A report by McKinsey argues that by joining the UHNW feeding frenzy, private banks risk neglecting one of the largest growth opportunities of the next decade
From Coutts to Deutsche, private banks are taking their models upmarket. By doing so, they reason they will increase margins by focussing on more liquid (and seemingly more profitable) clients.
Yet a report by McKinsey called A Tale of Two Millionaires casts doubt over the thesis. Published in March, it argues that by joining the UHNW feeding frenzy, private banks risk neglecting one of the largest growth opportunities of the next decade: core millionaires worth £500,000 to £5m.
Four reasons are provided with a US-focus but will mostly apply to the UK too:
• Core millionaires are the predominant source of new wealth. ‘While only 27 percent of current private banking assets come from households with $1 million to $10 million in investable assets, the Core Millionaire segment already holds a large slice of U.S. household net worth and is expected to account for 60 percent of the asset growth among individuals with over $1 million in assets through 2015.’
• Core millionaires represent the acquisition sweet spot. ‘Private banking clients, especially UHNW clients, tend to skew disproportionately toward an older demographic. Overall, fewer than 15 percent of private banking clients are under 40. McKinsey’s interviews with clients and bankers suggest that those who inherit UHNW estates are more likely than ever to seek new financial advisors, rather than rely on their parents’ bankers. Long-term success will therefore require building relationships with Gen X and Millennial clients, who are in the market for wealth management services for the first time. These clients typically enter the market at the lower end of the $1 million to $10 million in assets range and are much easier to acquire at the point of entry than after they have developed a relationship elsewhere.’
• Core millionaires offer higher investment fee income. ‘Core Millionaires, with $1 million to $10 million in investable assets, are large enough to justify relationship banking but do not have the pricing leverage of the wealthiest families. McKinsey’s research shows that the industry average ratio of revenue on client assets is 85 basis points for Core Millionaires versus an average of 38 basis points for UHNW clients. Moreover, private banking clients with less than $10 million in assets usually expect their private banker to directly manage their assets. On average, less than 5 percent of Core Millionaires’ assets are held in custody, compared to 25 percent to 30 percent of UHNW clients’ assets. Custody assets typically have revenue margins under 10 basis points and sometimes much lower.’
• Core millionaires make greater use of lending and deposit products. ‘McKinsey’s 2011 benchmarking reflects the important link between banking product penetration and overall revenue margins. In top-quartile private banks, deposits and lending products accounted for over 55 percent of total revenue, compared to 35 percent for their bottom-quartile peers. Core Millionaires can be important to boosting profits, since they are more likely to require credit and cash management services. On average, lending and deposit products represent 28 percent of total account balances for Core Millionaires, twice the average for wealthier families.’
Overall, McKinsey conclude that the incremental revenue opportunity from core millionaires is four times that of UHNWs. Proof that all that glitters is not gold.
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