset class deserving careful attention. Indeed,
optimal allocation of wealthy clients assets to property may even provide a way for
wealth managers to re-boost their credibility in the eyes of clients. This is provided the
exposure to property is made in a timely manner.
Hedge funds
Overview
Strong average hedge fund performance during the equity bear market of 2000 to 2003
has captured investors imaginations. Institutional investors that had previously been
114
TLFeBOOK
dissuaded from hedge fund investment by a lack of regulation and transparency have
been increasingly attracted by their strong performance.
Many wealth managers regard regulatory difficulties as a major barrier to hedge fund
investment in the European market. In many European countries most individuals have
been barred from investment in hedge funds. They cannot be publicly advertised, are
rarely domiciled in local markets and are not specifically regulated by the local financial
authorities, making the level of regulatory protection for the customer minimal.
However, the increasing popularity of hedge fund investments has forced regulators to
review this situation and attempt to open up hedge funds to a wider market. Legislative
changes are occurring or are planned in many European territories designed to make
hedge funds investment available to a wider range of people, primarily by making it
easier for hedge funds to be domiciled onshore and reducing distribution controls on
investments in these funds. In general these are reducing the barriers to the domicile and
distribution of hedge funds in onshore European territories while introducing a higher
level of regulation than is traditionally the case in offshore territories.
Regulations
Since its launch in 1999 the Financial Services Action Plan has set out a roadmap for
integration and regulation of financial services in Europe. 36 of the 42 original proposals
have been implemented. The European Commission is theoretically supportive of
integrating the European hedge fund market and the mechanism already exists through
which greater progress could be made towards integration of hedge funds in the
Committee of European Securities Regulators. The European Parliament opened a
preliminary debate in September 2003 on hedge funds and derivatives regulation. In the
future this could revolutionize hedge funds in Europe by introducing a passport allowing
funds registered in Europe to demonstrate compliance to one regulator and be able to be
marketed to customers throughout Europe.
115
TLFeBOOK
UCITS 3
Two new directives, collectively known as UCITS 3, are replacing the original UCITS
directive to expand the range of UCITS-qualifying investment products beyond fixed
income and equities, to include derivatives. The new directive was to be implemented by
February 2004 by all member states. However, it does not cater for hedge fund products
in its current form because it includes restrictions on short selling, gearing and liquidity
(three characteristics common in hedge fund strategies).
Given the slow progress that is occurring towards the integration of more regulated
investments such as mutual funds, the unification of the hedge fund market in Europe is
still on the horizon. It is unlikely that any unified European legislation on hedge funds
will impact the market prior to 2007.
UK
Hedge funds are not available to the general public but only to qualified private
investors and they cannot be advertised to private clients. The regulation of hedge fund
distribution is controlled by the Financial Services Authority through the Collective
Investment Schemes (CIS) Sourcebook, which outlines regulation of hedge fund
distribution. The current sourcebook regulation is complex and confusing. The definition
of qualified private investor is also complex, but is based on a mixture of the
sophistication and experience of the investor and their asset levels. The FSA has
proposed changes to the sourcebook to create new funds. The new funds will have
much greater freedom than mutual funds, such as being able to charge performance fees,
invest in commodities, derivatives, real estate and cash, engage in short selling and
leverage up to 100% of Net Asset Value (NAV). However, they would be regulated to
a greater extent than offshore funds usually are.
France
Traditionally there has been very little regulatory framework for hedge funds in France,
making it almost impossible for hedge funds to be established there. Hedge fund
116
TLFeBOOK
investment was restricted to HNW investors investing in offshore jurisdictions. As in the
UK, controls on distribution in France include an element of discretion based on the
opinion of an authorized seller as to the eligibility of the customer rather than any
assessment on a pure net worth basis. Following the COB (Commission des operations
de bourse) statement of position on April 3, 2003 a new breed of domestically-
domiciled FOHFs (funds of hedge funds) have become available. Restrictions were also
lifted on multi-manager funds that invested in a range of products including hedge funds.
The funds are available at retail level with a threshold of 10,000 and a minimum fund
size of 160,000. They are required to meet certain criteria in relation to matters such as
the legal environment and the control of the assets, however the restrictions are not as
stringent as those proposed in some countries (e.g. Germany). The regulators are
currently considering proposals for offering realistic regulation for the domicile of single
hedge funds for this year (2004).
Germany
Traditionally, there have been no restrictions on the management and domicile of hedge
funds in Germany. Yet, the prohibition of hedge fund distribution in the country has
meant that there has been hardly any development of the hedge fund market there. While
foreign-based hedge funds have traditionally been available through wrapper
instruments, investment by German investors in foreign hedge funds has been limited by
disadvantageous tax rules for direct investment in certain foreign investment funds,
including hedge funds. The domestic hedge fund industry was established in Germany on
January 1, 2004. The legislation allows for the distribution of both single hedge funds
and FOHFs. It also equalizes the tax treatment afforded to foreign and local hedge
funds.
FOHFs are available for distribution to mass market and HNW customers but they have
to comply with strict rules, including disclosure levels that are higher than those
traditionally associated with hedge funds. They are also required to invest no more than
20% in one fund and 40% in one investment strategy. Single hedge funds domiciled in
Germany are special funds, not available to individual investors, only open to up to 30
117
TLFeBOOK
investors and are required to calculate and publish asset levels on a daily basis, a
stipulation that most hedge funds are not able to currently comply with.
Italy
A Ministry of Finance decree in May 1999 made hedge funds and FOHFs legal, and
appointed both the Bank of Italy and national depository Commissione Nazionale per le
Societa e la Borsa (Consob) as regulators. However there were fairly proscriptive
restrictions on both the minimum investment (1 million) and maximum client numbers
(100). Investment in foreign funds is subject to additional taxation.
Eligibility to invest in hedge funds in Italy is decided on a pure net worth basis, with no
account taken of investment expertise. Hedge funds in Italy cannot be publicly
advertised and have to be distributed through private placement. The controls on the
distribution of hedge funds has put severe restrictions on the growth of the market,
taking two years following the change in the regulation for the first Italian-domiciled
hedge fund to be launched.
In April 2003 the minimum investment level in hedge funds was reduced from 1 million
to 500,000 and maximum client numbers increased from 100 to 200. In addition the
Italian authorities permitted retail investment in FOHF with a minimum investment of
25,000.
The market for the distribution of single hedge funds in Italy remains limited. The fact
that advertising and distribution of hedge funds continues to be restricted to private
placement remains a limiting factor in the growth of the onshore hedge fund market for
HNW individuals.
Spain
The market for hedge funds in Spain is in its infancy. The management of hedge funds is
controlled by the Comision Nacional de Mercardo de Valores (CNMV) and there is a
118
TLFeBOOK
low level of capital of 300,000 required to operate as a hedge fund manager.
Investment in foreign hedge funds is discouraged because hedge funds are not available
within existing UCITS fund regulation and non-UCITS foreign funds are affected by
higher levels of taxation.
Unlike several European counterparts the Spanish government has not yet shown any
intention to regulate the market for Spanish hedge funds, or to allow hedge funds to be
effectively marketed and distributed in Spain.
Performance
There are some concerns that the general performance of hedge funds will decrease as
the market develops. This concern operates on several levels, including:
Limited markets. There are elements of the market that are finite in the volumes
they can support, the arbitrage market being an example where sufficient funds can
quickly arbitrage out markets;
limitations on the size of individual hedge funds. Beyond a certain level, hedge
funds can lack mobility (around $1 billion). However significant scale ($100 million
plus) is needed to afford high quality research;
management resource. Given that there is a finite pool of quality hedge fund
management ability it is possible that top quality hedge fund managers, finding it
easy to attract funds, will have no need to enter markets where they face higher
levels of regulation, leaving regulated markets offering poorer returns due to poorer
management;
greater regulation and compliance. This may stop hedge funds performing freely,
using the full range of investment techniques or reacting quickly, thus reducing
returns.
119
TLFeBOOK
Greater regulation and compliance is the most crucial factor. If regulators do not judge
the balance of freedom and control correctly, onshore hedge funds may lose the
attributes that have driven the popularity of these products and become little more than
expensive mutual funds.
Some wealth managers believe that the trend towards alternative investment in general
and hedge funds in particular has been largely the direct result of the volatility in the
equity markets. They typically believe that should volatility decline and a period of
sustained equity growth reoccur, the growth in hedge fund investment will cease, or in
fact reverse, with HNW asset allocation strategies reverting to pre-2000 patterns.
Table 5.25: Customers primary motivation for investing in alternative

investments, % of wealth manager responses, total Europe
Product To hedge To ensure To achieve To increase Other Total

against an absolute superior diversification
equity return returns
downturns
Hedge funds/ 14.2% 31.1% 13.2% 38.7% 2.8% 100.0%

fund of hedge funds
Q: What do you believe have been customers primary motivation for putting money into the
following alternative investments?
Source: Datamonitor European Alternative Investments Survey 2003 Business Insights Ltd
It has been suggested that the motivations behind investment in hedge funds are more
complex than simply as a hedge against equity downturns. Hedge fund investment has
wider motivations, led by the increasing understanding of the need to have diversified
assets and the desire to invest in asset classes that have the flexibility to gain absolute
returns irrespective of market conditions.
Fee structures
Many hedge funds carry heavy fees and performance bonuses, plus commissions to
wealth managers. Recent research by Fitzrovia International found that hedge fund fees
120
TLFeBOOK
were in general 80% higher than the fees for mutual funds. The average cost of a hedge
fund selected randomly in 2003 (weighted by assets) was 3.23% per annum, compared
to 1.79% for (offshore) equity funds.
The problem is even more pressing at the FOHF level, where a further level of costs is
added. Indeed the process of hedge fund selection involves a high level of due diligence
and competence, (to a greater extent than for equity fund of funds due to the lower level
of regulation and greater degree of variation in strategies employed). Fitzrovias survey
also found that fees were heavily weighted towards performance-related fees, where
management fees tended to be lower with some smaller hedge funds relying almost
entirely on performance fees.
To some extent the additional fees charged by hedge funds can be justified. As shown
above, hedge fund management and administration fees are generally in line with those
of offshore mutual funds. The additional costs are performance fees, which are only
charged when the investor is making gains. In absolute performance hedge funds in
particular, managers can argue that performance is specifically attributable to their skills
and that it is fair to be rewarded accordingly.
Traditionally hedge fund pricing has been far less regular and transparent than that of
mutual funds, with hedge fund valuations often being updated only on a weekly or
monthly basis. While this is a limited impediment for the hedge funds traditional market
of HNW customers, it causes significant issues for the distribution of hedge funds to
both affluent and institutional clients.
Internal compliance
Many hedge funds lack the qualities that private banks should demand in terms of risk
management, transparency and quality of management. The pressure for further hedge
fund regulation is expected to be increased by evidence of previous misbehaviors,
particularly the market-timing scandal in the United States where hedge funds were seen
to be colluding with mutual funds at the expense of mutual fund investors.
121
TLFeBOOK
To some extent these problems are negated within the FOHFs model, which involves
scrutiny of the hedge fund by the FOHF manager. Indeed, regulators such as those in
Ireland have adopted an approach towards regulating the internal practices of hedge
funds by placing the obligation on FOHF managers to demand evidence of compliance
with practices.
Distribution factors
The ability to offer clients exposure to hedge funds is fast becoming a must-have in
wealth management. This trend is likely to continue in the next two years although
distribution channels to mass market and affluent customers are not yet established. This
is a major deterrent to the growth of a large affluent market for the products before
2007.
Table 5.26: Percentage of wealth managers offering hedge funds or envisaging

doing so in the next two years, 2003
Product % of wealth % of wealth % increase

managers who managers who
currently offer will offer
hedge funds hedge funds
by 2005
Hedge funds 70.8% 77.1% 21.4%
122
TLFeBOOK
Chapter 6
Appendix
123
TLFeBOOK
Chapter 6 Appendix
Definitions
Advisory portfolio management
The client gives full details of investments and seeks advice on the best strategies for his
or her fund as a whole. Advice is given on individual stock selection and capital gains
tax. The ultimate authority for transacting trades remains with the client and not the
investment manager.
Asset management
The structuring, monitoring, and management of a portfolio of financial assets for an

individual, corporate or institutional client. See Portfolio Management
Bull market
A prolonged period in which investment prices rise faster than their historical average.
Bull markets can happen as a result of an economic recovery, an economic boom, or
investor psychology. The longest and most famous bull market is the one that began in
the early 1990s in which the U.S. equity markets grew at their fastest pace ever.
Bear market
A prolonged period in which investment prices fall, accompanied by widespread

negativity. If the period of falling stock prices is short and immediately follows a period
of rising stock prices, it is known as a correction. Bear markets usually occur when the
economy is in a recession and unemployment is high, or when inflation is rising quickly.
It is the opposite of a bull market.
124
TLFeBOOK
CAGR
This refers to the measure of the compound annual growth, and is given by the formula
(Xyear2/Xyear1)^1/(n-1) - 1, where n refers to the number of years between the two
measurements of X, and ^ represents raising this result to the power of 1/(n-1).
The CAGR differs from an average of year on year percentiles by taking percentage
increases from a compound base figure, for example if the HNW market grew 10% from
1995 to 1996 it would evaluate the growth from 1996 to 1997 from a compound base of
110%. This gives a more accurate view of growth over the period than averages.
Discretionary portfolio management
The responsibility for buying and selling investments is delegated to an investment

manager. The client grants the investment manager the authority to transact on their
behalf, without seeking approval for every trade.
Equity fund
Equity funds invest a majority of their assets in the shares of companies on the stock
exchange. They are referred to as listed equity and the regulations stipulate what
percentage of the assets may be invested in assets of unlisted equity. Equity funds may
consist of foreign or domestic equity funds.
Execution only stock broking
This service is designed for investors who do not require advice, but who do need a
stockbroker to buy and sell shares for them. There is no element of advice or
management in this service, and so the costs of transacting business are generally lower
than for other advisory services.
First/second/third tier fee
Various levels of charges incurred by client based on amount invested.
125
TLFeBOOK
Fund supermarket
Technically, fund supermarkets can either be online or offline services, or both,

however, for the purpose of this report, the term 'fund supermarket' refers only to online
services. In order to be classified as a fund supermarket, the service should meet the
following criteria: 1) it must offer a range of funds from a range of fund providers.
Ideally, this range will cover at least 50% of the relevant mutual fund market in terms of
volume of retail mutual fund assets; 2) customers must be able to complete the
investment transaction online. This includes both buying and selling;
FSI - Financial Services Institution
Hedge funds
Despite the name, hedging transactions are not the primary purpose of such funds. Since
these funds are aimed at generating absolute income, they make investments which
conventional funds are not allowed to make (speculation on market declines, short sales,
use of derivatives, financing investments by borrowing). This enables hedge funds to
record positive returns irrespective of the market situation.
High net worth (HNW)
An individual holding 300,000 or more of liquid assets (200,000 and above).
Independent Financial Advisor (IFA)
UK equivalent to insurance agents. They are not tied to certain companies and can
provide advice on products from any insurance provider;
Liquid assets
Liquid assets in this report refer to onshore only and are retail. They are taken to
include:
126
TLFeBOOK
Cash;
deposits in bank and building society accounts;
ordinary stocks and shares;
government and other bonds;
unit trusts and other collective investments.
Liquid asset bands
Liquid asset bands used in this report are in Euros and represent either the number of
individuals or the value of liquid assets held by individuals who hold a value of liquid
assets that falls between a specified ranges. For example the 300k 450k liquid asset
band represents the number of individuals or the value of liquid assets held by
individuals with between 300,000 and 450,000 in liquid assets.
Liquid assets
Onshore cash, deposits in bank, ordinary stocks and shares, government and other
bonds, unit trusts and other collective investments
Major European countries - in the context of this report major European countries
refers to France, Germany, Italy, the Nordic region, Spain and the United Kingdom.
Lower high net worth competitor
Wealth managers primarily serving individuals with onshore liquid assets ranging from
GBP 200,000 to GBP 1.0m.
Upper high net worth competitor
Wealth managers primarily serving individuals with onshore liquid assets exceeding GBP
1.0m.
127
TLFeBOOK
Mass affluent
Individuals who are of above average wealth, but do not have sufficient liquid assets to
be classed as HNWs, i.e. they have liquid assets of 50,000-300,000. As such they form
the bridge between the HNW market and the mass market.
Mass market
Individuals who have less than 50,000 in liquid assets. This constitutes the large
majority of customers in most geographies.
Non-core competitor
Financial institutions that do not offer a wealth management service per se and are
therefore not direct or core competitors. However, these players still effectively
compete for the liquid asset of clients through offering products that provide an
alternative destination for clients liquid assets, and thereby removing an element of
potentially manageable wealth from a wealth manager. An example of such would be a
retail banks that holds a proportion of wealthy clients assets in deposit accounts
Nordic region - the Nordic region comprises Denmark, Finland, Norway and Sweden.
Premier bank
Banking services aimed at individuals with sufficient wealth to merit more sophisticated
services than those provided as standard by high street banks, but without sufficient
liquid assets to qualify for private banking services.
Private banks
Banks that provide banking and investment services, including independent and
confidential advice and individually tailored financial planning services, to both
individual and institutional clients with a certain amount of investable assets. Minimum
levels of investment are determined by individual banks, and vary significantly between
companies.
128
TLFeBOOK
European markets - France, Germany, Italy, Spain and the UK.
UCIT
Authorization for products to be sold throughout the Single Market on the basis of
approval in one Member State.
129
TLFeBOOK
130
TLFeBOOK

Reuters Business Insights - The UK Wealth Management and Private Banking Market Outlook 2004

Enviado por

Dados do documento

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Reuters Business Insights - The UK Wealth Management and Private Banking Market Outlook 2004

Enviado por

Direitos autorais:

Formatos disponíveis

FINANCE

The European Wealth Management and

Copyright 2004 Business Insights Ltd

Chapter 2 The European Wealth

Chapter 3 Customer Focus: Incorporating

Chapter 4 Fee Structure Analysis and

Chapter 5 Tackling the Strategic Issues in

Chapter 6 Appendix 124

European wealth management and private banking

During the period 19972002, affluent individuals in major European countries

Customer focus: incorporating lifestyle services

By offering to help wealthy clients in their aspirations to purchase luxury items

Fee structures and advertising strategies

Tackling the strategic issues in wealth management

Wealth managers looking to target retired individuals as a client group must

Unfavorable market conditions have been a primary factor in the development of

Property funds offer an efficient investment opportunity for wealthy clients to

The European wealth management and private banking market overview

The important issue of cross-border expansion in wealth management is examined with a

Customer focus: incorporating lifestyle services

Fee structures and advertising strategies

The European Wealth

During the period 19972002, affluent individuals in major European countries

UK mass affluent customers

Figure 2.1: Identifying the dynamics of mass affluent wealth creation

Alternative and non

Wealth creation factors

Wealth creation factors

Wealth reduction factors

Wealth reduction factors

Source: Datamonitor Business Insights Ltd

GDP and other economic factors

16.4% Direct equity

Liquid wealth concentration

Source: Datamonitor Global Wealth Model 2003 Business Insights Ltd

Source: Datamonitor Global Wealth Model 2003 Business Insights Ltd

Source: Datamonitor Global Wealth Model 2003 Business Insights Ltd

Region Average standard CAGR growth in average

East of England 126,714 14.7%

North Yorkshire North Wales Scotland West Midlands

East Northern East Greater South South

Source: Datamonitor, analysis of Halifax Data Business Insights Ltd

The influence of income

Region Number of individuals Total value of earned Average earned

North East 21 1,820 86,667

Total UK 1,260 132,270 104,976

Table 2.4: Proportion of total UK population in each region compared to

Region Proportion of total UK Proportion of total UK

North East 4.3% 1.7%

Private client wealth managers

A number of dedicated wealth management services aimed at mass affluent individuals

Barclays Lloyds TSB NatWest HSBC (a)

Income threshold 60,000 60,000 50,000 75,000

Source: Datamonitor company analysis Business Insights Ltd

Stockbrokers primary focus is on direct equity investment

bn 1998 1999 2000 2001 2002 CAGR

Individuals 250.8 275.8 289.9 229.9 165.5 -9.9%

Source: Datamonitor, ONS Business Insights Ltd

Retail asset managers

Table 2.7: UK personal deposit account balances by competitor, 19972001

bn 1997 1998 1999 2000 2001 CAGR

Halifax/HBOS 81.1 85 87.9 89.8 123 11.0%

Total of above 358.7 383.4 415.1 441.7 486.7 7.9%

Other 96.3 100.6 103 111.5 112.6 4.0%